U.S. companies are pulling away from China as Democrats and Republicans increasingly impose duties on Beijing
4 min
Until a few years ago, Chinese factories supplied the world with Sharpie retractable pens and Oster blenders.
No more.
Consumer giant Newell Brands now makes those products, and more, at its own plants in the U.S. and Mexico. Many of its other products are made in factories in Vietnam, Indonesia and Thailand.
Chris Peterson , Newell’s chief executive, said the company’s shift reduces its dependence on China at a time when both the Democratic and Republican parties “are getting more protectionist in terms of trade policy.”
Tariffs are becoming an entrenched tool tying together geopolitics and trade , and they are playing a bigger role in long-term manufacturing and sourcing decisions. Nowhere are they hitting harder than in China, where importers and exporters are navigating an increasingly complicated regime of levies on goods ranging from semiconductors to mattresses.
“Tariffs have always existed and they’ve always been regarded as a cost of doing business,” said Simon Geale, executive vice president of procurement at supply-chain consulting firm Proxima. “But they’ve been getting much more teeth in the last five or six years.”
The new era of tariffs kicked off under the Trump administration with duties on imports from a swath of countries and a focus on Chinese products ranging from truck chassis to consumer goods.
The Biden administration kept most of the tariffs in place, and then added further duties on Chinese steel, semiconductors and electric vehicles, citing national security concerns and an industrial policy aimed at reviving American manufacturing .
The two candidates in this year’s presidential election look set to continue the trend, as trade, manufacturing and the tools to tie them together take a prominent role in the campaign.
Former president Donald Trump , the Republican nominee, has said he would roll out new tariffs with a potential 10% across-the-board duty on imported goods and a 60% tariff on goods from China.
Vice President Kamala Harris , the Democratic nominee, so far hasn’t indicated a desire to deviate much from President Biden’s trade policies.
Before becoming vice president, Harris diverged from Biden on Trump’s revised North American Free Trade Agreement, known as the United States-Mexico-Canada-Agreement. As a senator, Harris joined some Democratic lawmakers, saying it didn’t do enough to address climate change, suggesting Harris may have more of a focus on social justice issues when considering trade pacts.
Harris has been in lockstep with the president in the Biden administration.
At an electronics factory in Wisconsin last summer, Harris said she and Biden want to bring manufacturing jobs back to America. At a campaign event in North Carolina on July 18, she said Trump’s proposed universal 10% tariff “would increase the cost of everyday expenses for families.” She didn’t criticise current tariffs on Chinese goods .
Both Trump and Harris opposed the Trans-Pacific Partnership, the expansive multination trade deal that was designed to expand alternatives to trading with China. Trump withdrew the U.S. from the agreement immediately on taking office in 2017.
The trade policies pose a conundrum for companies. Do they continue sourcing from China and risk the potential impact of escalating tariffs? Or do they look outside China, where costs are higher, but duties and other geopolitical risks are lower?
Trump’s threat of universal tariffs has even spooked supporters. Tesla Chief Executive Elon Musk , who has endorsed Trump, said he would delay a decision on a new plant in Mexico until after the election because “it doesn’t make sense” if Trump wins and puts “heavy tariffs” on vehicles produced there.
Shifting supply chains to other countries is complex. Companies must find new suppliers of raw materials and finished goods. Suppliers and sub-suppliers must be vetted to make sure they don’t violate increasingly stringent U.S. rules on issues such as forced labor.
Anne van de Heetkamp , a vice president of product management at supply chain and logistics technology company Descartes , said when trade tensions started ratcheting up five years ago companies weren’t in a hurry to shift supply chains. Now that the duties appear more permanent, Descartes’s customers are mapping out new global supply networks.
Surging exports out of Southeast Asia, India and Mexico suggest Newell isn’t alone in its desire to reduce reliance on China. The shifts are fuelling new logistics investments in factories, warehousing and transportation operations around the world.
DHL Express U.S., a parcel unit of German logistics giant Deutsche Post , added a new direct flight between Vietnam and the U.S. in 2022 to cater to rising exports that used to reach the U.S. via Hong Kong. CEO Greg Hewitt said the unit is also looking at expanding its networks along the U.S. -Mexico border to serve surging demand there.
Hewitt cautioned that China remains the world’s top supplier of manufactured goods and will likely hold that position because of its streamlined supply chains and low costs for raw materials and labour.
Retail industry trade groups and some executives warn some items can’t be produced anywhere else in the world and that escalating tariffs will simply raise consumer prices and fuel inflation. Analysts at Goldman Sachs estimate that every percentage point increase in the overall U.S. tariff rate would increase core consumer prices by just over 0.1%.
“The problem is the best place to make shoes is China,” said Ronnie Robinson, chief supply chain officer at Designer Brands , parent company of footwear retailer DSW.
Robinson said for every dollar the government adds in tariffs, consumers pay an extra $2 to $4 at the checkout. “The reality is that you and I are paying for the tariffs as part of the ticket price when you go into the store and buy,” he said.
Robinson said Designer Brands sources about 70% of its footwear from China, down from 90% several years ago. He said the company aims to reduce its reliance further to about 50%, but China will remain the company’s largest single source of shoes.
Peterson said just 15% of Newell’s goods rely on products made in China today, down from more than 30% several years ago. He expects that by the end of next year the share will fall below 10%.
He said that when the company is searching for new Chinese suppliers one of its first questions is whether they have capacity or plan to add capacity outside the country.
“If a supplier doesn’t have manufacturing capability outside of China, we will not select them as a vendor for us,” he said.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Following the successful launch of its Palais Collection, MAISON de SABRÉ has unveiled a new modular handbag system offering more than 720 styling combinations.
Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.
3 min
Wall Street’s hottest trade has gone ice cold.
For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.
The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.
Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.
“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.
Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.
Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.
Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.
“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.
Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.
“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”
Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.
Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”
The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.
The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.
These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.
Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.
The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.
Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.
Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.
And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.
“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”
