Wolf Money(Tariffs, Trade War and The Misguided Trumpism)
Tariffs, Trade War and The Misguided Trumpism
The world trade war is upon us. This is just the beginning. There is no escaping. I seriously doubt any country can negotiated out of the tariff. To me, having a gun pointing at the head is not negotiating. In Trumpland, countries have two options. Option 1 “You jump off the cliff” or Option 2 “ Someone pushes you off the cliff”.
Back on a more serious note, any country thinking of negotiating out of trouble is going to be disappointed. I suspect any negotiated settlement will involved doing less trade with China, which means countries who agreed to such terms will be cutting off their Fortune God(China). Most countries on the tariff list will have China as their top or second trading partner. Both ways it cuts. It might be better to stand firm and be on the right side of history. Even if there are any negotiated deals, will the Trump administration keep their side of the bargain. NAFTA was a failed attempt to keep that promise.
The only way to solve the tariff problem is the passage of time. Bite the bullet for the next 2 to 4 years since the American government has very short election cycle. Most countries should be all right. Countries shouldn’t go into panic to sign a terrible deal with the devil. The Japanese signed The Plaza Accord hastily which caused a generation of poor economic progress for their country. A bad deal is worse than no deal. Politicians come and go. The long term consequence of a poor trade deal is permanent.
US is a big market and a big country. They need all the goods to keep the economy going. A hike in tariff will be felt by consumers. Trump can continue to hike tariffs by 300% or even 400%. It wouldn’t solve the demand side of things. I was joking with a friend, only Americans buy American made cars. In our roads, you barely find an American made vehicle. Cruelly, they ain’t as good as the Japanese, Germans and now to the Chinese in the ev space. The tariff will zapped away the innovation and enterprising spirit within America especially in the auto industry that falls into a false sense of security under the umbrella of tariff.
The tariff will create a shortage of goods in America. It will cause panic buying of daily essentials. American voters will cast their dissenting vote due to high inflation. Since Trump needs to seek reelection if he manages to run for the third time. A Democrat running for president with the mission of lowering inflation, will win handsomely. For people interested in Trump next move, read the lips of Peter Navarro. Enough of Trump. I wouldn’t allow him to stay rent-free in my brain.
For most investors, the world excluding the US is your oyster. There is still 75% of the world economy to focus on. I can’t speak for others. I am avoiding American companies in the meantime. Just for the simple fact, they are expensive. Profit warning storms might be coming in greater intensity and frequency. They are caught in a catch-22 situation. Most CEOs will be asking themselves, do they shift productions back to US for good and pay much higher costs for workers and materials? There are no easy answers. The higher tariff imposed on Chinese goods wouldn’t balance the cost and benefits. One example is farm equipment. A Chinese made industrial excavator cost USD $15,000 vs USD $45,000 of an American made. Let’s do the math. Even with a 54% tariff on Chinese imports, the new price of the Chinese excavator is still much cheaper at $23k, about half of the American-made. In the opinion of the YouTuber, a Chinese-made machine has better performance. It is an interesting video to watch for the neutrals. I put the link here
Let’s talk about history. The Japanese went through great length to learn from the British during the Meiji period, which led to their own industrial revolution. The Koreans learned from the Japanese during the late eighties to improve their manufacturing processes in electronics and cars manufacturing. It helped them move up the value chain for their electronics and car sector to be on par with the Japanese. As for the Chinese, they took best practices from the Japanese, the Korean and the Germans to be a manufacturing powerhouse now.
America, the financial and the human capital of the world. The country that gives us IPhone and Boeing aircraft is suddenly running scare of competition? The current move by the US government reflects an underlying insecurity. To be a great industrial leader, shouldn’t one learn from the best in class? Britain is an example of protectionism failing to work. There is a general opinion in the eyes of the British public, brexit was a disaster. Now the British government is trying to establish trade links again with other countries, including the European Union.
To be fair to America, not all countries under the tariff list play by the same fair trade rules. The tariff uppercut should act as a conduit for changes in those countries too. Cutting down trade barriers and red tape. Improving processes and infrastructures shouldn’t be view in isolation. Ultimately, free trade has proven its success in uplifting millions out of poverty. We, Singapore has benefited greatly and there is no reason for any countries to turn inwards with protectionist trade policy.
The US path to be the manufacturing powerhouse again starts by getting the basic infrastructure right. Maintaining your roads and highways should be the number 1 priority. One can’t have all the manufactured goods stuck at the ports and the highways. The big power contestation is not a winner takes all game. An Olympic medal can be shared among teams in some instances. In 1984, the Los Angeles games, the US’s Woman Gymnastics team shared a silver medal with Romania. In 1984, it ushers in the start of the long boom in the US economy under President Reagan. The world can only hope this period of US soul-searching be short-lived. The world will always welcome an energised America back to her rightful place.
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