Trade War with China. What Could Possibly Go Wrong?

Forgetting for a moment the siren voices, a closer look at Trade War USA™ reveals an intention to favour John Henry at the expense of The Man. Increasing America’s slice of the economic pie. That’s the plan but does it work? Is there method in the madness?

History

Between 1982 and 2012 the richest 1% in the US increased wealth from about $4 million to almost $14 million each, up about 350%. Wealth of the lower 90% increased only 33% from about $60,000 to about $80,000. TV never mentions the discreet expectation-setting theatre framing growth or company earnings when reporting the figures. We carry on oblivious to social impact and the deeper meaning of economic headlines.

A famous, or even infamous, novel, Atlas Shrugged, the first of several by Ayn Rand, arrived in 1957. A time of great opportunity and growth, space travel, Elvis and the Frisbee. Rand’s story pits winners, go-getters, innovators

against politicians and administrators. She extols self-interest, knowledge and rationality and rejects altruism and religion. If you’re not a creator you’re a freeloader. Love it or hate it, Rand’s philosophy endures like a holy guide for achievers, providing moral consent for success. It champions deregulation, light government and low taxes in a handy book we could name Self-improvement for Founders. It’s easy to infer the popularity of this philosophy among corporate leaders today. It’s also easy to see where ‘shareholder value’ took over from social responsibility.

Globalization

The argument for globalization is simple: everyone benefits.

Looking closer though, it doesn’t take long to see the missing disclaimer “on average”.

Yes, it creates more wealth in total but — and it’s a big but — outsourcing manufacturing eliminates jobs at home. The wages for millions of jobs go to overseas workers. At home the money flows into balance sheets of large corporations.

Individual workers pay taxes but global corporations can optimise their tax liabilities. Often they separate the flow of goods from the flow of money. In globalisation money flows to the company, the C-suite, shareholders and knowledge workers plus of course the lower-paid workers overseas. In total though, less goes to domestic workers and often, less goes to domestic taxes.

Arguments Against Globalization

The argument against globalization is the exact opposite of the outsourcing rational: bring jobs back. Repatriated manufacturing generates new jobs to refill the hollowed-out cities. When money starts flowing, each manufacturing job creates as many as five other jobs such as plant maintainers, machinery suppliers, office managers, truck drivers and shopkeepers.

Corporations lose the step-change cost-advantage of outsourcing but the domestic economy gains factories and jobs. The idea is that onshore wages create new demand and supply adjusts to meet it. People buy couches and mattresses again, they dine out, visit theme parks, choose new clothes or upgrade to a bigger TV.

Shareholders and executives disapprove but re-employed workers love it and vote for more.

Until recently, Russia was the only rocket-motor supplier to the US despite sanctions and increasing tensions. Germany is the main supplier of key parts of US night vision goggles. Imports account for many US military plane parts. A report due soon will stress risks sourcing from overseas. Particular issues are supplies from potential foes and easy to disrupt logistics. Defence supply has entered the deglobalization spotlight as America begins to pull up the drawbridges.

A Dream gone Sour

Enrichment of the few revealed the notion that everyone benefits from global trade as a pipe dream. It’s not impossible for everyone to benefit of course. For that to happen traders need to pay taxes, in full, in the economies eviscerated by offshoring. A further essential step is then to use those taxes to help create new jobs in the area. We’re a long way from that situation though. Trade wars start life as an attempt to reset the balance.

In the competitive world of technology, and with no regulatory barriers, outsourcing is a complete no-brainer. Which company can afford a ‘Made in USA’ sticker if their product is 25% more expensive than that of their competitors?

Tariffs change the economic calculation making ‘Made in USA’ cheaper relative to imports.

Policy changes like de-globalization take time to become effective since costs go up. But, if the policy remains firm, theory suggests a new optimized equilibrium will emerge.

What Happens Next

In 2017 America flipped when mercantilism replaced the collective value of international collaborative trade. Trade deficits became bad, protectionism and the nationalist agenda became good.

Contraction of trade happens every 40 to 60 years and is known as the Kondratiev wave. Inequity is a cause of turning points, as is the exhaustion of major innovations. Electronics won’t be the great growth-engine one day either. Like steam engines and railways of the 1800s or the car boom of the 1950s, Chinese smartphone shipment peaked early 2017 and PC sales peaked in 2011. Most people still view new technology such as voice-controlled assistants with suspicion.

Our future will depend on what we do with the technology. What matters now is how we use the computer, the software, the services and businesses built upon them.

Will new treaties like USMCA (aka NAFTA in new shoes) replace tariffs and end the trade wars?

The ingenuity of competitors is their only limit.

Who can guess then what the outcome may be. Uncertainty is all that’s certain.

The Long and the Short of it

Trade is important for world growth, prosperity and defining relationships between countries. When trade declines so too does world prosperity.

Nationalism may justify tariffs but can escalate. We’re already seeing US and British navy ships asserting rights to sail near islands claimed by China. In this and many other ways tariffs may be the tip of an iceberg. We can’t roll back the manufacturing clock to the heady days of the 1950s. It seems tenuous that Britain and America could succeed worldwide as early 20th century imperialist police.

Hang on to your hats, it could be a wild ride as a domino effect of negative consequences collapses trade and the fragile peace.

More poems and verse: How Globalisation and Market Forces Fanned the Flames of Political Extremism

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Image by Alex Radelich

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