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The Price of ‘America First’

By Richard Stavros on February 1, 2017

As the Trump administration pushes trade policies that favor U.S. industries, American companies are divided over whether the new administration’s border tax and other proposed tariffs will hurt them in the global economy. 

The concern is that the higher cost of bringing operations stateside will prevent some U.S. firms from competing effectively. Even more worrisome is that no one knows whether that disadvantage will be temporary or permanent, with perhaps some U.S. companies never regaining their competitiveness.

Meanwhile, the new incoming head of President Trump’s National Trade Council, Peter Navarro, raised the bar even higher. He told the Financial Times recently that he wants not only all U.S. products to be made here but also all product components. For some companies, the cost of building everything in the U.S. could be prohibitive in part because some of the expertise for developing product components is hard to find on these shores.

But even importing components to a U.S. factory carries a steep price tag. For example, according to estimates from consulting firm IHS, Apple spends roughly $225 to make an iPhone 7 in Asia, with assembly costs accounting for about $5, or roughly 2% of the total cost. By some estimates, the cost to make the same iPhone in the U.S. could be $30 to $40 higher. For consumers, the price of an iPhone could potentially double, as they would have to absorb the cost of shipping components to the U.S. from various countries.

Foxconn Technology (TPE: 2345), which makes the iPhone for Apple, is talking with Pennsylvania elected officials to build a manufacturing facility there. What role, if any, Apple has played in Foxconn’s plans to expand its U.S. operations is still unclear, according to Fast Company. Foxconn makes almost 100 million iPhones, on average, per year, and both companies most likely heard  President Trump’s calls during his campaign to have the iPhone made in the United States.

Of course, U.S. technology firms are not the only ones whose costs and profitability are on the line. According to the Financial Times, retailers such as Walmart (NYSE: WMT) and other import-dependent businesses say that Trump’s proposals would amount to a 20% tax on imports that would raise consumer prices and hurt their businesses. 

Given this uncertainty, we’re urging investors to rethink their U.S. holdings, and to consider what kind of detrimental effect a trade war might have on U.S. business. The countries in Trump’s crosshairs should also give investors pause. The Trump administration has strongly criticized the currency and trade practices of Japan, China, Mexico and Germany, increasing the risk of a potentially disastrous trade war if  these countries respond with their own punitive tariffs. 

For investors, even shifting their dollars to companies that already make components in the U.S. is no guarantee of bagging a winner, as some firms initially hurt by the new trade policies could retool and regain their competitiveness. Plus, the Trump administration’s pledge to reduce corporate taxes may offset the worst effects of his trade policies on these businesses’ global supply chains, but it’s unlikely that all U.S. multinationals will be affected the same way.    

This is a brave new world investors and U.S. companies must navigate, and it’s one we’ll explore in future issues of Personal Finance. We will identify those companies that can adapt best to an administration bent on driving home its “America first” trade policies, even if it means that some U.S. companies will come in last.   

 

 

 

 

 

 

 

 

 

 

 

 

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