How has Apple been impacted by trade tensions with China?

Source: Wired

Anyone looking for positive news regarding trade with China might want to move onto another site.  Not that I intentionally want to sound negative regarding trade between the United States and China.  Quite the contrary, I would love to report great news regarding trade -- if there were some to report.  Unfortunately, the United States is in a period of 'stagnation' with China over trade tensions.   Which have caused adverse impacts on the Soybean industry and Cherry industry -- as highlighted on this site in the past few months.  Cherries and Soybeans are not the only industries which have started to feel the impact of trade tensions between China and the United States.  These tensions are highlighted in the anxieties noticeable in a recent 'letter' to investors by Apple CEO Tim Cook:

January 2, 2019

To Apple investors:

Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29. We now expect the following:

 1) Revenue of approximately $84 billion

 2) Gross margin of approximately 38 percent

 3) Operating expenses of approximately $8.7 billion

 4) Other income/(expense) of approximately $550 million

 5) Tax rate of approximately 16.5 percent before discrete items

We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.

Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance. 

While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now. Our final results may differ somewhat from these preliminary estimates. 

When we discussed our Q1 guidance with you about 60 days ago, we knew the first quarter would be impacted by both macroeconomic and Apple-specific factors. Based on our best estimates of how these would play out, we predicted that we would report slight revenue growth year-over-year for the quarter. As you may recall, we discussed four factors:

First, we knew the different timing of our iPhone launches would affect our year-over-year compares. Our top models, iPhone XS and iPhone XS Max, shipped in Q4’18—placing the channel fill and early sales in that quarter, whereas last year iPhone X shipped in Q1’18, placing the channel fill and early sales in the December quarter. We knew this would create a difficult compare for Q1’19, and this played out broadly in line with our expectations.

Second, we knew the strong US dollar would create foreign exchange headwinds and forecasted this would reduce our revenue growth by about 200 basis points as compared to the previous year. This also played out broadly in line with our expectations.

Third, we knew we had an unprecedented number of new products to ramp during the quarter and predicted that supply constraints would gate our sales of certain products during Q1. Again, this also played out broadly in line with our expectations. Sales of Apple Watch Series 4 and iPad Pro were constrained much or all of the quarter. AirPods and MacBook Air were also constrained.

Fourth, we expected economic weakness in some emerging markets. This turned out to have a significantly greater impact than we had projected. 

In addition, these and other factors resulted in fewer iPhone upgrades than we had anticipated. 

These last two points have led us to reduce our revenue guidance. I’d like to go a bit deeper on both. 

Emerging Market Challenges

While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.

China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.

Despite these challenges, we believe that our business in China has a bright future. The iOS developer community in China is among the most innovative, creative and vibrant in the world. Our products enjoy a strong following among customers, with a very high level of engagement and satisfaction. Our results in China include a new record for Services revenue, and our installed base of devices grew over the last year. We are proud to participate in the Chinese marketplace.

iPhone

Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. 

While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be. While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements. 

Many Positive Results in the December Quarter

While it’s disappointing to revise our guidance, our performance in many areas showed remarkable strength in spite of these challenges. 

Our installed base of active devices hit a new all-time high—growing by more than 100 million units in 12 months. There are more Apple devices being used than ever before, and it’s a testament to the ongoing loyalty, satisfaction and engagement of our customers. 

Also, as I mentioned earlier, revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac. Our non-iPhone businesses have less exposure to emerging markets, and the vast majority of Services revenue is related to the size of the installed base, not current period sales. 

Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020.

Wearables grew by almost 50 percent year-over-year, as Apple Watch and AirPods were wildly popular among holiday shoppers; launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth and the launch of the new iPad Pro drove iPad to year-over-year double-digit revenue growth. 

We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea. And, while we saw challenges in some emerging markets, others set records, including Mexico, Poland, Malaysia and Vietnam.

Finally, we also expect to report a new all-time record for Apple’s earnings per share.

Looking Ahead

Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.

As we exit a challenging quarter, we are as confident as ever in the fundamental strength of our business. We manage Apple for the long term, and Apple has always used periods of adversity to re-examine our approach, to take advantage of our culture of flexibility, adaptability and creativity, and to emerge better as a result. 

Most importantly, we are confident and excited about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas.

We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results. One such initiative is making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone. This is not only great for the environment, it is great for the customer, as their existing phone acts as a subsidy for their new phone, and it is great for developers, as it can help grow our installed base. 

This is one of a number of steps we are taking to respond. We can make these adjustments because Apple’s strength is in our resilience, the talent and creativity of our team, and the deeply held passion for the work we do every day.

Expectations are high for Apple because they should be. We are committed to exceeding those expectations every day.

That has always been the Apple way, and it always will be.

Tim

After Apple CEO Tim Cook released this letter to investors the stock took a hit of 10%.  Tim Cook still tries to stay optimistic despite parameters which directly impact his company are under the control of the Trump administration.  There has been buzz in the news lately regarding this potential problem.  Is a real solution in sight?  I am not one to speculate -- so the question remains open ended.


