I am always in awe of the lines in Prada and other luxury stores; so many folks want to buy, but they restrict you to 5 guests at any one time, and it’s a long line.
LV and Prada are only able to impose long queues on their potential customers because “everyone” wants to buy an LV bag (exaggeration).
The United States has a unique advantage; the French call it an “exorbitant privilege”.
The US dollar can be printed and used to settle transactions worldwide. Thus, the US can print USD to import Cocoa from Nigeria, but Nigeria has to export Cocoa to the US to earn USD, and they use that same USD to import Teslas from America. America can do this because everyone wants to hold the US Dollar, the currency for international settlements.
The IMF regularly surveys the Currency Composition of Official Foreign Exchange Reserves (COFER). Its latest COFER report shows that as of the first quarter of 2024, 54.8% of all FX reserves are held in USD, which translates to $6.77t
Why does everyone want dollars? The US is the largest market, the number one exporter and the largest importer on earth. Thus, if you are in Japan, you need to hold reserves of $ to import goods from America and to ensure the Yen does not get too high, making Japanese exports to America uncompetitive.
When Mr Trump says he will impose a tariff on nations that don’t offer reciprocal trade deals with the US, He can only do this because he has a dominant market, which is the largest on earth, meaning everyone wants in.
Let’s scenario this out: Trump imposes a 100% tariff on imports of European cars. This means Mercedes and BMW cars imported into the US will be more expensive, meaning GM and Ford will gain market share locally.
What will the Europeans do?
BMW, for instance, sells 15% of its cars in the US and only 10% in Germany. Will BMW walk away from 15%? No.
So what? BMW will be forced to expand its operations INSIDE the US to avoid the tariffs.
This expansion means capital investment in the US, manufacturing jobs in the US, and more tax revenues collected in the US. This is what Mr Trump is really targeting.
The tariffs are a Trojan horse to push for Foreign Direct Investment into the US. It seeks to incentivise onshoring and punishes US companies who are seeking a lower manufacturing cost abroad.
Tariffs are taxes, but the capital investment into the US will offset those taxes. Take the BMW example; if BMW makes its cars in the US, then the cost of a BMW car in the US will go up due to higher labour costs in the US, but in the same vein, those US workers have more money to spend and their income rises which will be taxed.
This tariff policy is similar to Nigeria’s offering 0% to 1% duty for CKD but a 70% tariff on full-built car imports. The policy is intended to force auto companies to onshore manufacturing in Nigeria and create local jobs. Will any Nigerian argue that the tariff on Fully Built Autos is a tax on Nigerians? Even though they are? The net effect is what is measured
If Mr Trump enacts a tariff policy, two things can happen
1. Other nations can reciprocate, but will they walk away from the most significant market on earth
2. Foreign brands will onshore more manufacturing to the US
Mr Trump is banking on the latter; his Tarrff plan is a trojan horse for Foreign Direct Investment.
