Trump’s Trade War, Stranded Assets, and Wilbur Ross’s Shipping Company

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? Permit me to state I was trying to come up with some way of making sense of one narrow aspect of our overly complicated income tax law – how provisions known as GILTI (global intangible low tax income) as Defined Foreign Intangible Income (DFII) segment the return to tangible assets versus profits attributable to intangible assets. Law firms want to make this complicated but it comes down to this:

GILTI includes any income over and above a 10 percent return on the tax basis of tangible assets

Multinationals are now scrambling to figure out how guilty they are but why 10% of the book value of assets and not an appropriate return to the market value of assets? Shipping companies own a lot of tangible assets but few if any intangible assets. If I had to venture an estimate of the cost of capital for this sector, it would be only 9 percent. Now to Wilbur Ross:

U.S. Commerce Secretary Wilbur Ross is divesting his interests in shipping firms Diamond S Shipping and Navigator Holdings, an official said Tuesday

Navigator Holdings has a lot of stranded assets. The book of its ships is recorded at approximately $1.7 billion but the market value of equity is over $300 million below the book value. What happened was that the shipping companies invested heavily in ships during the commodity boom so much that there is an excess supply of ships. Ross likely sold his shares at a considerable loss but it is good for him that he got out before the trade war he is now promoting as that will further exacerbate this excess supply.