By Bob O'Brien
I wrote this piece originally for our weekly newsletter, the Display Supply Chain Monitor, right after the 2016 election. Originally published on November 14th, 2016, it holds up pretty well and is likely interesting to DSCC blog readers.
The astonishing and unexpected election of Donald Trump for President of the United States brings the issue of free trade and protectionism to the front of the national agenda. Since the Flat Panel Display industry consists of a global supply chain that depends on free trade, a shift towards protectionism may have a profound impact on the industry in the coming years.
The political firestorm against free trade is not limited to Donald Trump; during the campaign both Trump and Hillary Clinton stated their opposition to the Trans-Pacific Partnership (TTP) trade deal, and in the primaries Clinton’s opponent Bernie Sanders drew tremendous crowds with a political program that (among other things) strongly opposed trade deals. The Belgian region of Wallonia recently held up an EU-Canada trade agreement (CETA), and a corresponding deal between the EU and the US, the Transatlantic Trade and Investment Partnership (TTIP) is now considered dead.
Far beyond blocking future trade deals, free trade opponents want to roll back existing trade agreements, and/or alter the terms of trade in profound ways. Trump has promised to renegotiate the North American Free Trade Association (NAFTA), and to impose up to 45% tariffs on goods imported from China. He has criticized US companies, like Apple in consumer electronics and Ford in automobiles, for building their products outside the US.
Before discussing the possible policy changes of a Trump administration, it’s worth looking at some of the history of the display industry and the impact of free trade deals on the structure of the industry.
The growth of the flat panel display industry was co-incident with an historic growth in world trade. After the end of the Cold War, EU expansion brought Central and Eastern Europe into a common trade bloc. NAFTA was signed in 1994 by President Clinton (a fact hyped by Trump during the campaign) and ratified by a Republican Senate. International merchandise trade grew much faster than GDP, as shown in Figure 1, but more recently this trend has slowed, and the WTO recently estimated that trade growth in 2016 will be less than GDP growth for the first time in decades.
Figure 1: World Merchandise Trade & GDP Growth
One of the most important factors driving trade growth in general, and the growth of the flat panel display industry in particular, was the Information Technology Agreement (ITA) signed in 1996. The ITA eliminated tariffs on a wide range of IT goods, not only computers but also computer monitors. Starting with 29 countries, it has since been expanded geographically to cover 82 countries, and the scope of products covered now includes such items as tablets and smartphones.
Because of the ITA and more generally the free trade environment in the 1990s and 2000s, most trade in flat panel display products, especially end-products, crossed borders without tariffs. This tariff-free system encouraged the development of a global supply chain in the FPD industry, first in notebook computers, then in computer monitors. FPD clusters formed, first in Japan, then in Korea and Taiwan, because FPD makers could build huge economies of scale and enhance learning effects to rapidly improve both cost and performance of LCDs. Once these global supply chains became entrenched for the IT industry, the LCD juggernaut overwhelmed the CRT and PDP industries to dominate the TV space.
During the time leading up to the global financial crisis of 2008, it was unchallenged economic orthodoxy that trade growth was an important driver of overall economic growth, but since that time the political underpinnings of free trade have been fraying all over the world. The election of Trump is just the latest in a series of signs that the trend towards freer trade may reverse.
Trump’s campaign rhetoric on trade resonated with many voters because it is undeniably true that manufacturing employment in the USA has declined dramatically since the turn of the century, as shown in Figure 2:
Figure 2: US Manufacturing Jobs 1980 – present
Although the display industry was only one small part of this trend, it was an important part, especially with respect to the 2016 election, because much of display industry manufacturing was in the “battleground” states. At the time that NAFTA was signed in 1994, there were 20 or more manufacturing plants in the US making CRT and CRT projection glass, tubes, and TVs, with many more feeder plants producing metal parts, components, etc. In Figure 3, I have placed many of these plants on a Map of the 2016 election. There was a significant concentration of the CRT TV industry in Ohio and Pennsylvania, two states whose combined 38 electoral votes are almost the entire margin of the Trump victory.
Figure 3: US-Based CRT & TV Industry Manufacturing Sites, circa 1995, on Map of 2016 Election
The areas where these plants were located, with a few exceptions, voted heavily in favor of the winner. In the table below you can see the city or town with the display industry plant, and the % vote for Trump in the surrounding county. Although there were a few plants located in major urban areas like Chicago and Memphis that went for Clinton, many of the plants were in more suburban or rural areas and went heavily for Trump.
While undoubtedly these specific plants would have shut down anyway (CRTs are no longer with us), the corresponding replacement product, LCD TV, has effectively zero manufacturing employment in these areas. While the display industry was only a part of this seismic shift (automobile manufacturing was a larger part), its role cannot be dismissed.
Now that we are on the way to a Trump presidency, what are the implications for display products? Trump’s proposals to withdraw from NAFTA and to impose a 45% tariff on goods from China would have an immediate and profound impact on the TV market in the US, because the US TV market is composed nearly entirely of imports from Mexico and China. In 2015, there were 43 million TVs imported into the US, 19.6 million or 45% were imported from China and 21.9 million of 50% were imported from Mexico.
TVs imported into the US from Mexico are, under NAFTA rules, duty-free. TVs imported from China are subject to a duty of 3.9% if they incorporate a recording device (5% without a recording device), and since a USB input is considered a recording device, nearly all TVs of any size sold in the US now have a USB input. So for a typical low-end TV imported from China, with a wholesale price of $200 the duty adds $8 to the cost, not a meaningful part of a retail price of $250. If Trump’s 45% duty were imposed, this would change $8 to $90, and likely shift the retail price from $250 to $350. Similarly, for a higher-end set assembled in Mexico with a retail price of $1000 and a 30% retail margin, today the tariff is zero, but Trump would replace NAFTA with a 35% tariff on Mexico imports, meaning a $245 tariff, and likely $300-400 added to the retail price.
Like many in the display industry or in many other businesses, my reaction to Trump’s anti-trade proposals is “that will never happen”, but that’s what most knowledgeable people said about a Trump presidency. The idea that these proposals will be implemented can no longer be dismissed.
So how would the display industry change if Trump’s anti-trade agenda was implemented? First, brands and OEMs would look to find alternate locations for TV assembly. Vietnam is already a significant manufacturing center for smart phones; manufacturers seeking to avoid China-specific tariffs would likely move there first. Second, the current configuration of TV assembly plants in Mexico would not be viable, and those imports would be replaced either by direct TV imports from Asia or by imports of LCD panels and assembly in the US. With respect to LCD panels, a China-specific tariff would make it untenable to source panels from the many LCD fabs rising in China, so TV panels bound for the US market would need to be sourced from Taiwan, Korea, or Japan.
Such a Trump anti-trade policy would not appear without major reactions from the countries affected. While Mexico has little direct influence over the display industry, the reaction of China to Trump moves could be catastrophic to some players in the industry with significant sales in China, such as 3M, Corning, and Applied Materials.
In the free trade, low-tariff world of the last 25 years, the display industry and the wider electronics industry has formed a cost-effective global supply chain which has provided billions of innovative products that are increasingly powerful at ever-lower costs. If those benefits are not valuable enough for free trade to remain politically viable, as we have seen in the US election, then that global supply chain will be disrupted, and all of the participants in the industry will be affected.