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Take a long view amid Trump tariff uncertainty

Ben Paul
Ben Paul9/25/2018 05:38 PM GMT+08  • 8 min read
Take a long view amid Trump tariff uncertainty
SINGAPORE (Sept 24): While watching the markets react to the escalation of the US-China trade war this past week, I stumbled over a small news story that I doubt many people noticed. A unit of Compagnie de Saint-Gobain, a French MNC, which is part of the
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SINGAPORE (Sept 24): While watching the markets react to the escalation of the US-China trade war this past week, I stumbled over a small news story that I doubt many people noticed. A unit of Compagnie de Saint-Gobain, a French MNC, which is part of the Euro Stoxx 50 index, is spending US$26 million ($35.5 million) to build an 88,000 sq ft facility in a little town called Beaverton, in the US state of Michigan, to produce components and assemblies for its customers in the pharmaceuticals industry.

This is not a big move by the standards of an MNC with a market value topping €20 billion ($32 billion), but the story caught my eye because it stood in sharp contrast to all the negative news in the market. Also, Saint-Gobain has an interesting history that stretches back to 1665. That was the year Jean-Baptiste Colbert, who was the Comptroller-General of Finances, under the rule of the famously profligate French king Louis XIV, established a company called Manufacture Royale de Glaces de Miroirs. As its name suggests, the company produced glass and mirrors, which were all the rage among the wealthy elite of France.

The company was partly financed by the state, though its beneficiary was an individual named Nicolas Dunoyer, who also happened to be a son of one of the king’s butlers and a tax collector for Orleans. Colbert backed the venture because he wanted France to produce the glass and mirrors it was importing from the Republic of Venice, which was the global leader in this arguably high-value field. It was a struggle to match Venice at its own game, but France eventually became good enough to supply its home market. In 1672, subjects of Louis XIV were banned from importing glass. By 1678, the company was producing glass for the Hall of Mirrors at the Palace of Versailles.

Descended from merchants, and trying to keep the coffers of France from being drained by the extravagance of Louis XIV, Colbert had a practical and mercantilist approach to government. While he promoted textile manufacturing technology and imposed tariffs on foreign imports, he supported the French East India Company’s efforts to bring in commodities that could not be produced at home such as coffee, cotton and pepper. He also replaced direct forms of tax with indirect taxes, which were harder for the wealthy and privileged to avoid.

Yet, there were many who preferred a government that did less. In 1681, Colbert is said to have asked a group of French merchants how the state could support commerce. “Laissez-nous faire,” was the reply he is said to have received, which roughly means “let us do it”. References made to that meeting by promoters of free trade years later resulted in the term “laissez-faire” becoming widely used to describe an economic system that is free from government regulation, tariffs and subsidies.


For many market watchers, US President Donald Trump’s attack on global trade is a worrying abandonment of the liberal market-oriented economic thinking that has dominated policymaking since the 1970s. That was about the time when the Keynesian demand management ideas that emerged after the Second World War seemed to fail in the face of stagflation. By the 1980s, the US was focused on cutting taxes and government regulations. Meanwhile, US companies outsourced manufacturing processes to less-developed countries, amid an expansion of free trade agreements and a boom in cross-border flows of goods.

It was also around the 1970s that the once vibrant industrial heartland of America began waning. Since then, many cities and towns in the so-called Rust Belt — which include Ohio, Pennsylvania, Indiana and Michigan — saw big declines in their populations as well as higher unemployment and crime. In the last couple of decades, things seem to have gone from bad to worse. In Michigan, for instance, cities and towns such as Detroit, Flint and Saginaw saw their populations decline by more than 20% between 2000 and 2016. For this segment of the US, there seemed to be few benefits from globalisation and trade.

In 2016, Trump won Michigan’s 16 electoral votes, and carried the popular vote by a fraction of one percentage point, with promises to bring jobs back to the US. Prior to that, Michigan had backed Democrat candidates in six consecutive presidential elections. Barack Obama won Michigan in 2012 by more than nine percentage points. There were similar swings in Trump’s favour in Pennsylvania and Ohio.

