Why is Trump concerned with laundry?

Even before November 2016, companies were closely following Donald Trump’s campaign and the promises and threats he was making. What would it mean for global giants that rely on long, distributed supply chains, such as Samsung? After the surprise victory, the issue became much more concrete, pushing companies to act.

International trade is a huge part of American economy, with imports, accounting for 14.7% GDP in 2016, a total of 2.71 trillion dollars [1]. Of particular relevance in Trump’s protectionist speech was the trade deficit of approximately 500 billion dollars, or 2.7% of GDP [1].

In recent times, we’ve been seeing indications that countries will adopt more protective measures. NAFTA, the trade agreement between US, Canada, and Mexico, was called by the president “the worst trade pact in history”, and he is threatening to either make changes to it or withdraw completely [2]. Trump also picked a fight with global automotive companies when he threatened to tax all imports into the US with a 35% “big border tax” [3].

Samsung, despite being a Korean-based company, has a lot of exposure to the US market, which represents roughly one-third of their global sales [4]. Their products, manufactured in several different countries, are mostly imported into the United States, placing the company in the top 10 overall importers in terms of volume [5]. New taxes on imported products could hugely impact Samsung’s overall profitability, and even compromise the viability of their current business model in the United States.

To complicate matters further, Whirpool, an American manufacturer of household appliances, has filed complaints against Samsung and LG, arguing that the large number of items imported was hurting domestic manufacturers, and asking for “global safeguard” restrictions against their Korean competitors [6]. In October of this year, the US International Trade Commission (ITC), voted 4-0 in favor of Whirpool, in what could be a major step towards imposing additional import taxes or quotas on foreign-made machines. President Donald Trump is expected to make a final decision on the issue early next year, after the commission recommends possible remedies by December.

Samsung is taking action to improve their prospects, despites the probable headwinds. Earlier this year, even before the ITC’s verdict, Samsung announced it would open a $380 million home appliances factory in Newberry County, South Carolina, expecting to create almost 1,000 jobs by 2020. It will be the first plant of this type opened in the US in more than three decades [7]. The impact of this measure is twofold. First, it creates goodwill with the American government, and with Trump in particular. In effect, after Samsung’s announcement, Trump used his highly publicized twitter account to thank the company, saying: “Thank you, @samsung! We would love to have you!”[8]. Second, by installing a manufacturing facility in the United States, Samsung, is effectively hedging against possible import restrictions in the future, at least for this specific product line. The company is also investing an additional $1.5 billion on their semiconductor factory in Texas, that already employs about 3,000 people [9].

Samsung is not fighting this alone. A group of companies from South Korea, represented by the Korea Chamber of Commerce and Industry, the country’s largest business association, proposed several investments in the US, such as an LG factory worth $250 million, and also announced a South Korean company would import American shale gas starting in 2019. The country is, after all, an important trade partner with the US, with total two-way trade totaling $145 billion, creating a trade deficit of $17 billion for the US [10].

In addition to these measures that Samsung is already undertaking, others are possible. They could, for example diversify their supply chain even further, installing plants of additional product lines in the US, or installing plants in other countries, to spread the risk of one single country being imposed trade barriers. Another idea would be to invest to strengthen their revenue streams from markets other than the US. This could limit their downside in case they are effectively imposed trade restrictions, and allow them to diversify risks in general.

Several questions about the protectionist measures remain. Is the average American really better off because of them? Job creation is certainly expect from these individual investments in the US, but what are the side effects of these measures? Some argue that the unexpected consequences can be far worse than the benefits created, including increases in prices for the consumer [11]. (737 words)

 

[1] International Trade Administration, “U.S. Trade Overview 2016”, April 2017, https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005537.pdf, accessed November 2017

[2] Paul Wiseman, “U.S. demands big NAFTA changes, setting stage for tough talks”, The Denver Post, August 16, 2017, http://www.denverpost.com/2017/08/16/north-american-free-trade-agreement-nafta-us-demands-changes-donald-trump/, accessed November 2017