Conclusion...



Regardless, trade tensions cannot keep going on between China and the U.S. -- otherwise, more industries will start to feel real pain.  According to economists, the amount of money at stake is small compare to the rest of the economy.  Although, the few industries (sectors) which have had a negative impact on business cause a stir in important industries (smartphones being one?).  Additionally, China plays a huge role in the assembly of smartphones (and other smart devices) for the United States.  Precious metals are mined in the United States.  The unprocessed ore is sent to China to be processed for the  eventual incorporation into smartphones along with other digital devices (Apple, Samsung, etc.).  The United States does not have the capability (processing plants) set up to do the work here.  Nor are there any immediate plans (in congress) to build any back up into the system.  There was discussion last year on the sense of urgency of having our own (independent) processing plants as back up in the case of situations like the present (i.e. trade tensions).



Therefore, a healthy trade relationship with China is sought out for the United States.  And no, that does not mean that the U.S. closes trade deficits with China or other Countries.  Global trade is based on the fact that the United States will not necessarily have monetary gains but positive benefits in other areas.  Be those extra provisions which were previously built into the TPP (Trans Pacific Partnership) or NAFTA (North American Free Trade Agreement), or other agreements.  The inherent benefits are often far from direct financial gains.  Trade relations should be restored between the U.S. and other countries as soon as possible.  Holding out for a better deal is only looking to lose more -- as has been shown already with TPP.



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Trade War Hurts Farmers -- From The Farmer's Mouth Directly

"Trade Not Aid" -- The Answer For Trade War!

Soybean Farmers Are Storing Too Much Soybean, Although Chemical Industry Is Greenlighting Trade Deals?

Source: Post Bulletin

Depending on your exporting destination or importing origin along with the industry type, the response to the Trump Administration's tariffs program and emerging trade war is different.  For the chemical industry which heavily relies on good relations with local (North and South) neighboring countries, life is acceptable - as reported recently in the chemical news.  At the same time, if you are a soybean farmer or a farmer who relies on storing product in elevators for an extended period of time, trouble is approaching quickly due to trade coming to a 'stand still'.   The two different scenarios are listed below - briefly.

Soybean Storage?

Early on after trade tariffs were set to take effect, I wrote a blog post discussing (briefly) the benefits of global free trade.  In which, I highlighted the obvious fact that all commodities are connected to each other in some manner. Recently, the news site 'Politico Agriculture' has shed light on the connectivity which the trade industry relies on:

HIDDEN TRADE WAR IMPACT: CROP STORAGE SHORTAGE: Retaliatory tariffs have weighed down commodity prices for months. With the harvest well underway, the trade dispute with China is dealing another blow to U.S. soybean producers: a shortage of space in grain elevators that's causing major backups in states like North Dakota, Minnesota and Louisiana — and driving down prices even more.

China, the biggest market for U.S. soybeans, slapped 25 percent duties on the crop in retaliation for President Donald Trump's tariffs on Chinese high-tech products. Now it's effectively closed for business to American soy growers. Some farmers are gathering more soybeans than they can sell or store, jam-packed silos are running out of room, and the trains that usually carry soybeans to the Pacific Northwest for shipping to China aren't moving.

"In Southwest Minnesota and the Dakotas, you now have elevators that are storing all their beans because there's no market to the West. There is absolutely no bid," said Bill Gordon, a farmer in Worthington, Minn., and member of the American Soybean Association board of directors.

Gordon said some storage sites are piling corn outside to make room for soybeans, and that his local grain elevator is expected to be full after just one week of the month-long harvest.

Cash prices falling: The demand for storage space is also widening the gap between the market commodity price for soybeans and the cash price farmers receive for their crops at the elevator. Grant Kimberley, director of market development for the Iowa Soybean Association, said the drop-off — or "basis" — is normally 30 to 50 cents per bushel in central Iowa. Now it's about $1 per bushel.

Downstream problems: There's also a surge of Midwestern crops being shipped down the Mississippi River to New Orleans, where they're sold to Europe, South America and elsewhere. That's putting extra strain on growers and exporters in Louisiana.

"Everything is choking up right here on the Mississippi River on the barges and the elevators," Abraham said. "Every elevator that we have is full of soybeans right now and can literally take no more on."

Soybeans are taking up space which might be used for other crops which need to be stored too.  The states being affected - North Dakota, Minnesota, and Louisiana - have around 130,000 farms (combined in 3 states).  Not all of those farms serve the soybean industry.  Although, that enormous number of farms could be impacted by the connectivity to other crops which need to use the same storage space used temporarily for soybean crops held up by trade tariffs.



On top of the elevators being filled up are the barges (storage boats) which are filled up with soybeans being transported to other states to be stored.  Shown below is an example of a barge filled with soybean being filled.  Just think of all the transportation, space, and time -- which equates to money burned -- waiting to be moved, stored, or shipped.  All of the jobs which are on hold due to trade tariffs.  Not cool.