North and south

Yet, the decline of the Rust Belt was probably not entirely due to global manufacturing capacity shifting to countries such as China and Mexico. There has apparently been competition within the US too. Notably, nine southern states — North Carolina, South Carolina, Georgia, Tennessee, Kentucky, Alabama, Mississippi, Louisiana and Texas — collectively accounted for nearly 22% of US GDP in 2015, up from just over 19% in 1990, according to a study by Reuters last year. From 1990 to 2015, population in the nine southern states also jumped 43%.

While these states were adversely affected by the ill wind of globalisation and international trade, they traditionally offered lower labour costs and less unionisation than the Rust Belt areas. By some accounts, they also tried harder to draw investment. And, over time, the development of robust supply chains, growing ranks of skilled workers as well as tax incentives added to the momentum.

Much like France supplanting Venice as a producer of glass and mirrors 350 years ago, these southern US states are now home to industries that were once the preserve of the Rust Belt states. For instance, among the automobile players, Toyota has been expanding in Alabama, Texas and Mississippi since 2000. The largest Toyota plant in the world is in Georgetown, Kentucky, where about 8,200 people are employed. BMW and Mercedes- Benz run factories in South Carolina and Alabama, respectively.

Rust belt revival?

So, what’s next? Some observers already see a subtle revival unfolding in the Rust Belt, with engineering talent in the region being put to use in new high-value manufacturing activities related to biotechnology, advanced materials and robotics.

A case in point is the new investment Saint-Gobain is making in Beaverton, Michigan. The new facility is part of the group’s life sciences business unit, within its performance plastics division. It will be used to develop and produce components and assemblies for pharmaceutical companies to process fluids. Demand for these so-called “single-use-systems” is increasing as high-value drugs are becoming specialised and individualised. This is prompting a shift away from stainless steel components to disposable plastics and silicones.

Interestingly, the group has a life sciences lab in Worcester, Massachusetts, which tests products for cutting- edge cell and gene therapies. This includes processes where scientists modify the immune cells of patients, and then use them to detect and destroy cancer cells in those same patients.

Saint-Gobain is reportedly already the top employer in Beaverton, with 251 workers. The town has a population of just 1,071, according to its 2010 census. The company has reportedly grown its headcount in the city by some 78% since 2015. And, if its operations continue expanding, it seems the population of Beaverton could swell too. As it happens, Beaverton is about 40km from Midland, where Dow Chemical is headquartered. In the 1940s, former Dow employees who were experts in the use of polystyrene started their own businesses in the town and built its reputation for thermoforming, a process of heating plastic and casting it into a certain shape.

Saint-Gobain, which has a presence is 67 countries and employs about 179,000 people, now produces a wide range of materials besides glass. In the US alone, its product categories include abrasives, building materials, ceramic materials, flat glass, technical textiles as well as performance plastics.

Think long-term

What does all this mean for investors? I’m not suggesting that the economic malaise in the Rust Belt that helped put Trump in office will evaporate any time soon. Or, even that there is a silver lining to the dark clouds of Trump’s tariffs.

The current narrative in the market is that the escalating trade war is affecting the rest of the world more than the US. Since the beginning of this year, the S&P 500 index is up more than 8.7%. The Nasdaq is up nearly 15.2%. On the other hand, Chinese stocks are getting battered. The CSI 300 Index is down 22% this year, while the Shanghai Composite Index is down 21.6%. The explanation for this is export-oriented countries such as China are more dependent on international trade than the US, and rising US interest rates are drawing liquidity out of global financial markets.

Yet, trade tariffs are raising costs in the US, which could mean slower sales and weaker profitability for its corporates. Car makers in the US are already warning that tariffs on steel and aluminium imposed since June will weigh on earnings in the months ahead. Indeed, given the globalised nature of most large US companies, it seems unlikely to me that Trump’s tariffs and the retaliatory measures being taken by other countries would leave them better off on the whole. Moreover, the current trade tensions could prompt many companies to conserve cash and postpone their capital expenditure plans.

With the near-term outlook so uncertain, investors should adopt a long-term perspective in any moves they choose to make. If there’s a lesson to be learnt from Saint-Gobain’s long history, it is that the pursuit of business and profit can transcend the shifts in economic and political thinking over time.

This story appears in The Edge Singapore (Issue 849, week of Sept 24) which is on sale now. Subscribe here

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