[3] Edward Taylor, Andreas Rinke, “Trump threatens German carmakers with 35 percent U.S. import tariff”, Reuters, January 16, 2017, https://www.reuters.com/article/us-usa-trump-germany-autos/trump-threatens-german-carmakers-with-35-percent-u-s-import-tariff-idUSKBN1500VJ, accessed November 2017

[4] Philip Iglauer, “Samsung Electronics’ US sales account for over a third of global revenue”, ZDNet, July 5, 2016, http://www.zdnet.com/article/samsung-electronics-us-sales-account-for-over-a-third-of-global-revenue/, accessed November 2017

[5] Marsha Salisbury, Chris Brooks, Bill Mongelluzzo, “JOC TOP 100 IMPORTERS & EXPORTERS RANKING”, The Journal of Commerce, 2014, https://www.joc.com/sites/default/files/u59196/Whitepapers/Top_100-Importers_Exporters/JOC_Top_100_Importers_and_Exporters_2013.pdf, accessed November 2017

[6] David Lawder, “Panel finds U.S. washing machine makers hurt by LG, Samsung imports”, Reuters, October 5, 2017, https://www.reuters.com/article/us-usa-trade-whirlpool/panel-finds-u-s-washing-machine-makers-hurt-by-lg-samsung-imports-idUSKBN1CA1W4, accessed November 2017

[7] Joyce Lee, “Samsung announces new U.S. plant ahead of Trump summit with Moon”, Reuters, June 28, 2017, http://www.reuters.com/article/us-samsung-elec-us-plant/samsung-announces-new-u-s-plant-ahead-of-trump-summit-with-moon-idUSKBN19J1TM, accessed November 2017

[8] “Samsung Will Open a Home Appliance Factory in South Carolina”, Fortune, June 28, 2017, http://fortune.com/2017/06/28/samsung-manufacturing-plant-south-carolina/, accessed November 2017

[9] Sam Kim, “Samsung Invests $1.9 Billion in U.S. Ahead of Trump-Moon Summit”, Bloomberg, June 28, 2017, https://www.bloomberg.com/news/articles/2017-06-28/samsung-invests-380-million-in-south-carolina-appliance-plan, accessed November 2017

[10] Youkyung Lee, “South Korea to Buy American Gas, Build New Factories in US”, U.S. News, June 29, 2017, https://www.usnews.com/news/business/articles/2017-06-29/south-korea-to-buy-american-gas-build-new-factories-in-us, accessed November 2017

[11] Joshua Tucker, “Trump’s 35 percent tariff wouldn’t keep jobs in the U.S. Here’s why.”, The Washington Post, December 8, 2016, https://www.washingtonpost.com/news/monkey-cage/wp/2016/12/08/trumps-35-percent-tariff-wouldnt-keep-jobs-in-the-u-s-heres-why/?utm_term=.ff8dcc1c8058, accessed November 2017

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9 thoughts on “Why is Trump concerned with laundry?

  1. Although the current re-negotiations are meant to protect and safeguard the American manufacturers first and foremost, I find it a bit puzzling because these discussion are the same reason why other manufacturers, such as Samsung, are taking additional steps to strengthen their presence in the US. The question remains whether the American manufacturers, such as Whirlpool, are ultimately better served this way or not.

  2. It will be hard to predict policy outcomes as politics becomes more complex and volatile. Regardless of what happens in politics it is key for companies to diversify and create contingency plans. While Samsung has likely incurred increased costs to move plants to the U.S. they are also effectively hedging against unknown future policy decisions. This is not only a U.S. problem but a global one. Companies must manage their global footprint conservatively, so as not to be overly concentrated in one part of the world. Whether a company faces problems in manufacturing (e.g. Bangkok floods) or services businesses (e.g. Brexit) a company’s assets must be diversified and there must be contingency plans in place.