Source: Feed Stuffs

Additionally, the mere fact that China can just shut down and refuse any crops from the United States shows how reliant the United States is on other countries.  Which is dangerous to say the least.  Our reliance to other countries for crop sales or technology processing is becoming a major issue which going forward into the future will have be heavily weighed by those in elected office who make the large decisions in Washington D.C.



Although, they are elected positions therefore, your input is imperative in driving their respective vote.  With that being said, keeping up with the status of trade talks and disenfranchised farmers is important in moving forward participating in democracy.  Below, the conversation shifts from grave concern now to the chemical industry.  The chemical industry is quite pleased with the changes - which is strange.

Chemical Industry Is Good!

As I mentioned in the introductory paragraph, the chemical industry is one which has flourished since a deal has been arrived at between Canada, Mexico and the United States.  According to the Chemistry trade journal 'C&E News' titled "U.S. chemical industry reacts positively to revised trade pact with Canada, Mexico" the deal is being cast in a positive light:

The U.S.-Mexico-Canada Agreement (USMCA) is an overhaul of the 24-year-old North American Free Trade Agreement (NAFTA), which underpins $1.2 trillion in total trade between the three countries.

The trilateral accord is critically important to U.S. chemical manufacturers because Canada and Mexico are the industry’s two largest export markets. Approximately 46,000 chemical industry jobs in the U.S. now depend on trade between the North American neighbors.

Although ACC and its member companies are still reviewing the provisions of the updated trade pact, the industry group says the agreement “appears to include several enhancements long sought-after by the U.S. chemical sector,” including greater regulatory cooperation.

That is not to say that other industries reliant on chemicals and pharmaceuticals are not hurting with the trade war emerging with other international countries.  Noted in the article above that 46,000 jobs depend on trade.  That is just one single industry - chemical industry.  Imagine all other industries across the board which contribute to global trade which are being negatively impacted.  The total amount of jobs which are tied to the trade of those industries.  When all is considered, the numbers are enormous and difficult to comprehend.

Conclusion...

Just today in 'Politico Agriculture' was the following news:

TRADE DISPUTES LOOM OVER GLOBAL FOOD SECURITY: Trade protectionism and climate change are among the factors weighing on international food security, according to the Economist Intelligence Unit's Global Food Security Index, a benchmark used to measure individual countries' level of food security.

The report, released Tuesday by EIU and DowDuPont's Corteva Agriscience, cited China's retaliatory tariffs on U.S. soybeans as an example of trade turmoil that can raise prices for consumers and hit low-income families the hardest.

"Protectionist trade policies can contribute to world food price increases and limit agricultural competitiveness," EIU wrote.

The benchmark has the U.S. tied for third place with the United Kingdom — and down in the rankings for the second year in a row. The result doesn't indicate a worsening situation in the U.S. but, rather, slower progress on food issues than other nations. Singapore ranks No. 1, followed by Ireland in second. The Netherlands rounds out the top five.

In light of the news above, get ready for prices to change due to changing demand both internationally and within our nation.  As highlighted, each of these avenues of export are tied to one another in some manner.   Typically, the thought of total impact never crosses each of our minds.  That needs to change with the changing times.



Instead of thinking in terms of an 'isolationist' country, the United States needs to again open up trade avenues to disseminate the crops which are stored and hindering profit margins of families (farm families) along with all of the other players in the trade game: tractor drivers, truckers, dock workers, mariners - captains of ships, ship manufacturers, shipping companies, traders, diplomats, local store owners, foreign store owners, Chinese supply chain.  All of these players have families to support.   Not to mention the amount of energy needed to move goods across supply routes nationally and internationally. 



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Parameters: How many sticks of butter are contained in 7.5 million pounds of butter?


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How many cows are needed to generate 50,000 tons of beef exports?

Source: EcoWarriorPrincess

Recently, I wrote a post on the import of butter into the United States in a given month.  According to the excerpt that I cited, the amount in a single month was significant (as an import).  Continuing along this path, the media/news outlet 'Politico' recently reported about the negotiations surrounding the export of beef to Europe.  As indicated in the excerpt below, European nations want to cap the amount of 'hormone-free' beef arriving from outside nations:

How the quota works: The policy stems from a long-running World Trade Organization dispute over the EU's refusal to import U.S. beef treated with hormones. In 2009, the U.S. and EU agreed to set an annual quota of 45,000 metric tonnes (nearly 50,000 in U.S. tons) for hormone-free-beef imports to Europe, which was open to the U.S. and other nations.

After reading the ceiling of 50,000 tons for the import limit from outside nations, I wondered how many cows are needed to generate that amount of beef.  Below is the analysis with the answer.

How much beef for a single cow?

To  begin the analysis, the first question is searchable by using a search engine such as Google with the following question: How much usable meat from a cow?  The answer is shown below:

Source: Google

Note: At first sight, the way that the question is stated might seem strange.  Although, as a user enters words, the Google algorithm starts to guess what the final question is.  Which I use to assemble the question.  That statement was put into the blog post to cover the readers who will read the question and wonder if I know how to ask questions.  Yes, the answer is in short.  I am not beyond the use of assembled questions though too.



