Paul Krugman relates declines in stock valuations to the insanity of trade policy from Donald Trump and taught me a new expression – stranded asset:
An asset that is worth less on the market than it is on a balance sheet due to the fact that it has become obsolete in advance of complete depreciation.
Paul notes:
Yet there is a reason why stock prices might overshoot the overall economic costs of a trade war. For a trade war that “deglobalized” the U.S. economy would require a big reallocation of resources, including capital. Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics. Or to put it another way, a trade war would produce a lot of stranded assets … But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets. Since about 1990 corporate America has bet heavily on hyperglobalization – on the continuance of an open-market regime that has encouraged complex value chains that sprawl across borders. The notebook on which I’m writing this was designed in California, but probably assembled in China, with many of the components coming from South Korea and Japan. Apple could produce it entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too.
Companies in the export sector have already seen their stock valuations take a hit from the upcoming trade war. But why am I focusing on Wilbur Ross as an owner of a shipping company?
Paul Krugman says that the factories “that do exist” to produce Apple products, glossing over that they are in foreign countries, would be useless and would therefor become stranded assets. Are those factories owned by Apple? He doesn’t say, but I seriously doubt it, and in some cases know that they are not since some Apple products are manufactured by a company named Foxconn. If they are foreign owned and able to be used for other things they are not “stranded” and if they are not part of our economy why does Paul Krugman care what happens to them?
Bill – there is no mystery who manufactures iPhones. It is a Taiwanese based publicly traded contract manufacturer called Foxconn. Its assembly plants are located in China. Its Annual Report is very clear. Try reading it.
Foxconn’s financials and stock valuation can be found here:
https://finance.yahoo.com/quote/2354.tw?ltr=1
There is no market evidence that they have stranded assets. Of course no one – including Paul Krugman – ever suggested that they did. So one has to wonder what Bill’s complaint was.
Krugman did say we do not such assembly plants in the US right now. That is a valid point.
But hey – I mentioned a Krugman post so I guess we should all expect more pointless Krugman bashing.
Public utilities like California’s PG&E have been talking about stranded assets for decades. Like Diablo Canyon.
Let me try this again. I don’t think that I claimed that Foxconn had any stranded assets and, no, I’m not suggesting that I think they do or that Paul Krugman said they do.
Maybe I was too brief to be understood. If Apple builds new factories in America to build iPhones and cuts Foxconn off, which is what Krugman suggested would happen due to tariffs and which he suggested would make Foxconn’s factories sit idle and would turn them into stranded assets. Foxconn is not an American company, so how does Foxconn’s fate hurt the American economy? It would certainly hurt Taiwan’s economy, but…
Foxconn is not owned by Apple, however, and is not restricted to building for Apple, so they are free to build other things, in addition to or instead of iPhones. If they are cut off by Apple they could start building something else for someone else and avoid becoming idled. Maybe they would build something for sale in Taiwan because global trading has ground to a halt and Taiwan now needs to build its own products. In any case, if they switch to building for someone else, which they are certainly free to do, how does that make them a stranded asset?
” If Apple builds new factories in America to build iPhones and cuts Foxconn off, which is what Krugman suggested would happen due to tariffs and which he suggested would make Foxconn’s factories sit idle and would turn them into stranded assets.”
Fine except this is not what Krugman’s point is here. The people that are saying Apple will make their phones here overnight are Team Trump. Krugman is saying this does not happen overnight.
If you are going to criticize one of his posts – first get what he is really saying.
Trump vs Krugman–we might as well just kill ourselves now if that’s the only choice we have.