Cory Diary : Value-Add in Trade War

“If he shows up, good, if he doesn’t – in the meantime, we’re taking in billions of dollars a month [in tariffs] from China,” Trump tells “Fox & Friends.”

Sounds familiar ? Yup is from President Trump. Interestingly to say it so openly could imply many things ...

1. He is threatening President Xi
2. He purposely want to make sure President Xi lose face
3. He is trying to make sure President Xi won't attend G20
4. He is trying to stall the talk purposely
5. He is not thinking at all
6. He is not interested for trade talk at all. Is all a ruse
7. He is stupid

Let's sit back and think when the 25% tariffs kick-in. First is final export to America cannot be China as the tariffs are too high unless we are prepared to pass the cost to consumer which are specifically American Consumers. This won't happen due to competition for market shares therefore even Chinese companies will have to change their supply chain model.

Secondly, to classify as not China produce there have to be sufficient value-add through the supply chain. Value-Add could be the next level that Trump administration will focus on if Trade War gets deeper. For now, if one need to avoid tariffs is to have the key assembly done in another country say Mexico but there must be enough value-add to the product. Adding packaging or labeling which are cosmetic and naming won't be enough and US will still consider it as Made in China.

What will happen is manufacturers will likely do the minimum to meet the cut-off. This will mean China will still produce the basic raw lower level assemblies. Some jobs will be loss. There will be a slight delta in product cost due to additional touches in Mexico. Consumers probably won't feel much impact.

If this model continues long enough, soon manufacturers will find cheaper eco-system outside china. This could be expedited and permanent if they decided to adjust the value-add criteria higher such that it may not make sense to even do basic assemblies in China. When this happen, product cost will soon come down to norm or even cheaper. This could take a few years to happen though.

The final stage will be when the new eco-system is so establish, Mexico can be a manufacturer not only for America market but also the other parts of the world. At this time, China will start their own protectionist measures requiring their own local value-add to sell in China.

Replace Mexico with few other like countries. Countries that benefits from this trade war will be Vietnam, Taiwan, Mexico, Thailand, Cambodia, South Korea, Japan, Singapore etc. Maybe even India if they open up their market fast enough. Remote choice could be North Korea if they have settled their difference with America.

From what I see, trade war is just a pre-text for bigger things to come. Is about ensuring US stay much ahead. So from this read, who will pays for the tariffs ? Where should we focus our investments ? How the world will be after ? Food for thoughts.

Cory
2019-0614