Will the US/China Trade War Save US EV Makers?
Maybe. But tariffs will boost inflation.
A feature article in Saturday’s Washington Post highlights the Chinese government’s latest push to promote physical fitness: Running marathons. And this weekend, Gubeikou on China’s Great Wall hosted the “Conquer the Great Wall” half marathon.
Testing physical limits amidst breathtaking views of Chinese antiquity and nature was my son Nate Conrad, author of Substack column “New Energy Future.” And the pictures prove he and his American friends were in good form.
Together, the US and China account for 40 percent of global GDP—at a time when the global economy is the largest in history. Statista reports total trade reached $575 billion last year. The “Beautiful Country” was the “Middle Kingdom’s” largest trading partner. And only adjacent Mexico did more business with the US, much of that just American corporations operating on the other side of the border.
Most people reflexively credit former Federal Reserve Chairman Paul Volcker for quelling the double-digit inflation of the 1970s. But some of us remember how inflation spiked in the 1980s, after the Volcker Fed was forced to slash interest rates by a deepening global depression.
Rather, the pro-investment and trade policies of the Reagan Administration boosted supply and ultimately tamed inflation. And the indispensable piece was massive expansion of US/China trade and investment, which also raised hundreds of millions of people out of poverty.
The US and China are still cooperating in multiple areas to promote mutual prosperity, particularly energy and the environment. But after roughly seven years of tit for tat antagonism, those in government seem fixated on the idea of a “Thucydides Trap”—with the world’s two leading nations inevitably headed for conflict as the natural outcome when a rising power (China) threatens to replace a ruling power (the US).
I would point out that China was a leading global power in the 19th century when the Qing Dynasty invested heavily in rising power America. And its purpose was to build the US into a counterweight to European powers then threatening to carve up China.
But what matters right now is the “geo-politicians” running both countries appear to believe in competition over cooperation. We investors have to live in the world as it is. And right now that means being prepared to adapt to government policies that would flunk Economics 101.
For the record, tariffs are taxes. US consumers and businesses pay 100% of the tariffs imposed on $370 billion of Chinese imports by the Trump Administration—which the Biden Administration is adding to now.
That brings us to electric vehicles. The Biden Administration is proposing quadrupling tariffs on electric vehicles imported from China. That will take the total levy up to 100%, meaning US consumers will pay twice the effective price Chinese manufacturers are charging.
The geo-politicians’ objective is boost sales of US made EVs. But all EV tariffs have accomplished so far is to push up prices for US consumers and businesses, stalling sales.
Last week, Ford Motor (NYSE: F) announced a big cut back in orders to battery suppliers. That’s part of a move to slash EV development spending by $12 billion, in order to stanch expected losses of up to $5.5 billion from production this year. CEO Jim Farley called the EV unit “the main drag on the whole company right now.” And Bloomberg Intelligence believes losses from EVs will basically cancel out company earnings from selling traditional cars.
Why is Ford failing? Mainly, competitors produce cheaper, more efficient and more attractive models. And that definitely includes Austin, Texas-based Tesla Inc (NSDQ: TSLA), which unlike Ford has learned how to compete effectively with its giant rivals in China.
It’s true that China’s government has heavily subsidized industries like EVs and solar panels. But so does the US with record tax credits provided by the Inflation Reduction Act. And so in fact does the European Union with similar supports.
The great tragedy of the Biden Administration’s EV policy is it’s never embraced America’s effective national champion, namely Tesla. In fact, it’s usually excluded the company from its plans, starting with a White House meeting early in the Administration where every automobile company except Tesla was invited.
The decision to hold Tesla at arm’s length has been almost certainly because of the company’s policy toward unions. And positions have only hardened with CEO Elon Musk’s takeover of Twitter, now “X,” and his re-opening of the forum to voices many Democrats consider extreme.
But whatever the reason for shunning Tesla, the Biden Administration has been promoting EVs with one arm tied behind its back—trying in vain to prop up the weak like Ford instead of riding the leader. And the result is weakening US EV sales at the same time they’re surging overseas, particularly in China.
Would a second Trump term be more favorable for Mr. Musk and Tesla? The former president was known for policies that were basically transactional. And he was no fan of unions. But Trump has also promised to kill EV incentives. And he’s proposed a 10 percent tariff on all imports to the US, a measure that would scramble supply chains and boost inflation.
Tesla can’t count on the government to treat it as the US EV national champion it is, no matter who wins November elections. But then, it’s gotten used to that as the only American car company to become a major manufacturer in more than a century.
My view is the stock is still too expensive for an auto company at 61 times expected next 12 months earnings. But the more earnings and revenue grow and the stock retreats, the closer it’ll be to a buy. And for now, I wouldn’t touch any other EV maker with a 10-foot pole, including Warren Buffett favorite BYD.
In the May issue of Conrad’s Utility Investor, I highlight other alternative energy companies that will grow regardless of election outcomes—and as we see more impediments to free trade and investment.
Most of the best buys are deployers rather than developers of technology. But there is a notable exception: The world’s leading solar components manufacturer, which actually raised earnings in Q1 and is looking very cheap at barely 7 times expected next 12 months earnings.
That’s China’s JinkoSolar (NYSE: JKS). Slumping along with its battered sector, the stock’s not for the faint of heart. But it increasingly dominates the world’s biggest solar market, as plunging selling prices force rivals to leave the field. And with expanded manufacturing within the US tariff walls, it’s reaping rewards here as well.
Even getting caught up in US/China geopolitics would not be a company killer, as the US is still just 8 percent of sales. That’s a good place to be at a time when geo-politics is trumping economics.