‍

Globalisation is unravelling rapidly

The timing of the US tariff announcement was clearly political and aimed at voters and producers rather than consumers. However, it marks an important shift in unravelling the world of Globalisation, as well as threatening EU unity and exposing the inherent contradictions in believing net zero is a job creating policy. In short, in trying to head off populist protests against the impact of globalist policies in order to preserve them, the Globalists are actually unravelling these very policies…

The timing of the announcement last week that the US would impose tariffs of 100% on Chinese exports of EVs, as well as varying % tariffs on steel, batteries, solar cells, and critical minerals was obviously political, as many of the key swing states in the upcoming US Election are facing intense competition from China and politicians need to promise jobs in order to get elected. However, more importantly it marks a profound shift in international trade and a ratcheting up of Geo Politics in the calculus of corporate profitability, and thus for investors.

The tariffs are about jobs and votes and, more importantly, an attempt to re-industrialise the US. It also suggest attempts to reduce US dependence on imports ahead of a likely move to devalue the $.

Having ‘rolled the pitch’ (as they say  in Cricket) with months of intensifying anti-China propaganda, the all-powerful US  narrative machine is now pushing out stories about China ‘cheating’, ‘unfair subsidies’ and ‘dumping’ to justify these protectionist moves. As such, little notice is given to the fact that tariffs are paid by the domestic consumer, not the overseas producer. Importantly, that includes domestic producers as well; users of steel, aluminium and other critical minerals will have to pay more for their inputs and that will be passed on to consumers as well.

Meanwhile, there is some concern that since swing states actually export to China and are thus at risk of any retaliation, this may actually backfire. However, the reality is that, right now, this is about corporate pleading and politics and not about the consumer. However, that can not last; there will be political blowback.

Source Bloomberg

This is because, while the rhetoric means that few will immediately notice or comment on either the double standards of the so called ‘Inflation Reduction Act’, (IRA) which is nothing more than a huge subsidy to US corporations, nor the irony of it’s name, they will notice its impact on their wallet (or pocketbook). For together with tariffs on cheap imports, this will of course increase inflation and a policy of preventing competition and raising consumer prices to protect corporates is not sustainable.

The US wants European consumers to subsidise US producers in Europe and keep out Chinese competition

The headline grabbing US tariff on EVs is more noise than substance for the US, as current US EV imports from China are minimal. But not so for Europe, not least because the EU has been aggressively pushing EVs as part of the net Zero policy. All carmakers  - including US ones like GM, Ford and (EU hybrid) Stellantis, as well of course as Tesla - are recognising that they have likely over-committed to EV production in Europe to meet the theoretical mandated demand and now face price and quality competition from China. As such, the pressure on Europe to follow suit is coming at least in part from the powerful Detroit lobby to protect their overseas interests. And it is here that we see another thread of Globalisation unravelling.

This is causing some serious problems for EU unity. The swing states in the US may be competing for Auto Employment, but so are the ‘swing states’ in the EU.

President Macron is basically telling China that they should open up factories in Europe - by which of course he means France. Historically the EU played a key role in these decisions, allocating subsidies in the form of industrial policy to ‘encourage’ large automakers to establish in certain countries and the Global automakers themselves are past pasters in ‘Forum Shopping’ for subsidies. However, part of the populist revolt this summer in Europe is coming from pushback on policies that favour Global corporations over local business and consumers and national leaders are themselves focusing on local jobs and employment even as the EU continue their grand designs. European states competing for Chinese factories to relocate even as the EU wants to impose tariffs is another unstable equilibrium.

Then there is the EU itself. This is also unstable. In the past it flipped from supporting EU manufacturers like SolarWorld with tariffs against Chinese Solar panel makers to supporting the needs of EU consumers instead. Such contradictions in policy are only going to intensify as EU unity unravels.

Politicians need to ask “Where are the workers?”

Of course the other unpleasant reality is that the reason that China is so competitive is not so much cheap labour, but extensive automation particularly in areas like autos. Thus, in isolation, having a car factory in your country creates far fewer jobs than it used to. Meanwhile, EV production is even less labour intensive than that; Ford CEO Jim Farley recently suggested that EV factories use 40% less labour than Internal Combustion Engine production. If we combine this with a Mckinsey study which suggested that Chinses EVs are even more automated than that, 50-60% automated versus 30-40% in Europe, it means competing on price with China is really tough. And that is assuming that improving to the Chinese level is even politically possible in the west, as it means job losses and difficulties with the Unions. The likelihood is that majority of any jobs created will be in the supply chain rather than the factory itself.

Is a VW made in China German or Chinese?

Another key problem emerging is actually how to define a Chinese EV? For example, , while Hungary is producing Chinese owned EVs, (the picture above is of a BYD factory) the big German car makers are increasingly manufacturing in China itself - as incidentally is Tesla. Historically, a Japanese owned company was OK, so long as it manufactured within the EU (a key benefit for the UK in the past). Would the same now apply to China? Similarly, when Mercedes made cars in the US and exported them back to Europe, that was OK (apart from quality problems). So, would a tariff be applied to a VW made in Shanghai and exported to Germany?  If so, would VW give up  on China? Or the EU?

The tariffs also highlight the magical thinking and economic folly of a Green Industrial Policy

Unlike the historic experience of competition with Japanese and Korean auto makers, the competition from China comes at a time when a combination of (US led) sanctions on imports of energy and raw materials from Russia and net zero policies have left European manufacturing extremely uncompetitive, not just against China, but also India and the US. Why single out China for tariffs?  The fact is that the US is re-industrialising not at the expense of China, but at the expense of Europe. With energy costs between 6 and 10 times that of India, China and the US and with this also feeding through into lower disposable income and thus reduced demand, the belief in net Zero as a source of ‘well paid jobs’ is unravelling as fast as globalisation.

Forcing consumers to buy expensive electric cars in pursuit of  net zero, then preventing competition making that more affordable is not only bad economics, it is bad politics and will lead to ever more pushback against the climate alarmism. Similarly with Solar panels and the rest of the world of ‘Green Energy’, opinion is shifting about what are increasingly being called ‘luxury beliefs’.

Meanwhile, the inherent contradiction of claiming that it is vital to ‘save the planet’ then effectively banning the products that would supposedly achieve that is confusing many who believe what the Government tell them, as well as opening the pandora’s box of cost benefit analysis that they have been so keen to keep closed. Despite claims from activists to the contrary, the Green Leap Forward is dramatically increasing the unit cost of energy production and reducing, rather than increasing the standard of living. Efforts to deal with this that fail to address the root cause (net zero) are doomed to failure, both politically and economically.

The Great Unravelling…

Overall, we see a great unravelling occurring, as not only the Globalisation of manufacturing and company supply chains, but also the key Globalist policies of open borders and Net Zero are coming unstuck under the combination of populist pressure and their own inherent economic incoherence. In trying to buy off populist protests with tariffs on China and propaganda about cheating and national security, the Globalists are fatally undermining the very policies they are trying to save. Meanwhile, we should not overlook the fact that a US economy that has reduced its reliance on imports from China has every incentive to push the $ lower. Our currency, your problem redux.

‍