Broker Check

In Defense of Trade Wars

| August 14, 2019
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You'll recall in 2018, I wrote a blog about the folly of tariffs. Any thorough analysis of the issue, however, requires me to see things from the other side. In fact, if you can't clearly understand both sides of an issue chances are you're on the wrong side of the issue.

Why Is Trump Angry?

As the Chinese economy has grown from backwater Communist farmers to the largest in the world, it has done so by playing dirty. Over the last 25 years, the United States has overlooked this toxic relationship, basking in the cheap goods from China. Trump wants the US to realize the toxicity and renegotiate the relationship. In broad strokes, here are the allegations against China:

  • Communist China uses near slave labor to create cheap products for the world. An unfair advantage and a moral dilemma for Western consumers. Source 
  • China steals patents, technology, intellectual capital and makes forgeries of fashion.Source
  • China manipulates their currency, not allowing it to be marked to market directly. They have for 25 years and have recently been formally accused by the United States.Source

If you are in a business relationship where you don't pay your employees, steal competitor's best ideas and pay your bills with Monopoly money, you'll do quite well. In the short term. Now that Trump is in office and determined to fight back the tide is turning. First in public opinion on China and finally in the economic realities playing out in China.

Why Does Trump Think He Can Win?

It's been said that Chinese culture thinks long term. They are planning for centuries and millennia, while the West plans on the next quarter. Furthermore, the Chinese can outlast the West in terms of their commitment to enduring economic pain. The United States is a fickle group of capitalists likely to vote Trump out of office if the stock market is down and a recession looms. China's leader is in place for the rest of his natural life. How in the world can the US win with such an adversary? Here's a few possibilities:

  • When the US sneezes, China catches pneumonia. In other words, the United States is a self-sufficient economy and has choices. The seller (China) needs the buyer (US) to survive. Vietnam, Cambodia and the Philippines are more than happy to fill the dance card. Once manufacturers and buyers leave China, they have no reason to go back.
  • The size of the Chinese economy belies its incomplete nature. Dominated by manufacturing with little to no original innovation, China hasn't been thinking long term about technology. You can't force your brightest to invent. You can't steal from the West forever.
  • Stimulus creates inflation which creates unrest. The go to fix for economic slow downs has been infrastructure spending. This is why we see ghost cities with nobody who can afford to live there. It looks like China is growing. It's a lie.
  • Planning for the next few centuries is a good thing. But what about the last few centuries. Chinese history shows us that labor unrest has led to the downfall of most dynasties. Rampant inflation in a centralized economy leads to starvation.

What is Trump's Path to Victory?

While Trump may give speeches requiring China's full capitulation to his demands, that's not likely. Nor is it necessary. Here's why:

  • Trump wins simply by having an enemy. During the Cold War, Russia galvanized multiple administrations. For Bush and Obama, it was the War on Terror. Trump can likewise use China as a rallying point.
  • Manufacturing jobs will continue to return the United States. Tariff's make the price arbitrage less profitable and slowly bring jobs back to the Rust Belt. Economically this scores points as well as politically.
  • The longer this drags out, the slower China's economy grows. Furthermore, increased scrutiny on China's economic misdeeds will weaken faith in China as a safe place for businesses and foreign capital. For Trump, victory is in taming China, not eliminating them as a world player.

In a way, Trump already has won because we are openly debating China's role in the world economy. For years, China has gotten away with dirty deeds and now they are being accused by an American President. This trade war will end when the US, China and the world choose the side they want to be on. It's a battle to persuade the world which country is a better player on the economic stage. Expect vitriol, volatility and posturing for the months and years to come.

What are your thoughts on the trade war? Click here to let us know.

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