The answer indicates that from a 750 pound carcass (remains of a single cow), there will be roughly 490 pounds of 'steak'.  This answer is the conversion factor which we will use to convert the total amount of meat (hormone-free beef) into cows.  The conversion factor is shown below:

The total amount of usage (edible) amount of beef from a single cow is shown above to be 490 pounds of meat.  Before that conversion factor can be useful in our analysis, another unit conversion must take place.  The statistic cited in the introduction of 50,000 tons is expressed in units of 'ton'.  In order to divide by the number above, a unit conversion needs to be accomplished from units of 'ton' to units of 'pound' as shown below:

Our unit conversion revealed that 50,000 tons of beef corresponds to 100 million pounds of beef.  How many cattle does that represent?  The question of interest can be answered by dividing the answer above by 490 pounds/cow as shown below:

100 million pounds of beef -- the total amount of 'hormone-free' beef allowed to be imported into Europe from outside nations requires 204,082 cows to be processed for beef!



How do 204,082 cattle as exports compare to the total amount of cattle processed for beef annually in the United States?



A quick search using Google will reveal a few answers.  One of which is from a website called "Beef2Live" with the following annual world beef production statistics shown below:

Source: Beef2Live.com

I restricted the image size only to include the top 5 beef producers in the world.  As you can see, the United States is the largest.  The annual production of beef in the United States is around 12 million tons of beef.  In comparison, 50,000 tons represents around 0.41% of Annual Beef production in the United States.

Conclusion

Wow!  That really shows the restriction of imported beef into nations under the European Union from outside nations.  At first sight the number might seem significant.  Although, after performing an analysis and casting the statistic into perspective of annual beef production in the United States, the statistic is rather small.  Further, the United States is the world's largest beef producer on an annual basis.  Analyses like the one above really help a reader understand the news in relation to other reported values.  The cited statistic is not really that significant as reported in the excerpt above.  Although, with the status of today's global trade negotiations, every cow counts.



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"Trade Not Aid" -- The Answer For Trade War!

Source: Malulu

Last week, President Trump announced the financial bail out of $12 billion for farmers who are losing large profits to the trade war.  At first pass, a majority of Americans were expecting such a measure at the very least.  Especially, since the President himself is to blame for the new trade war between countries who used to have agreements prior to the inauguration of the President.  Not everyone is happy with the aid offered to the farmers negatively impacted by tariff set by President Trump.  In fact, the recipients of the trade relief have been chanting along with sending the message "Trade not Aid."



This slogan should come as no surprise to anyone who has received a large payout.  The money is great in the short run - until the money runs out.  That is, if all of the aid is spent on keeping up the farm output with no money coming in, then the money will run out quickly.  Which brings us to the current state of affairs highlighted in an excerpt by Politico Agriculture sent out via e-mail on Monday shown below:

TRUE TARIFF BAILOUT WOULD COST $39 BILLION: The full cost of a government aid package to help U.S. all manufacturers, farmers and fishermen negatively affected by President Donald Trump's new tariffs on steel and aluminum from around the world and a host of products from China could reach $39 billion, the U.S. Chamber of Commerce reports this morning. That works out to be another $27 billion on top of the $12 billion the Trump administration announced last week to help U.S. farmers.

"While America's agricultural industry has been hit extremely hard by escalating tariffs, it's not alone," Neil Bradley, U.S. Chamber executive vice president and chief policy officer, wrote in a blog post. "Thousands of U.S. companies - including manufacturers, input suppliers, fisherman, and businesses from numerous other industries - are finding it more difficult to sell American made products abroad amid the growing trade war."

Other sectors are feeling the pain: The business group estimates that U.S. automobile, motorcycle and parts manufacturers would need up to $7.6 billion in federal aid if the assistance promised for farmers is extended to other sectors. Chemical manufacturers would need $960 million; prepared food manufacturers, $884 million; fishermen and crabbers, $811 million; soap manufacturers, $725 million; beverage manufacturers, $765 million; shipbuilders, $632 million; and furniture makers, $567 million.

Last week, U.S. Trade Representative Robert Lighthizer told lawmakers at a Senate Appropriations subcommittee hearing the administration had no plans "at this time" to extend its farmer aid package to other sectors.

Bradley, in the Chamber's blog post, made clear what the business group would really wants is for Trump to remove the tariffs and back off from the threat of imposing more. "The best way to protect American industries from the damaging consequences of a trade war is to avoid entering into a trade war in the first place," he said.

Steel needs help ... because of the steel tariffs?: Ironically, some of the biggest recipients of an expanded aid package could be two sectors, steel and aluminum, Trump set out to help with his tariffs. A number of countries have retaliated against U.S. steel and aluminum exports, so companies that produce steel and/or manufacture steel products could need $6.4 billion in federal aid and U.S. aluminum companies could need $2.4 billion, the Chamber said.

