Breaking the Base – Trade War Update

In 2016 Russia showed just how easy and effective it is to target different American demographics and impact them ideologically. With Russia’s efforts assisting in the election of President Trump, Trump has largely ignored his campaign promises, from swearing he would release his tax information, to promises to ‘drain the swamp’. One of the few areas where Trump has delivered, though, is on starting a trade war with the world. This is a campaign promise, I would like to note, that I wish he had chosen to ignore.

So, with the United States now levying tariffs on any number of Chinese and European Union goods, the Chinese and Europeans have, understandably, chosen to retaliate. Where this gets interesting is how they have chosen to retaliate. Rather than broadly swatting at the US economy with tariffs left and right, they have largely chosen to go after trade demographics that went to Trump. Steel, soybeans, oranges, lobsters. If it comes from a red state, and more importantly a red part of a swing state, then you can bet your now heavily foreign taxed bottom dollar that the Chinese and Europeans are hitting it hard.

This serves a number of purposes:

• By targeting red state commodities the Chinese and Europeans are seeking to economically punish Trump voters, and likely attempt to sway their votes in the future to candidates promising more open trade.
• By largely ignoring blue state or higher end items associated with Democratic leaning voters, such as tech goods and intellectual property, the Chinese and Europeans can help ensure there is less bad blood in the future were there an administration or Congressional change.
• This helps to limit the trade war overall, though it still risks escalating out of control. Targeted tariffs, rather than broad ones that hit higher budget industries, can send the message without total catastrophe. Provided it does not continue to escalate unabated.

I work in the metals industry. We have been hit with foreign tariffs. Those tariffs are hurting our bottom line, particularly among smaller yards that do not have the volume to handle massive changes or absorb the economic impact. I can say with certainty as well that those smaller yards largely went to Trump as far as management votes went.

 

	Chinese Price – Pre-Tariff
	Aluminum Lbs	Price / Lb	Overhead / Lb	Net Profit
Big Yard	200000	$0.35	$0.25	$20,000.00
Small Yard	40000	$0.30	$0.25	$2,000.00
	Chinese Price – Post-Tariff
	Aluminum Lbs	Price / Lb	Overhead / Lb	Net Profit
Big Yard	200000	$0.27	$0.25	$4,000.00
Small Yard	40000	$0.22	$0.25	-$1,200.00

 

In the metals world the more volume you move the better price you get.  This is because high volume can offset low margin – that is, after all, how CostCo and Wal-Mart make their money.  Smaller yards are more exposed to market changes in the metals world as they get a lower price and move less volume.

In this example a big yard moving 200,000 lbs of aluminum could make $20,000 / month before the tariffs.  After the tariffs they are down to $4,000 / month, but still in the black.  A small yard will go from making $2,000 to losing $1,200 / month.  Their overhead remains the same, but with the price drop they just can’t make it – while the big yard can.

Whether it be fish or soybeans or metal, if you are looking at economic ruin then perhaps you will reevaluate your position on globalism and its benefits.  And since American elections are decided by just a few swing voters, those votes could make all the difference in the world.

I believe that the Chinese and European tariffs are targeted to achieve a political goal, Russia showed them how effective it can be, and the Chinese and Europeans are attempting to insulate themselves against ‘bad blood’ from any future administration.

For once I welcome foreign interference, if it can help avoid global economic destruction.