News - 08.24.2018

Trump’s Tariff War is not all doom and gloom. Here’s why.

The current trade tariffs imposed by the Trump administration around steel—and more broadly products of material metals from China—have brought about an interesting situation in our global economy.

Datum News

There is the expected concern surrounding product demand and the consequences this trade war will have, but we forget about the unexpected opportunities tariffs have the potential to create.

It’s not all doom and gloom.

As a business with specific needs for these products, your first thoughts are “Shit, costs are going up by 10 or 25 percent.” But at the same time, we can ask ourselves if this new situation we are in brings us any opportunities, and if so what are they?

Trade tariffs in some ways are a subsidy, and a subsidy is particularly useful when innovating.  It can help people achieve things that they otherwise couldn’t, because they now have money they otherwise wouldn’t have had. If these tariffs are considered appropriately—in the context of it being seen as a subsidy and imposing a floor price on a product—then they can be used to grow and develop a business, but more importantly, incentivize technological improvement. Tariffs force businesses to consider the alternative: whether they should restructure their business, use an entirely different product or even invest in making their own.

The tricky thing with tariffs is not knowing how long they are going to last. They could last for the next three, four, five years or we can wake up one morning to find that the current administration has decided to take them all away. With this in mind, businesses needed to be aware of their investments, because the danger of a tariff viewed as a subsidy is that it often influences poor decision making when managers get distracted by the idea of free money. When that tariff (or subsidy) goes away, the new businesses often become unprofitable.

In our specific situation with steel, no one is going to invest in the equipment needed to build the product because it makes no sense financially, and the steel business doesn’t need anymore capacity. To build a steel mill takes years, and by that time the trade tariffs may be gone. The aluminum products we bring in are a slightly different situation. They pose a potential for investment and innovation. We have alternatives to the products we import from China, but they cost more—whether that is the actual acquisition cost or the switch cost. These trade tariffs, and the potential price increases associated with them, can be used as an incentive to get our customers to invest in alternatives, because in the long-run they’ll be cheaper and more cost effective. They may not consider the switch cost of a few thousand dollars initially, however if their current costs are going to increase over a year due to these tariffs, then it may be in their interests to invest now because they’ll be better off in a shorter period of time and for the long haul.

Of course, this is all circumstantial and depends on the business and product. Trade tariffs will inevitably bring about innovation which can have both positive and negative outcomes. However, the obvious is that tariffs will also cause job loss and immediate negative consequences as well. Only time will tell how these tariffs will ultimately impact the global economy.