Tariffs – A European View

Introduction:

I’d like to thank DKI subscribers for their thoughtful response to last week’s article on the potential Trump Tariffs. I got a lot of nuanced opinions along the lines of “I mostly agree with you, but I see this issue differently”. That’s fantastic. Thanks to those of you who chose to share your thoughts in detail.

 

As promised, I had my scheduled call with one of our Danish subscribers who offered to discuss the view from Europe. While I don’t have permission to share this member’s name, I can relay that he is smart, well-read, thoughtful, and one of the most detail-oriented amateur investors I know. For the purposes of this discussion, we’ll call him “D”. Let’s dive in.

 

Greenland:

When President Trump started talking about Greenland becoming a US territory, there was great concern in Denmark including widespread fears that the US would send the military. A few days later, fears of the US military subsided among most of the population, and I believe that is the correct view. Neither D nor I think Trump has any intention of starting a hot war with a long-time US ally and fellow NATO member. In our conversation, I added that a large number of people in the MAGA voter base support President Trump precisely because he hasn’t started new wars. Starting one with a strong ally like Denmark would likely end with a loss of support from MAGA voters and a successful impeachment effort.

 

D relays that most Danes have come around to my point of view which is that the only way Greenland would become a US territory is if a deal is made where the people of Greenland decide for themselves that joining the US is in their self-interest, that Danes feel like they receive fair compensation for the proposed loss of territory, and the US is happy with the deal. D, most Danes, and I think any completed deal would only happen if it is generally viewed as an overall positive for all three sides. We further agree that no one is going to fire a shot over this issue.

 

On a personal note, as someone who has spent time in Denmark, been treated kindly by the people there, and who benefits from many smart and engaged Danes here at DKI, I’m glad to see that anxiety there has been alleviated.

 

Tariffs:

As noted in last week’s longer piece, many of President Trump’s tariff plans haven’t been specified yet, and should they go into place, they will almost certainly have unintended consequences. I also noted that Trump frequently uses the threat of tariffs to get concessions on other unrelated matters.

 

D relays that many Danes are worried that tariffs on the EU would have a harmful effect on the Danish economy. After much discussion, both D and I agreed that significant economy-crushing tariffs on our EU allies are unlikely. We both think Trump is following his usual plan of threatening tariffs to get other concessions. With Russia and China becoming closer allies, and the BRICS coalition trying to challenge the dollar, it is not in US interests to try to crash the EU economy!

 

The most likely issue on the table would be NATO funding. Many European countries spend less than what they’ve agreed to spend on their defense budgets. This leaves President Trump and many Americans with the opinion that the US is subsidizing European defense, and that Europe isn’t living up to their agreement as part of NATO. This was a subject of much discussion during President Trump’s first term. Could he stop threatening tariffs if EU countries commit more to their defense budgets? That’s what D and I think is the most likely outcome.

 

There are also areas where European governments subsidize their own companies and industries that compete directly with US companies. Airbus subsidies irritated Boeing for years and Boeing regularly complained about an uneven playing field. I’m not hearing a lot of talk about these kinds of company or industry-specific issues, but they have arisen in the past and could be part of a future deal. I’ll also acknowledge that there are industries where the US subsidizes its own companies or has high-priced supply deals which could be seen as an indirect subsidy. Any uneven playing field allegations can be pointed in multiple directions.

 

An Example:

Overnight here in Vietnam, Colombia refused to accept repatriation of their own citizens. President Trump responded by threating a 25% tariff on Colombian products scheduled to rise to 50% one week later. Within hours, Colombia agreed to the repatriation of all Colombian citizens in the US illegally including on US military aircraft. The President of Colombia issued some threats of his own.

 

DKI will not be commenting on immigration policy. I note this situation solely because it illustrates my point above. President Trump used the threat of tariffs to get concessions on an unrelated issue. Neither D nor I think Trump wants to harm the EU economy. He most likely wants something else.

 

Conclusion:

  • D and I are in agreement that anything that might happen regarding Greenland will be peaceful and considered in the best interests of Greenland, Denmark, and the US.
  • We are also in agreement that EU-related tariff discussions are not specific right now, and are most likely an attempt to get concessions on other issues.
  • The most likely issue is military funding from our NATO allies. Issues related to a perceived lack of a level playing field in various industries could come into play as well, but we’ll have to wait for more potential details on that.
  • DKI will continue to monitor these issues as they evolve and continually evaluate the effect on our portfolio companies.
  • As always, I value the opinions and contributions of our readers so feel free to send your thoughts to IR@DeepKnowledgeInvesting.com. I read everything that comes to that inbox.

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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