US economy

Trade wars send manufacturers scurrying back home

The international rules-based order is under attack from populist and government forces. A world in which progressive rounds of trade liberalisation through the World Trade Organization were led by the advanced western countries is having to adjust to trade wars and economic nationalism.

These countries are used to influencing conflicts worldwide through US and NATO forces, allied to United Nations resolutions and actions. They now face a world in which China and Russia also wish to have more influence and where there is not always agreement among the great powers about aims or solutions.

Global companies are having to rethink their strategies in the light of tensions between countries and trading blocs, and as tariffs and sanctions damage or prevent easy movement of finished goods and even components between factories and countries.

In spite of the swings and wobbles these forces have produced in markets, the FT fund has delivered a return of about 13 per cent so far this year. A direct China ETF holding, which started the year strongly, was removed after worries developed about manufacturing, Hong Kong and the trade war.

The US has pursued a policy of self sufficiency in oil and gas, allowing Donald Trump, the US president, to accentuate his wish to be less involved in the Middle East’s religious, civil and regional wars. Russia has built up her influence and presence as a result. The foreign policy clashes are becoming more reminiscent of the Cold War.

Instead of an Iron Curtain dividing the US-led alliance from the USSR’s sphere of influence, however, today we face a cyber curtain extending between the Chinese or Russian-led systems and those of the US. Daily forces test out western cyber defences and seek to disrupt systems or public debate, with the suspicion that some may be backed by state actors. On the Chinese side the state has also taken steps to insulate its system from western influences.

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At the centre of the cyber war, the US is leading a western clampdown on the use of Huawei components in digital systems and devices. It looks as though the result of China’s ambitious “Belt and Road” strategy will be to create a series of friendly or dependent states looking to China for economic development and support, with China owning some of their crucial resources.

Trade wars encourage companies to bring more activity onshore to avoid tariff walls. Mr Trump wants the US to make more of its own industrial products, so sees tariffs on imports as helpful, even though the immediate impact is negative for trade and world activity. The EU and the US have a long-running clash over subsidies and support for Airbus and Boeing planes, fought out through the WTO. Its recent judgment on the Airbus allegations has led to more tariffs. Mr Trump’s attempts to arm wrestle the Chinese into lowering their tariffs has so far resulted in higher tariffs imposed by both sides. We are getting used to the idea that tariff rises are just a part of modern foreign policies.

The impact on individual companies is becoming most apparent in the car industry. It is here that the EU and Chinese policies of seeking fast environmental change have induced falling demand for traditional vehicles, before demand for electric cars has picked up to compensate. The result is major factory closures or reduced production lines worldwide. This is encouraging manufacturers to consolidate factories and output, which they usually do by returning to their home base for more of their manufacture. Ford is talking about reductions in China, just as it has cut its EU factories. It ceased engine production at Bridgend and transmission output at Ford Aquitaine.

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Japanese manufacturers are busy pulling out of part of their EU factory space, paradoxically aided in their intent by a rare case of tariffs coming down. Under the EU-Japan Free Trade Agreement, a 10 per cent car import tariff into the EU will be gradually removed.

This leaves Japanese auto companies free to make their vehicles in Japan and export to the EU from their home base. Honda is in full retreat, leaving the UK and Turkey. Nissan has decided to end the Datsun brand, spelling the likely closure of emerging market factories where this brand was concentrated, such as India, Indonesia, Russia and South Africa.

General Motors has shut a factory in South Korea, pulling out of Oshawa in Canada, having some years ago left Australia and South Africa. There is a general retreat from globalisation in manufacture in an industry undergoing major structural changes in products and technology.

In this new world, there will still be large companies with interests in many countries. Complex supply chains with components and products travelling many miles between locations will not abruptly end. More investment decisions, however, are likely to result in more consolidation in home locations or countries regarded as safe and friendly.

Some technology companies will find they cannot serve both US and Chinese customers easily. All companies will need to be fleet of foot as governments deploy the tariff and sanction powers they have always had more widely and fiercely. This has left the big manufacturing economies, China and Germany, more exposed, as growth shifts to the newer technologies of the digital revolution and the green energy era. The fund reflects this reality.

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Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. Email:


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