With concerns about protectionism rising, whether in the context of the Border Adjustment Tax or simple tariffs, Barclays has compiled a useful table summarizing what goods America's top trading partners export to the US for - mostly cheaper - consumption, compared to domestically produced equivalents.
Why does this matter? Because as Barclays economist Keith Parker writes, President Trump mentioned that the administration is already considering a 20% tariff on Mexico to pay for the wall, among other potential protectionist moves. The rhetoric highlights Trump’s desire to specifically target countries, as well as companies, that are perceived to be benefiting from jobs moving out of the United States. China has also been singled out. Absent BAT, - which as Goldman wrote over the weekend is looking increasingly unlikely to be implemented in Trump's tax proposal - the incentives to offshore and sell into the US would remain. ‘Relocation penalties’ would provide a deterrent, but the goal of territoriality would be difficult to achieve. This approach would lead to more targeted protectionism, including tariffs, trade agreement negation or corporate penalties.
In light of such concerns, Barclays has identified which industries are most exposed to potential tariffs on Mexico and China, which is the bank's baseline assumption at this point. Some scenarios from Barclays:
- Company-targeted rhetoric and “relocation penalties” will act as a “stick”. President Trump has used social media and speeches to specifically target companies to effect policy goals in some form or another (machinery, autos, pharma, etc.). Given that this approach has a relatively low cost and the potential to influence corporates’ behavior, the practice is likely to continue. We view this tactic as a headline risk for companies but fundamentals matter more. Using Boeing as an example, the tweets about cost overruns
did not necessarily affect the trajectory of the stock.
- Tariffs against Mexico (7%) and China (15%) are our economists’ baseline. Tariffs can be enacted by the President without Congressional approval to remedy “unfair” trade practices. President Trump specifically mentioned a 20% tariff against Mexico to pay for the wall. Assuming tariffs against Mexico and China of 7% and 15%, respectively, our economists estimate that restrictive trade policies could slow growth by 0.5pp in 2017 as trade volume slows and higher prices reduce real consumption and investment. The drag from the tariff would precede the boost from fiscal policy
- President Trump has also voiced the desire to renegotiate NAFTA. Thus goods and services sourced from Canada and Mexico would be an overhang for those exposed industries and companies. For instance, Canada is actually the largest exporter of cars to the US. Additionally, Canada is the second largest trading partner/third largest exporter with the US, just behind Mexico, making Canada as a whole potentially vulnerable.
- Treasury unilateral actions are another approach (i.e. inversions). We also see the potential for the U.S. Treasury to take actions to stop companies from relocating abroad.
- Tax mitigation strategies are numerous and could be selective targets. For instance, some companies have the ownership of intellectual property in low tax jurisdictions and charge costs/royalties to operating subsidiaries/parents in higher tax countries to keep taxes low. The administration and lawmakers could target these types of arrangements.
Barclays then focuses solely on Mexican and Chinese exposure. First, here is the US' exposure relative to Mexico: a lot of US value-add is embedded in Mexican imports
Mexico is the United States’ third largest trading partner, with over $500bn of total trade in goods (14%). Tariffs against Mexico would disrupt the supply chain for U.S. companies with manufacturing and assembly in Mexico, as inputs, parts and finished goods move repeatedly across the Mexico-U.S. border at different stages of production. To illustrate this interplay, Figure 6 shows the U.S. value-added that is returned from abroad in imports. Essentially, value-added in Figure 6 represents the proportion of the final cost of imports attributed to U.S.-based factors of production. Final goods imported from Mexico contain 40% of U.S. value-add, with Canada at 25%.
Autos and components make up a substantial part of the cross-border trade. Industries with trade exposure to Mexico include autos, some electronic equipment and appliances, as well as food, beverages, and tobacco; foreign direct investment has also flowed to these industries according to multinational affiliate capex data. U.S. imports from Mexico include vehicle parts, computer accessories, telecom equipment, and semis.
Finished goods include trucks and buses, computers, and televisions (both imported and exported). In addition to the manufacturing supply chain, the U.S. is reliant on Mexico for food, including fruits/juices (35% of U.S. imports) and vegetables (50%) as well as alcoholic beverages. The auto supply chain, food products, food retail, and alcoholic beverage companies would also be at risk from Mexico tariffs.
And China, where consumer goods will be mostly at risk should trade war break out:
China is the United States’ largest trading partner, with $600bn of total trade (or 16%) but a massive trade deficit. China accounts for a very large portion of U.S. consumer goods, over 50% share of total U.S. imports in most sub-industries such as: apparel, footwear, toys, furniture, appliances, cookware, cell phones, telecom equipment, televisions, computers and computer accessories.
The U.S. exports civilian aircraft, cars, industrial machinery, chemicals, agriculture, soybeans, pulp and paper to China. China accounts for 16% and 13% of U.S. exports of cars and civilian aircraft, respectively. Discretionary retail in apparel, toys, furniture, and technology would be at risk to a China tariff. Apparel and tech hardware manufacturers would also be at risk.
And while we will have more to say about the on again, off again topic of Border Tax Adjustment, here is an interesting factoid: Land Rovers will need a $17,000 price hike to offset border tax. Most other goods imports will see similar price increases under a new trade regime.