The Perils of Trump's Tariff Ambitions: A Risk to America and the Global Economy

• January 20, 2024

• Rayaan Chonoo

In the looming prospect of another Trump presidency, a pivotal aspect of his policy agenda takes center stage - the intent to escalate tariffs dramatically. Advocates within his administration, such as Robert Lighthizer and Peter Navarro, champion a strategy that would not only fail to achieve its intended goals but also pose severe threats to both the American and global economies.

The proposed 10% tariff on all imported goods, a threefold increase to the country's average, harks back to mid-20th-century trade protectionism. Proponents argue that tariffs would address the trade deficit, encourage domestic manufacturing, and rectify perceived injustices in the global economic system. However, these assertions fall apart under scrutiny.

Firstly, the idea that tariffs alone determine the trade deficit is debunked. America's low national savings rate, a reflection of its consumer-led economy, is the primary driver of the trade balance. The appetite for imports, far from a sign of weakness, showcases the country's economic vitality. Even during Trump's tenure, the trade deficit widened by nearly 25%, proving tariffs' limited impact.

While tariffs may benefit certain industries by expanding domestic market share, the cost is significant. Protected sectors can become less efficient than global counterparts, causing collateral damage to other industries. For instance, the steel industry saw expansion but at a staggering cost of $650,000 per job created. Contrary to claims that tariffs are borne mostly by China, American consumers bear the brunt through higher prices, with a proposed 10% universal levy potentially costing each household $2,000 annually.

Moreover, the global repercussions of such a tariff escalation are dire. Retaliatory measures from other nations would trigger a global tax on trade, exacerbating inflation risks. The already weakened World Trade Organisation would face further strain, and tariffs could strain America's relationships with its allies, hindering efforts to establish resilient supply chains independent of China.

Even as Trump's potential return threatens these economic pitfalls, the existing record of President Biden offers little reassurance. Subsidies favoring certain industries and the retention of many of Trump's original tariffs demonstrate a lack of commitment to free trade principles. As the specter of a 10% tariff looms, there is a genuine concern that America's transformation from a champion of free trade to an advocate of protectionism would reach its unsettling conclusion.

Tesla's Winning Formula: Real-time Strategy Boosts Sales Efficiency in China

In the ever-competitive Chinese electric vehicle (EV) market, Tesla has employed a real- time, aggressive management strategy, giving the American company a significant edge over rivals such as BYD. This approach, characterized by meticulous monitoring of sales staff and swift decision-making, has contributed to Tesla's robust performance in the world's largest auto market

Tesla has demonstrated remarkable sales efficiency despite temporarily conceding its position as the world's top EV seller to China's BYD in the fourth quarter. Data from China Merchants Bank International (CMBI) revealed that, on average, Tesla sold over 1,500 EVs in each of its Chinese stores during the first ten months of 2023, up from 1,300 in 2022. In contrast, BYD sold under 600 cars per store during the same period.

Tesla's approach involves real-time data collection, allowing the company to assess the effectiveness of its 2,800 sales staff across 314 stores in China hourly. This information not only informs pricing strategies but also influences demand for specific models, resulting in seven price hikes and three cuts in China last year. The company's ability to adapt swiftly to market dynamics is reminiscent of Chinese food delivery giant Meituan, known for its precision in measuring delivery times.

Tesla's sales staff is incentivized with a base salary higher than its EV rivals, with top performers having the potential to earn up to 30,000 yuan ($4,203.56) a month, includingbonuses. This aggressive recruitment strategy has attracted individuals from industries such as English tutoring and insurance, known for their assertive sales tactics. In contrast, BYD employs a more conventional approach with its 3,400 stores, selling plug-in hybrids alongside battery EVs. While BYD's overall EV sales outpace Tesla's, the latter's direct sales model has proven to be cost-effective and efficient, leading to increased market share in China.

Tesla's success, however, is not without challenges. As the company expands into lower- tier cities and towns where Chinese brands are more prominent, maintaining sales efficiency becomes crucial. Additionally, competition is stiffening, and Tesla's production capacity constraints in its Shanghai factory may impact its ability to catch up with BYD's overall sales. Despite these challenges, Tesla's proactive strategy and focus on margin improvement position it as a formidable player in the dynamic Chinese EV market

As the electric vehicle landscape evolves, Tesla's real-time approach to sales management serves as a testament to its adaptability and determination to maintain a competitive edge in the ever-evolving Chinese automotive market.

Chip Stocks Face Headwinds: A Post-Record Year Retreat

The strong performance of U.S. chip stocks in 2023, marking their best year since the aftermath of the financial crisis in 2009, is facing headwinds as the sector experiences a notable pullback in the early days of 2024.

On January 3, U.S. chip stocks, including industry giants like Advanced Micro Devices (AMD), Qualcomm, and Broadcom, continued their decline, contributing to a 2.1% drop in the PHLX semiconductor index. This comes after the index reached a record high on December 27, capping an impressive year with a 65% surge, the most robust performance since the rebound from the 2009 financial crisis. However, the recent dip has erased nearly 7% of those gains. The downturn in semiconductor stocks mirrors a broader decline in Wall Street, with investors closely watching the Federal Reserve's December meeting minutes for insights into the central bank's interest rate trajectory.

The chip sector's stellar performance last year was fueled by optimism surrounding artificial intelligence and expectations of interest rate cuts by the Federal Reserve in 2024. Notably, Nvidia, recognized as a leading provider of AI-related chips, witnessed its stock market value more than triple in 2023, reaching $1.2 trillion and making it the fifth most valuable company on Wall Street. Despite this, Nvidia experienced a modest 1% dip on Wednesday.

Amidst the current market dynamics, BofA Global Research analyst Vivek Arya suggests a strategic focus on cloud computing and automotive sectors. Stocks such as Nvidia, Marvell Technology, NXP Semiconductors, and ON Semiconductor are recommended for exposure to these promising areas. Arya also highlights KLA Corp and Arm Holdings as potential investments for those looking to capitalize on the increasing complexity of chip designs. On a different note, Wells Fargo analyst Joe Quatrochi predicts a subdued recovery for chip equipment sellers in 2024. He identifies KLA and Applied Materials as top picks in the industry, signaling a cautious outlook for the upcoming year.

As chip stocks face a retreat after their stellar performance, investors are navigating through uncertainties, closely monitoring global economic conditions, and awaiting further cues from the Federal Reserve to gauge the trajectory of the semiconductor market in 2024.