(Bloomberg Businessweek) -- Donald Trump’s proposed steel and aluminum tariffs have made American corporate executives jittery. That’s because they can easily imagine other countriesresponding by trying to tax U.S. whiskey, Caterpillar Inc. excavators, and Boeing Co. jets.
“God bless Boeing,” Trump said last February, right around the time he exclaimed, “I love Caterpillar.” A lot of good those warm feelings will do Boeing and Caterpillar: Both are big metal users and face competitive pressures from abroad that a trade war will only intensify.
Trump insists he’s not backing down on slapping broad levies on steel and aluminum imports, even as a growing chorus of world leaders, corporate executives, and members of his own party criticize the strategy. Whether he’s too stubborn to admit error or actually believes his statement that trade wars are “easy to win,” Trump seems determined to encourage retaliation. After the European Union raised the possibility of imposing levies on Harley-Davidson Inc. bikes and Kentucky bourbon, Trump threatened tariffs on European cars.
There’s still a chance the tariffs won’t be imposed or get watered down with exclusions for U.S. allies. House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady have criticized them, while Senator Mike Lee, a Utah Republican, is proposing a bill that would limit the president’s ability to impose tariffs without congressional approval. But for now, Trump’s rhetoric keeps the possibility of an all-out trade war alive, crystallizing the worst fears of many American CEOs, including those who thought they had a friend in the White House.
Caterpillar has forecast sales growth for its construction business in 2018—in part because it expects strong demand from China, at least through the first half of the year. Should tensions escalate, China, which is spending heavily on its “One Belt, One Road” infrastructure initiative, might shift more of that business toward local manufacturers such as Sany Heavy Industry Co. or Zoomlion Heavy Industry Science & Technology Co. Japan’s Komatsu Ltd. might take business from Caterpillar in deals with U.S. allies irritated by Trump’s actions.
Boeing faces similar challenges. The global aircraft fleet will double over the next two decades, with China set to overtake the U.S. as the world’s biggest aviation market by 2022. “It’s an incredible growth opportunity,” Chief Executive Officer Dennis Muilenburg told an investor conference last month, “but we have to be able to compete and win.”
There’s the rub. Aluminum makes up about 80 percent of the weight of most commercial aircraft, and tariffs would likely make Muilenburg’s metal cost more than his competitors’. Beijing’s homegrown manufacturer, Commercial Aircraft Corp. of China Ltd., hopes to bring a rival to Boeing’s best-selling 737 to market by 2021, and archrival Airbus SE is already ahead in the People’s Republic: It’s got a final-assembly plant operating in Tianjin and quotes unfilled orders for 551 planes from mainland Chinese and Hong Kong buyers, compared with Boeing’s 325.
Eaton Corp.—the $36 billion maker of lighting gear and truck parts, once based in Cleveland, but legally incorporated in Ireland since a 2012 inversion—is among the first big industrial companies to put a number on the direct impact of the tariffs. The company said on March 2 it could see a $50 million increase in its raw materials costs if tariffs are enacted on all grades of steel and aluminum by April 1. The recently passed tax legislation will give U.S.-based manufacturers a bigger buffer to absorb the impact of rising material costs, but that was hardly the point of the overhaul.
Foreign companies that have followed Trump’s exhortations to do more manufacturing in the U.S. will also have reason to feel sore. Automakers including Toyota Motor, Daimler, and Chinese-owned Volvo Car announced $5.5 billion of new U.S. factory investments in the nine months through September. That’s less than the average $10 billion in annual spending over the past decade, but the caution now looks justified.
Hyundai Motor Co. promised last year to invest $3.1 billion in the U.S. through 2022 with its Kia Motors Corp. affiliate. The tariffs “could negatively impact our current U.S. production and further expansion,” a spokesman for the Korean carmaker told Bloomberg News in an email on March 2.
Should a trade war turn political, the shock waves could even extend beyond metal-bashing industries. Sheldon Adelson, the No. 1 donor to conservative groups in the 2016 election cycle, depends on his casino concessions in the Chinese territory of Macau for about 60 percent of revenue at his Las Vegas Sands Corp. Those rights are due to expire in 2022. The government of Macau last year promised to provide details on how it would extend the concessions around the middle of this year. Adelson may find it harder to get his rights renewed if there’s a trade war going on. The same issue could affect Wynn Resorts Ltd., already reeling from the resignation of its founder and GOP fundraiser Steve Wynn after sexual assault allegations.
Watch what happens to deals, too. The Committee on Foreign Investment in the U.S. (CFIUS) has taken an increasingly tough stance on Chinese takeovers. In a trade war, China’s antitrust regulator, the Ministry of Commerce (Mofcom), may push back harder—or simply drag its feet—on proposals that cross its desk. Qualcomm Inc.’s $46 billion purchase of Netherlands-based NXP Semiconductors NV was announced more than 15 months ago, and the companies are still awaiting signoff from Mofcom. Qualcomm needs the deal to help it fend off Singapore-based Broadcom Ltd.’s proxy fight and attempted $100 billion takeover bid, both of which are on hold after CFIUS intervened.
Even Apple Inc. may have reason for concern. Its $45 billion of annual revenue in China is bigger than those of the next three largest U.S. companies there put together. Beijing has proved adept at directing China’s shopping habits: An unofficial boycott of South Korean goods after the country deployed a missile defense system poleaxed local sales for Hyundai and retailer Lotte Shopping Co. in 2016 and 2017. If any power on Earth can keep consumers’ hands off the latest iPhone upgrade, it’s the Chinese government. One thing’s sure: A supposedly “easy to win” trade war is going to have a lot of American losers.Brooke Sutherland and David Fickling are columnists for Bloomberg Gadfly.
To contact the authors of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net, David Fickling in Sydney at dfickling@bloomberg.net.
To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net.
©2018 Bloomberg L.P.
