A trade war between the US and China is likely going to start next year with a key promise of Trump to declare China a “currency manipulator” on day one of his Presidency and to enact a 45% tariff on certain Chinese produced products sold in US markets.
China has threatened to retaliate by dumping Boeing and instead ordering from Airbus. China has said it will block sales of US automobiles and iPhones in China and that US soybeans and maize imports will be halted.
To better understand why I think 3D printing stocks are a good play on a trade war with China, we have to go back in history and use macroeconomic analysis to see how we got to where we are today.
China Joins the WTO
In 2001 China joined the World Trade Organization and began flooding America with illegally subsidized exports. Over the next ten years, the US would shut down over 60,000 factories, lose more than 5 million manufacturing jobs and see it’s historical annual rate of GDP growth cut by two-thirds.
Trade Deficits and Offshoring Subtract From GDP Growth
As a result of China joining the WTO, structural problems hit the US, Europe, and other major economies like Japan and South Korea.
If a country like the US runs a trade deficit, this directly subtract’s from its GDP growth. From that observation, you can see what the two most important structure drags on growth for many developed nations like the US have been.
The first has been the drag of the large trade deficits. The second has been the drag on lower domestic investment growth, as multinational corporations like Caterpillar, General Electric, and General Motors, have built more plants in other countries and fewer plants in the US.
Where have most of the offshoring of productions gone? The answer is China.
It’s no accident that the start of America’s era of slow growth in 2001 coincided with China joining the World Trade Organization or WTO, which gave China full access to American markets.
Contrary to the rules of the WTO, China began to flood the US with cheap, often illegally subsidized exports, and over the next decade and a half; the US would see the loss of over 60,000 factories and more than 5,000,000 manufacturing jobs.
The Emergence of Structural Trade Imbalances
During this time the economies of Europe, India, Brazil, among others, would likewise begin to have significant growth-sapping trade deficits with China and this would reduce global growth below what it would otherwise be.
The result would be the structural emergence of a growth-sapping global trade imbalance, as illustrated in the following set of figures.
Here, we see chronic annual trade deficits on the order of 200 to 400 billion dollars annually, with the heavily exported China.
By the year 2012, these deficits would help slow growth dramatically in both Europe and the US, and as a result, China’s two biggest customers would thereby be too weak to sustain China’s export-dependent growth.
In a ripple effect, slow growth in China, in turn, would lead to slower growth in so-called commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. More broadly, these structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.
Here, we see that weak demand for Chinese exports from Europe and the US leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust, global economic recovery.
Why Keynesian Stimulus Failed
From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.
3D Printing and China Manufacturing
China is rapidly losing ground to 3D printing technology. The business model of it being cheaper to manufacture goods in China could come to an end over the next ten years.
US companies will soon be able to make most things in small 3D printer factories right in your neighborhood or town. Factories, as we know them today, will get broken up and made smaller and local. Newsweek writes…
In the distributed manufacturing scenario, the carbon footprint, so to speak, of each shoe drops precipitously. Asian manufacturing is toast, probably upsetting the global balance of power. And factory jobs—well, they’re likely never coming “back.” 3-D printing automates a lot of what factory workers would’ve done. The hope is that distributed manufacturing creates a whole new set of opportunities for middle-class workers and keeps money local instead of funneling it overseas.
Coming Trade War With China
A Trump Administration will be placing tariffs on Chinese-produced goods effectively penalizing US corporations that manufacture products in China. China will retaliate by blocking the sale of US goods inside of China.
This trade war with China will only speed up the adoption of cheaper and faster 3D printing facilities inside the US IMO.
Many US businesses could increase their purchases of 3D printing machines as a result of the worsening trade relationship with China as well as the public outcry over the loss of millions of US jobs to China.
The earnings recession which began in Q1 2015 prevented businesses from buying 3D printers as consumer demand was uncertain. This last quarter we saw an end to the earnings recession, and if corporate earnings continue to rise, we could see more companies buying 3D printers.
Big Players and Big Money Flowing Into 3D Printing Technology
In September of 2016, General Electric acquired Arcam for $1.4 billion as it makes a major move into 3D printing.
In May of 2016, the 2D printing giant HP revealed that it has been spending billions of dollars developing 3D printing technology and announced the release of its Jet Fusion 3D 3200 and 4200 printers. The more powerful 4200 was slated to begin shipping in the fall of 2016, while the 3200 will be available in 2017. HP claims these polymer 3D printers are up to 10 times as fast and twice as cost-efficient as current 3D printers powered by the leading technologies. HP sees the incredible future for 3D printing and aims to become the leading 3D printing company.
3D Printing Stock Chart
Chart Comments: Not a great looking chart. Twiggs Money Flow is rising but still below the 0% line. The 50-day moving average (blue line) at $15.21 is currently being tested, and a breakout above this level would be bullish.
Stratasys Stock Chart
Chart Comments: Stratasys’ chart looks even worse than DDD. The Twiggs Money Flow is rising nicely, but it is still below the 0% line.
HP Inc Stock Chart
Chart Comments: Twiggs Money Flow falls below 0% line after missing on revenue; however, overall, the strongest looking chart of the 3D printing stocks. Fantastic valuation at P/E 9.9 and forward P/E 9.2. Wait for candle over candle bounce before taking a long entry.
Disclosure: I do not hold any stocks mentioned in this article.