The Trump Trade War - Will the Grinch steal Christmas?

IN case you haven’t noticed, there’s a trade war going on between the world’s two biggest economies.

The narrative from the White House is that China has been ripping off the USA through its trade imbalances for decades. Intellectual property thefts by China amount to billions more in lost revenue to the US. We’ve written about this before.

(Mis?)informing the president on trade policy is Peter Navarro. Mr. Navarro’s policies, specifically his China policy, have been criticized by leading economists, politicians and business leaders alike as being variously childlike, mercantilist and potentially dangerous in nature. They don’t so much disagree on the problem as the solution.

Countries are perpetually locked in trade struggles and take advantage of each other where they can. This is certainly true of China but it’s also true of the USA.

However to suggest that American firms having their goods manufactured with cheaper labour in China somehow translates into China is stealing from the US through a trade imbalance is nonsense. At the very least it’s only part of the story.

Navarro’s view is that if China sells $1 worth of goods to the US then the US should sell $1 worth of goods to China.

However the US, a developed economy, has much wealthier middle class than China and so their disproportionate levels of consumption combined with China’s cheaper labour and propensity to save more of their income than American’s will continue to create trade imbalances until something in the equation changes.

That’s not something that can be best fixed with an instrument as blunt as a trade tariff.

Intellectual property theft on the other hand is a long-standing gripe the US(& others) has with China, and it’s not without merit. Indeed, China has acknowledged as much and is taking steps to get its house in order in this regard. However they’re hardly encouraged to keep making progress given the flames of a trade war are licking at their feet. Perhaps a little more carrot and a little less stick is called for.

Quick story: I ride a bicycle for fitness and the new 2020s are out. I was salivating over a particular US branded carbon bike frame retailing at about C$4000+ (just for the frame!). That same exact frame, same precise geometry & measurements was almost immediately available on Alibaba and several other sites out of China for less than C$1000, no manufacturer’s name, & could be delivered to my door in a week.

I’ve researched the manufacturers and Youtube’d reviews by people who have taken the plunge. The frames are apparently safe so there’s likely a pretty big market for what appears to be a blatant rip off.

This is the kind of thing that Trump is railing against. This is IP theft leading directly to US manufacturing job losses for high end US bike manufacturers, right? Well, not so fast. What if I told you that most of the high-end carbon bicycle frames sold in North America & around the world are manufactured by 5 firms out of China & Taiwan?

Naturally I’m not seeking to justify the theft of someone else’s thoughts, ideas, creations or designs. Intellectual property should be protected, and fines levied where breaches are brought to light.

However my anecdotal bicycle frame example illustrates how interconnected our global economies have become with different nations playing different and ever-evolving roles in the supply chain.

Essentially Navarro & Trump are invoking protectionist policies in order to reverse-engineer globalization.

That’s also why they’re pulling out of trade agreements the world over.

The Navarro/Trump view is to place ever increasing, blanket tariffs on goods coming from China (& elsewhere), all the while trying to suggest that these 10-30% tariffs will hurt only China. More nonsense. Whether your business is bicycle frames or something else you are used to operating within certain parameters. You have a business model.

Having a 30% tariff levied on your incoming product for an indeterminate period of time isn’t part of that model and the majority of the increased cost will be passed on to the consumer. If people buy less product as a result, then associated sales & service jobs in the US may be at risk as well as some manufacturing jobs in China.

President Trump telling the business community that their problems aren’t caused by his tariffs but rather by their lack of business acumen probably doesn’t help and is also likely untrue.

One of the only things keeping the US and global economy afloat right now is the mighty American consumer. Input costs & prices on a broad range of finished goods imported from China and elsewhere are set to rise dramatically as they’re passed on to the consumer.

As of September, the impact of these tariffs will begin to show up on store shelves. With the Christmas shopping season up to bat soon thereafter, it would appear as though the turkey and the tree may have to be a little smaller this year for the US consumer.

Real economic damage is being done on both sides. The fact that the US has more trade ammo to expend than China doesn’t make it otherwise.

Cooler minds will have to prevail in order to arrive at a solution. President Trump may begin to value the opinion of people other than Mr. Navarro as the reality of what he’s doing bites deep into the American consumer and so too his chances of re-election.

“If you don’t know where you are going, any road will get you there.”
– Lewis Carroll, Alice in Wonderland

Brendan O’Brien,
Proprietor, Hibernia Financial Group
Sr. Financial Advisor, Manulife Wealth Inc.

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