Trading wars impact

marcus335 · April 7, 2018, 12:20am

Do people realize you can’t run a trade deficit forever? It’s literally the path to financial ruin. It’s like running a monthly spending deficit at home, and the deficit is spent on stuff that rapidly depreciates. Would you borrow home equity every month to buy clothes and electronics? That’s literally what the country is doing. The US can’t go on forever selling equity in business and RE to find consumable spending on depreciating stuff.

The US has been spending itself broke for decades. Checkout how debt is growing faster than income as shown by debt to income ratio.

People talk about post WW2amd all the growth of the US economy. The savings rate was over 7% for most of the 50’s and 60’s.

Jil · April 7, 2018, 12:30am

Yes, many govt over govt neglected with short-sightness and claiming they are trying to solve the jobless issue or other.

Unfortunately, whatever Trump does, people will not appreciate, he will be scolded / criticized, but the real benefis will be seen in next 3-7 years.

manch · April 7, 2018, 12:33am

From Stephen Roach’s article:

Trump’s budget deficits will make America’s trade problems worse. A low-saving U.S. economy can’t square the circle without trade deficits. With tax cuts of $1.5 trillion over the next 10 years and another $300 billion in spending increases added in by a reckless Congress in order to avert a government shutdown late last year, the net domestic saving rate is headed toward zero – or even lower – with trade deficits likely to widen sharply in response.

And that leads to the uncomfortable truth of China bashing: protectionism in the face of widening trade deficits. Courtesy of Trump tariffs, China’s deficit will now be distributed to the other 101 nations that make up America’s multilateral merchandise trade deficit. Relative to China, these are higher-cost producers, meaning the likely response to this retaliation will have the effect of taxing the very families Trump insists he is protecting.

Trade deficit is an automatic consequence of low savings rate. It’s just like 1+1 = 2. It’s not a moral argument. It’s just simple math.

You want trade surplus? Sure. Save more and spend less. Start with the federal government. Those corporate tax cut is a bad idea.

By singling out China as a bad actor, we may be substituting low cost Chinese goods with more expensive goods from elsewhere. Again, low to no savings means you must run a trade deficit because of balance of payment equation.

By the way comparing US as a whole with a single household is wrong, because of the simple fact that US can print its own money. And because USD is the reserve currency of the world, there is no default risk.

marcus335 · April 7, 2018, 12:37am

How many of the items with a new tariff are essential? Higher prices should lead to less spending which would increase the savings rate.

Jil · April 7, 2018, 12:41am

Same way, whole concept of the post is “The U.S. depends heavily on China for providing the low-cost goods that enable income-constrained American consumers to make ends meet.”

This is almost equal to saying “Apple badly needs Foxconn to supply iphone and Apple can not survive without Foxconn production”

The owner/designer (and payer) is always stronger than Supplier (and payee).

manch · April 7, 2018, 12:46am

Most people on this forum are rich. iPhones are for rich people. Imagine we put even more tariffs on shoes and clothing so they are 20% more expensive on average. It won’t affect you or me. It will affect people who live on minimum wage and shop at Walmart.

dioworld · April 7, 2018, 1:03am

i’m poor
minimum wage affects us more… lot of restaurants, cafes, closing down and cutting cost on their ingredients.
and iphone is not for rich people. lot of poor people use iphone. remember these college kid got no money for food but got money for iphone?

Jil · April 7, 2018, 1:13am

The complete list of 1300 items are linked here https://ustr.gov/sites/default/files/files/Press/Releases/301FRN.pdf

Second, necessity is mother of invention.

The force must come from top down, it is good that the issue is addressed Top Most in USA which was neglected for many decades.

When Obama put a stop (reduction) on oil imports and encouraged alternate source, we have got EVs on road. In 10-15 years, EVs are the way for regular commute cars. The entire USA went in recession during 1975 when OIL-OPEC-EMBARGO was in place which is turned UpSideDown when Obama reduced oil imports and increased domestic production and alternate energy initiative.

Similarly, when Trump forces a reduction on imports by adding tariffs, businesses will find alternate way to produce locally that benefits this local jobs.

Short term, entire country businesses will have issues, cost increase, but long term this clearly benefits the local economy. In 3 to 7 years, USA will have self reliance, self sufficient in jobs, manufacturing and growth.

The task is not simple or easy for any one,it is a struggle for everyone, but Trump is bold on taking such challenging task until he sees the end of it.

hanera · April 7, 2018, 1:50am

Time to remove the two terms limit. Trump for President for life👏🏻

manch · April 7, 2018, 2:18am

So are people suddenly for governments to force corporate changes? How about we tax oil out of existence because we can force more clean energy?