... AND MORE ON THE TARIFFS: USDA Secretary Sonny Perdue had been in Argentina since Friday, meeting with his fellow ag ministers from the Group of 20 nations. While there, he told Reuters that farmers shouldn't expect to be completely compensated for their losses. "Obviously this is not going to make farmers whole," Perdue said. He also said that about $7 billion to $8 billion of the aid will be in direct cash relief, while other money will go toward export promotion and buying up excess crops.

War of words, and worlds: Officials of the influential Koch network warned that President Donald Trump's tariffs could result in "long-term damage" to the country.

"When in order to win on an issue someone else has to lose, it makes it very difficult to unite people and solve the problems in this country. You see that on trade: In order to get to a good place on trade, convince the American people that trade is bad, " Brian Hooks, one of Charles Koch's top deputies, said this weekend during a briefing for reporters at the network's gathering in Colorado Springs, Colo., POLITICO's Maggie Severns reported.

Those comments prompted former White House chief strategist Steve Bannon to attack the network in turn. In an interview with POLITICO on Sunday, Bannon called the comments unhelpful. "We can have a theoretical discussion later, OK? This is why they don't know what it means to win, OK?"

The excerpt shown above illustrates the loss or potential loss to the deficit of either $12 billion or $39 billion regardless of who is correct.  Either way, the United States of America has officially opened an unlimited credit card account to "Make America Great Again" -- at least that is what is supposed to be happening.  The opposite seems to be unveiling in reality though.



What is surprising about the situation America finds itself in -- in regards to the 'trade war' is that even if the United States could recover or agree on trade agreements with countries based on the previous tariffs, our country would still lose out.  The trade agreements which the United States previously had with other countries had 'special provisions' attached to them.  The possibility of regaining these 'special provisions' is out the door heading into the future.



Which means that even if similar relations were recovered, the 'special provisions' would be gone.  "Free Trade" is based on certain deficits incurred by various countries.  While the United States appears to be 'a loser' on trade deals, as a country the United States has been a 'winner' in a large amount of situations.  I discussed briefly 'global free trade' in a previous post.  The United States is considered the 'major player' on the world stage -- at least as of 2 years ago.



This position has quite possibly changed over the last 2 years.  The current trade war has not helped us on the international stage.  As the excerpt above states: "When in order to win on an issue someone else has to lose, it makes it very difficult to unite people and solve the problems in this country. You see that on trade: In order to get to a good place on trade, convince the American people that trade is bad" -- The American people are now being convinced by politicians that being taken advantage of is a terrible cost of doing business on the world stage.  That is not necessarily the case.



Conclusion...



Bad news consists of recent events such as China telling shipping boats carrying up to 1.5 million shipping boxes of cherries to turn around.  Which is to say, over night, the demand for cherries all over China dropped to zero.  This results to a HUGE SURPLUS of cherries being dumped onto the United States produce market -- which will drive prices down.  In the short term, cost reduction seems great.  Although, in the long term, profits suffer -- farmers suffer -- then in return -- consumers suffer.  Not great.



Other commodities (products) will face similar fates.  Look for increases in prices for consumer goods as a result.  The Trump Administration has been handing out 'exemptions' to certain corporations which make them 'exempt' toward trade tariffs.  How does that help the United States in a trade war?  The answer appears to be that the exemptions amount to setting us further back as a trade negotiator on the world stage.  Which means in certain cases, the United States looks 'uncertain' or 'unstable' in trade negotiations.  Call your elected congressional leaders and demand that trade agreements be elevated to a top position for our nation.  Follow the farmers lead "Trade not Aid".



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Source: War Is Boring

Trade is a complicated matter. With that being said, trade occurs between countries and countries benefit from the global trade system.  In a previous blog post on this site, I have stressed the importance of thinking in a 'global fashion' when discussing trade.  The possibility of isolating certain imports/exports such as steel and aluminum is not possible without negatively impacting other traded products.  In the blog post below, a few of the various 'connected' products which are being negative impacted (higher priced commodities) are highlighted below.

Warnings Before The Storm

Recently, there has been a considerable amount of news coverage concerning the trade tariffs which are being implemented by the Trump administration.  The tariffs are supposedly under the umbrella of 'protecting national security.'  Really?  What is really at stake is the relationships that have been formed over decades of bilateral/multilateral agreements.  Here are the latest few e-mails from 'Politico' news journal regarding the unfolding tariffs set to take place over the last few weeks.



According to 'Politico Energy' (last week Monday) China is planning on implementing tariffs on us too as shown below:

CHINA THREATENS ENERGY TARIFFS: The Beijing government released a target list Friday of 25 percent tariffs it says it is ready to impose if the U.S. carries out a second round of duties on Chinese goods. On the list, Pro's Ben Lefebvre reports, is a host of energy products, including shipments of U.S. oil, coal and petrochemicals. China is the third-largest customer for U.S. oil behind Mexico and Canada.