  3. Great article John Smith! To Mohamad’s point, in the medium to long-term protectionist measures by the Trump administration will shelter inefficient American companies and take the pressure off of them to innovate and find new ways to satisfy consumers. This means that overall the US economy, built upon R&D and technology developments, can become weaker.

    Furthermore, protectionist measures by Trump may generate retaliation by foreign countries limiting the global market for American companies. Lower sales would naturally result in layoffs contributing to unemployment which was exactly what Trump intends to fight in the first place. Hence, I am not entirely sure that Trump will act upon his threats. Nonetheless, I fully agree with EL when he says that companies need to have risk management policies in place to be able to cope with political but also environmental and exchange rate risk.

  4. Great piece! I agree with earlier comments that the net impact on both Whirlpool and American consumers will most likely be negative. For Whirlpool- they will have a new domestic competitor to deal with when the new Samsung plant is completed. If Whirlpool is not able to improve its operations- protectionist policies are not going to help them. The American consumer who previously benefited from cheaper products from abroad will now have to choose among expensive products produced in the USA.

  5. Very interesting post!

    I just wanted to disagree with earlier comments that indicated Whirlpool may end up worse off as a result of these isolationist policies. While I agree that retaliatory trade policies from other countries are inevitable, I believe the impact to Whirlpool will be negligible relative to the impact on its Korean competitors. The reason being that the U.S. is a large export market for Samsung but any one country is not as important for Whirlpool’s relatively small amount of exported goods. Samsung is smart to hedge its risks and start investing more in the U.S., but those plants may not be able to manufacture the same quantity or with the same cost structure as currently done abroad — there is a reason Samsung wasn’t investing as heavily in the U.S. previously. If these high border taxes are implemented, I agree with others that it’s the American consumer who will be made worse off.

  6. Thanks for the post John Smith! I’m impressed that Samsung has been so agile in responding to the threat of potentially protectionist policies that will impact its business. I agree with you and CranberryCo that Samsung has been smart to invest in the US – as a hedge against higher import taxes, but also as a way of increasing its political capital. However, Samsung’s biggest risk isn’t the import taxes on its washing machines – it’s the risk of higher import taxes on its mobile phones and technology products as it competes against US-domiciled, Apple. Let’s hope for the American consumer that this doesn’t happen.

  7. Great post John Smith and interesting comments as well! I agree with most of them and I found the debate around Whirlpool particularly interesting, especially since they have their own factories in Mexico that will also be affected by a renegotiation of NAFTA. Since we agree that customers will pay a higher price, that innovation might slow down due to a lack of competition, which basically means that customers will pay more for less, that employment might not improve (see Miguel Frade’s comment) and that even American manufacturers with plants abroad might be worse off, I am left wondering what can justify this renegotiation and who will benefit from it?

  8. Thanks for the interesting post and comments, everyone!

    While I agree with the discussion above that Samsung has been smart to make investments in the U.S. in order to diversify their risk, I worry that their actions are mostly concentrated on late stages in the supply chain. As @CranberryCo pointed out, there are likely cost-related reasons Samsung did not choose to manufacture their products in the U.S. prior to Trump’s election — one reason is likely the relative absence of appropriate and cost-effective suppliers to Samsung’s final stage manufacturing plants. Going forward, I would be curious to see how Samsung reacts to political instability by globalizing the entire supply chain — e.g. investing capital and intelligence in its materials and components suppliers around the world to keep its input costs at a sustainable level.

  9. A very interesting piece! I largely agree with the sentiments of the other commenters that, while its not in Samsung’s financial interests to open up a factory in the Unites States, it is something they must do to gain favorability with the US government and put pressure on local US players such as Whirlpool. I wonder, however, if instead of opening a plant in South Carolina, Samsung could have opened one in Mexico instead (similar to what competitors such as Whirlpool have done). Labor costs are significantly lower South of the border and trade agreements are still favorable (at least until NAFTA is negotiated), resulting in much more favorable financial prospects for Samsung.

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