Try to be more consistent with yourself.

manch · April 7, 2018, 2:21am

Here’s a good article by Krugman to explain some of the math behind a trade war.

Trade war won’t affect economy of US and China all that much. So why did stock market drop so much? Was it just panic? One explanation is the “stranded assets” theory:

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.

manch · April 7, 2018, 2:24am

By the way we should also pay attention to the NAFTA negotiation. Car companies like GM have a big web of logistics spanning the 3 countries. If NAFTA came undone there will be HUGE disruption to GM for example. Their stocks can drop like a rock.

marcus335 · April 7, 2018, 2:25am

The end goal isn’t tariffs. The end goal is opening up China for more American companies to fairly compete.

dioworld · April 7, 2018, 2:32am

yup, not fair, even the legendary jordan have a hardtime winning in china, haha

Jil · April 7, 2018, 2:55am

Unfortunately, that is bad too. Power should not be concentrated in one person like the way China has given. This country proved that Trump (Rep) can do Similar (or better) one what Obama did (Dem).

harriet · April 7, 2018, 3:04am

@Jil since when did you become a Trumpster? I thought you voted for Hillary two years ago, or maybe I misremembered.

Jil · April 7, 2018, 3:52am

Corp tax reduction onwards !

I was scared by Bush period, spoiling the whole country into wars and economical crash. Yes, you are right, I supported Hillary during election.

I am not Dem or Rep, but I see Trump actions are bold, tough to meet even for himself and above all benefits US People. He is, even after winning election, thinking about the low income earners and how to benefit them/their jobs.

The first one was reduction of corp taxes. It was incredible that bring back money to USA from all over world. When companies, investors pour the money in USA, local people get benefited and companies, investors benefit by low taxes.

However, if they bring money, design in USA, market in USA, but manufacture elsewhere outside world, it affects USA.

All along US has been made marketing/sales world. BE AMERICAN and BUY AMERICAN is gone multi-decades before. He is trying to get it back.

The second one is tariff on imports. The basic premise is every item imported is affecting one person job locally. If the item is made in USA, it benefits the local people as job/income. This country has everything, Money, resources, technology, leadership, planning, but lack of direction/focus from the TOP resulted job-loss.

I admire his bold & challenging actions to help people of USA, even though I did not support him originally.

Elt1 · April 7, 2018, 4:31am

The problem with tariffs is the government picks winners and losers.Trump wants to help coal miners. It is dying industry retrain them don’t put tariffs on steel and aluminum. Then the Chinese retaliation on Boeing and soybean growers puts more people out work than the jobs saved.
Blame the EPA OSHA and government for lost jobs not China. We can’t beat China in the trade war. Maybe 20 years ago but not now. They can grow their economy with domestic spending… they don’t need us anymore.

Jil · April 7, 2018, 4:46am

Trump is not trying beat China or another country, that is not his intention.

He is trying to get back jobs by adding tariff.

I am taking a sample AAPL.

Why do AAPL manufacture iphone from China?
Lack of technology, or lack of money or lack of people…etc?
With the advent of internet and globalization economy, AAPL is taking advantage of low cost and they get tax reduction benefit at 21%. BY adding tariff (actually Trump exempted phones) AAPL needs pay 25% additional money to US as duty. This nullifies each other (tax reduction and tariff addition) unless AAPL makes the iphone locally.

It will affect to the extend how much they are exporting. I do not have statistics to Analyze.I trust that USA would have analyzed the retaliation measures and the impact. We will see the results in the long run.

Since I owned Boeing, only two giants Airbus and Boeing ,I can confidently say that Boeing will recover as Airbus is already shattered.

Yes, China is independent country, they can grow at their own will. They are not depended on USA at all. Every country needs to address their self reliance, self defense on their own.

hanera · April 7, 2018, 2:05pm

This is a fallacious argument. Without having a global supply chain the volume of sale won’t be that huge. The assumption is manufacturing in USA and manufacturing using a global supply chain, Apple can still sell the same number of units of Apple products, and hence require the same number of jobs. A big f… assumption. This same fallacious argument is being repeated for all other products.

Allow me to illustrate with fictitious figures (don’t have real numbers, too lazy to search web),
If no global supply chain, Apple may sell only $20B instead of $220+ B per year, hence, instead of employing 100,000 employees, Apple would employ 10,000 employees. Apple employs 80,000 employees in USA & created 2 million jobs in USA.

Trump didn’t impose tariff on iPhone, guess he is well aware of the fallacious argument or Jared manages to enlighten him.