If the tariffs are enacted, U.S. oil exporters Exxon, Chevron and others would have to search for new customers, said Andy Lipow, president of consulting service Lipow Oil Associates. "China would have to buy additional quantities of oil from someone else, and the U.S. would have to look for new customers, presumably someone who lost sales from the Chinese," Lipow said. "But the imposition of tariffs can lead to a wider trade war, which ultimately slows economic growth around the world and reduces demand for fuel." More here from Ben, and more from Pro's Victoria Guida on the proposed tariffs here.

Following on Tuesday (last week), an email from 'Politico Energy' highlights OPEC and trade tariffs as shown below:

ON OPEC: Harold Hamm, founder and CEO of Continental Resources, canceled his scheduled appearance at this week's OPEC meeting in Vienna, a company spokeswoman told Reuters, saying the event didn't fit Hamm's schedule. But Reuters reports: "Hamm is the third of five U.S. shale executives to withdraw from a scheduled speaking slot at the OPEC meeting in Vienna." His withdrawal follows an intensifying trade dispute between China and the U.S., with China imposing $50 billion in tariffs on U.S. crude oil and other goods, Reuters reports. Continental has been a key supplier of crude oil to China — whose market may tilt toward OPEC suppliers in the absence of U.S. oil.

Separately, analysts at Goldman Sachs say they still expect oil prices to increase above $80 a barrel over the coming months, despite the trade tensions and concern over higher OPEC production, CNBC reports. The analysts said the possibility of OPEC producers announcing an increase to crude production levels could actually have a bullish impact on prices.

Ahead of the meeting: New analysis from French think tank Institut Français des Relations Internationales highlights 10 "OPEC+" oil producers and the extent to which they've been economically hit by lower prices. With the exception of Venezuela, leading producers managed to "navigate through the storm of lower oil prices" during the 16-month down market, but now may want to cash in and raise production, the analysis found. Read it here.

The two excerpts above now indicate that there is a greater threat to other relationships besides the trade partners in question - bilateral agreements.  This further exemplifies that more 'goods' or 'products' are tied to one another.  Then on Wednesday (last week), in an e-mail from 'Politico Agriculture', readers were given some insight into an exchange between Commerce Secretary Wilbur Ross and congressional leaders as shown below:

ROSS GETS EARFUL ON TRUMP TARIFFS: Finance Committee senators blasted Commerce Secretary Wilbur Ross on Wednesday for the damage done to the U.S. agricultural sector by foreign retaliation to the administration's steel and aluminum tariffs. American farmers "are bearing the brunt of retaliation for these actions," Chairman Orrin Hatch said during the hearing. "I just don't see how the damage posed on all of these sectors could possibly advance our national security."

Warnings about economic harm: Sen. Ron Wyden (D-Ore.) cited complaints from Oregon potato growers and Pacific Northwest cherry growers "who have got nearly 1.5 million boxes of cherries ready to ship to China. They're worried those cherries are going to end up stuck on the dock or rotting in a warehouse due to China's retaliation,"

Not buying national security line: Sen. Chuck Grassley (R-Iowa) noted that market volatility can also make it more expensive for companies to invest in commodities to balance out the risk of other holdings. "I wish we would stop invoking national security because that's not what this is about," Sen. Pat Toomey (R-Pa.) said. "This is about economic nationalism."

The goal is more free trade: Ross said the administration has "no control over what another country does in retaliation," but argued the president's most recent threat to impose tariffs on another $200 billion in Chinese products was designed to discourage further escalation. The administration's aim, he said, is to have more free trade — not less. "The president's objective is not to end up with high tariffs, and his objective is not to end up in a trade war," Ross said. "His objective is to get to a lowering of barriers, both tariffs and non-tariff ones, and to protect intellectual property. ... The purpose of this is to get to an endgame that is much closer to free trade than what we've been before."

What about farmers? But Sen. Michael Bennet (D-Colo.) blasted Ross for not articulating a vision of how agricultural producers would be protected. "I don't think you're going to have any backstop for our farmers and ranchers, and to blindly pursue these policies without considering what happens to them I think is a huge mistake," he said.

Grassley wants nothing to do with handouts: Sen. Chuck Grassley had told reporters during his weekly ag briefing Monday that Trump pointed to Agriculture Secretary Sonny Perdue before telling a group of governors and congressional lawmakers that the federal government would subsidize any losses faced by farmers due to tariffs. "That's not what my farmers in Iowa want — help from the federal treasury," Grassley responded. He reiterated his displeasure about the idea to Ross at the hearing.

How can Commerce Secretary Wilbur Ross actually state with a straight face that the tariffs are designed to move the nation closer to 'free trade' than before?  This does not make sense at all.  Why?  What the administration does not take into account is that the overall benefits of global free trade on all parties (nations) in the world?  In an earlier post, I pointed this obvious aspect out.



