Tuesday, 25 September 2018

Trade Wars: Pros and Cons

The headlines are full of articles about the current US/Rest of the World trade war and the tariffs being introduced by the US President to combat what are deemed “unfair” trade practices by other nations.

Setting aside the question of who’s “right” and who’s “wrong” (the answer is usually both sides), the question is what’s the impact of sanctions in this case.

The US is the world’s largest economy and sucks in vast amounts of goods to keep the country and its people going, as well as exporting billions of dollars’ worth.  In such instances, there are buyers, there are sellers and those who transport those goods from where they are made to their final destination.  

In the age of global supply chains, the smartphone that you and I use may be assembled in China using parts sourced from Taiwan, Singapore and Malaysia which were manufactured using metals supplied by Australia and China and (perhaps) software developed in India before being loaded on ships registered in Panama and crewed by Indians, Filipinos or other nationalities.  

Raw materials have to be transported from where they were mined to where they will be assembled into finished products and then from the manufacturing country to another port where they are “transhipped” to another vessel for onward delivery to (say) the US. 

All the countries that take part in the process above employ people to mine/manufacture, document, inspect, programme, assemble and transport the goods.  

The purpose of tariffs is to ensure that local industries and workers are protected from “unfair” foreign competitors who may be able to produce the same goods (or an acceptable substitute) at a lower cost thereby competing against local manufacturers and perhaps driving them out of business.  This results in workers being made redundant and unable to earn a living if they can't find another job.

Where this is leading is that tariffs imposed by one country on another can actually have far-ranging global consequences.  To take an extreme example, if US buyers decided to buy local because the rise in tariffs on (previously cheaper) foreign-made goods meant that their price was now the same, this should result in higher demand for US-manufactured goods, creating jobs, employment and a larger tax base for the Federal government.  

Following this, there would be reduced/no demand for goods manufactured overseas, putting workers out of jobs in the mines, factories and global transportation industry.  This is already happening in certain parts of Southeast Asia.   

Back in the US, buyers now pay more for goods that, when sourced overseas, used to be cheaper.  This would have several effects:
  • Higher prices cause inflation to rise due to the higher cost of goods. 
  • This leads US businesses to close, raise their prices or lay off workers to remain in business.
  • Due to the increased cost of living, demands for increases in salary would rise, or workers would be laid off.
  • Countries affected by tariffs on goods exported to the US retaliate by imposing their own tariffs and refusing to buy US-made goods (this is already happening), affecting US workers’ livelihoods.  
  • Countries holding US Treasury Bills or other US government debt might decide to sell, driving the US Dollar down and forcing the US government to find other ways of financing the US budget.

In terms of US exports, Canada, Mexico, China, Japan and the UK imported $770.9 billion worth of US goods totalling 50% of US exports in 2017.   Much of this was aircraft, automotive and machinery, all key industries in the US which could be impacted if “the rest of the world” decided to respond to like with like.  A total of 74% of US exports go to 15 countries.  That’s a lot of economic power in comparatively few hands.

There are other consequences as well in loss of goodwill, time wasted on renegotiating and lost trade. In short, whilst political egos may win, the “normal citizens” of most countries stand to lose.  

I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in international financial services around the world  running different operations and lending businesses, I started my own Consultancy to provide solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. My websiteprovides a full picture of my portfolio of services.  For strategic questions that you should be asking yourself, follow me at @wkm610.

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