No More Cheap Stuff – Light A Candle And Curse The Glare

China and Mexico flags

It may not be intuitive to the lay person why a private investment company with a history of real estate investments would care about international trade.  In fact, for most people, they think of trade wars and tariffs as causing inefficiency and trouble.  And we would agree; efficiency is generally the casualty of a trade war.  

When then-President Trump started the trade war with China in 2018, he laughed and said, “Trade wars are good and easy to win.”  It felt cavalier at the time.  He was, on some level, undoing some of the profitability that he had encouraged through tax cuts the year before.  But the relationship between the US and China has clearly soured.  Trump’s Administration was very clear in that the US wanted to play on equal economic footing, and the trade war was one way to negotiate.  The Biden Administration has continued this discussion with regular “diplomacy” surrounding Taiwanese sovereignty and international cooperation about the war in Ukraine.  There is clear discord between the two countries, and which party occupies the executive branch doesn’t seem to matter.  

What is clear is that trade dynamics have changed the flow of imports and exports, and winners and losers are becoming obvious.  For the first time in more than 20 years, Mexico surpassed China this year as the largest source of international imports to the US.  Not all of this is due to diplomatic activities.  In many cases, China’s success was always going to result in workers that would want to be appropriately valued. 

The days of sweatshops may not have ended, but the communications era has brought with it a more knowledgeable worker that will fight for better conditions, and companies that know that their product can be made with higher margins and still beat international competition.  

Furthermore, the combination of tariffs and shipping costs ultimately put China at a relative disadvantage. 

So, what does that have to do with Willow Creek Partners?  We’ve said it before, and we’ll say it again, we make our investments on a risk adjusted basis.  For us, to assure ourselves of the best outcomes, we need to make sure that we understand where economic activity is moving.  Reshoring and nearshoring are clearly happening. 

The evidence is in the two preceding charts.  When we look for our next investments, we evaluate the likely success based on things we know.  This is true in real estate where we look for places where business drives population growth, and it’s true in private equity, where we must understand demand drivers as part of our due diligence process.  

As we watch this process play out, we have no crystal ball to determine the ultimate outcome.  But by understanding what’s going on in the global economy, and how that affects the geographies that we invest in, we hope to arrive at the best outcomes for our shareholders. 

Sources: The Wall Street Journal, CoStar, CNBC


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