The current administration believes that the possibility exists to make money on free trade with tariffs.  Over the last few weeks, threats have been made by other countries to level the playing field and enforce trade tariffs on exports/imports coming from the United States.  The result will be the following as has been reported in the news so far as shown below:


1) According to the New York Times, nails used for construction will increase at least 20% in price, a 20% duty has been imposed by the European Union on imported Whiskey from the U.S., a 25% tariff by China will be imposed on Lobsters, along with unknown losses for both the Peanut Butter industry, and Cranberry industry.


2) According to economic analyst Steve Ratner on Morning Joe, the price of soft wood lumber has increased 27%, which translates to the added cost of construction to a new home of around $6,388.


3) According to USA Today, both the soybean market and aerospace exports to China will take a hit - which impacts farmers and aerospace industry.  And Harley-Davidson Motorcycle corporation will move a portion of manufacturing overseas to avoid tariffs by other countries such as the European Union -- due to the tariffs imposed by the Trump administration.



None of the above bullet points highlight the obvious terrible fact that along with increases in prices of traded goods, a corresponding loss of American Jobs will occur.   The negative impact of the above tariffs is not enormous, but represents a loss to the revenue of our country.  According to the U.S. Department of Commerce, moves such as removing our nation from trade deals (i.e. NAFTA) could result in job losses of around 2.6 million American jobs.  Wow.



In the reporting cited above, the potential trade war with China over around $50 billion is not huge, but is not necessarily preferred and will not result in any positive outcome for the United States.  Additionally, a list of 180 types of products to which tariffs will be imposed upon can be found in the following article by NPR titled "EU Tariffs Take Effect, Retaliating For Trump's Tariffs On Steel And Aluminum".



And finally, yesterday Monday, in an email from 'Politico Agriculture,' pork prices are due to increase in price by 20% on July 5 of this year:

TARIFFS PILE ON PORK INDUSTRY: Few industries have been hit harder by President Donald Trump's tariffs than pork, where producers have gone from predicting growth at the beginning of the year to worrying about losing market share in two of their three biggest markets, Mexico and China. Pork producers already took a blow in 2017 when Trump pulled the U.S. out of the Trans-Pacific Partnership, putting producers in an awkward position with Japan — the biggest importer of U.S. pork by value, according to the National Pork Board.

Pork has been targeted by tariffs at every step of the way, first showing up on a retaliatory list released by China after the Trump administration imposed $3 billion worth of duties on steel and aluminum in March. China is the third largest importer of U.S. pork, buying a little more than $1 billion worth of product in 2017. But producers are much more concerned about losing market share with our neighbor to the south. Mexico's 10-percent tariff on pork will jump to 20 percent on July 5, and the largest importer of American pork by volume is already in discussions with the European Union about ramping up cross-Atlantic imports.

The USDA's livestock, dairy and poultry outlook report released June 18 predicts hog prices are expected to average 19 percent lower in the third quarter and 17 percent lower in the fourth quarter, compared to prices from last year, in part due to price adjustments to Mexican tariffs.

Overall, in the excerpts above, the clear notion of a threat to our 'national security' is obviously not a true threat.  Therefore, the trade tariffs imposed on other countries to overcome any threat to our national security is just a ploy (a trick) to build support among the citizens of the United States of America.  Do not fall for the trick.  Below, I want to discuss briefly, the indirect effect on business with China which has been reported but is not discussed widely in the news.

Storm Larger Than Predicted

The reporting over the last few weeks regarding trade would lead a person to believe that other countries will now need to 'pay their fair share' on traded imports/exports.  That sounds wonderful in principle.  With China having around $200 billion dollars in imported goods to the United States, the U.S. stands to get a good share of money from tariffs.  While the United States has only about $50 billion in exports in return, the Chinese government appears to have less negotiating power.  At first sight...



In reality, there is an entire other sector which is not classified as 'traded goods' as reported by NPR.  Those goods or that category is 'services' -- i.e. the service industry along with the tourism industry.  Businesses would love to expand their presence in China.  The Chinese government could strike back and put restrictions on corporations which would have an unknown negative impact to the United States.  The radio station NPR aired an episode titled "What It Takes For An American To Do Business In China" in which the unknown threat was discussed as follows:

READE: Well, I hope the United States expected the response that they got because any China watcher would tell you that China will not want to come to a negotiating table from a position of weakness. China would definitely respond with an immediate and clear message.

KELLY: The Chinese cannot respond in kind, though, because the U.S. doesn't send $150 billion worth of goods to China, right?

READE: Correct, but the trade relationship is bigger than just the production and export of goods. There's a whole services side to the trade, and it's a number of things that you don't necessarily think about. So it includes tourism, which is in the billions of dollars. It also includes education.

The cumulative negative impact to the U.S. with regard to businesses trying to break into the Chinese market is unknown.  Therefore, the current trade discussion is heating up and turning into a potentially problematic situation for both countries.  Hopefully, in the months to come, congressional leaders step up along with large corporations and write/call President Trump and have him reverse the discouraging trade tariffs.

Conclusion...

Ultimately, the United States will suffer from the current move toward the trade imbalance being implemented by the Trump Administration.  There is no sign of that occurring at the moment.  The overall message coming out of the trade war is that trade is not a huge system of 'isolated components'.  Each component is tied to each other.  The analogy in medicine is that operating on one system in the human body does not impact any other anatomical/physiological system.  Truth is that each component is connected in some fashion to another.  Why would law makers, administrators think differently.



Last but not least, the real troublesome result of the ongoing breakdown of trade agreements is that deep relationships are broken or thrown into question between countries.  Which is exactly what we (as a nation) do not want.  Trust between nations is important.  Imagine if you shopped at the farmers market every week.  Furthermore, imagine if you could trust that each week a certain vendor selling a selective fruit/vegetable would definitely be there.  The vendor depends on your business and you (as the consumer depend) on the vendor showing up with the produce that you desire to purchase.  The relationship is built on trust -- really purchasing trust.



If no relationship exists, then the vendor has no reason to keep the prices the same or show up.  As a result, you are impacted (cannot buy the produce that you would like) and the farmer/vendor cannot sell product.  And the farmer's market association which hosts the market each week loses on the vendor's cut of the profits.  Relationships breakdown and everyone loses.  Lets not let that happen with other nations around the world.

Parameters: One Parameter Change In The Trade Machine Leads To A 'Re-Adjustment' Of Another

Source: Ottumwa Courier

Over the last few weeks after President Trump announced imposing tariffs on Steel and Aluminum, there has been talk of 'retaliatory measures' on exports leaving the United States.  Yes, our farmers will pay the prices for the decision to impose tariffs on indirect products which are tied together on a commodity level.  I wrote about this in a previous post.  How does this affect the U.S. consumer?  Get ready for quite possibly higher food costs -- agricultural produce to start with.  I recently received the following excerpt in my e-mail box from 'Politico Agriculture' shown below:

HOW A TRADE WAR THREAT COULD SQUEEZE AG: Farmers and ranchers, and their representatives in Washington, have spent much of President Donald Trump's 14 months in office warning that the agricultural industry would be collateral damage in a tit-for-tat trade war. It seems their fears have been confirmed, after China released a lengthy list of $3 billion worth of products it has set up for reciprocal tariffs - including pork, nuts, fresh and dried fruits, and wine, Pro Ag's Catherine Boudreau and Helena Bottemiller Evich report this morning.

China's action was in response to Trump slapping new tariffs on steel and aluminum imports, which took effect on Friday for countries that the president decided not to exempt. Additional retaliatory measures aimed at U.S. farm products could be on their way after Trump unveiled another action last week that could impose tariffs on $50 billion in Chinese goods over intellectual property concerns.

Pork producers - and prices - are already feeling the strain, even without the threatened tariffs in place. The U.S. shipped more than $1 billion of products to China last year, making it the No. 3 destination for exports after Japan and Mexico.

"This is an incredibly risky gamble on the president's part, and quite frankly, I wish he was gambling with someone else's money," said Brian Duncan, who raises 70,000 hogs and grows 4,000 acres of corn in Ogle County, Ill. He noted that the market price of lean hogs dropped $9 in two days last week. "There are real people's lives at stake in this game of brinkmanship."

Dennis Nuxoll, vice president of federal government affairs for Western Growers, told POLITICO that the president could use other avenues - such as the World Trade Organization - to address trade disputes with China without sending ag markets on a rollercoaster.

Talks still going: The Wall Street Journal reported Sunday evening that China and U.S. officials were quietly discussing issues ranging from financial services to manufacturing. That could serve to de-escalate trade tensions.

The talks may not be all that secret, though. Treasury Secretary Steven Mnuchin said on Fox News Sunday that the administration was moving forward with imposing tariffs on Chinese imports and restricting Chinese investment, but said he was "cautiously hopeful" that the two countries could reach an agreement.

"We're simultaneously having negotiations with the Chinese to see if we can reach an agreement," Mnuchin said.

I am not that impressed over the last sentence.  The reason being is that our country got us into this mess.  The concept of 'free trade' has benefits which cannot be understated.  Each country benefits from security of goods (traded goods) by ensuring trust through relationships.  As I mentioned in a previous post, the complex machine will make adjustments (the trade machine) if adjustments are made to any one part of the system at a given time.  The overall adjustments (outcomes) of the small adjustments are not always predictable -- i.e. a trade war.



This is serious business when the administration plays with the lives and well being of the farmers of our nation.  The farmers who supply goods -- food to us - consumers who purchase goods at the market (grocery store).



Conclusion...


The next time that you find yourself in the grocery store wondering why the cost of soybeans or other crops have gone up, remember the decision made by President Trump - tariffs on Steel and Aluminum -- which caused instability in the global trade market.  Where do we go from here?  Who knows?  We will see in the months to come as each nation responds in their respective manner with tariffs on U.S. exports.  Regardless, instability in the trade system (global trade system) is not good for anyone - regardless of what is said in the newspaper or in Washington.




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