Secrets of the Trade Wars: How to Fix the Global Economy

Are the fundamental understandings of trade incorrect?

In this day and age, with communication easily at our fingertips, everyone is an expert.

But when we part the veil of misunderstanding and misinformation, how does this really hold up against the realities?

Recently, I’ve kicked-up my activity on Twitter to continue expanding perspectives and fostering conversation and deep-thought.

Deficits: Good or Bad? Does it Matter?

What I’ve learned is that many are say deficits are good…yet without a framed context they lose their meaning. Take a look at the tweet from World Economic Forum below:

 
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To understand what trade deficit means in context, you first must look at it from a wider perspective.

For example, China is currently utilizing an ACD model, in which SOE’s and many large corporations are subsidized by the government either directly or through side-channels such as central banks. Ultimately, the focus of the Chinese economy, and therefore the SOE and corporations, is the manufacturing of goods for export.

And one of the major export recipients is the United States.

Using global trade agreements, such as those managed by the WTO, Chinese (and global in general) companies circumvent the usual barriers of entry, be it high tariffs or blocked imports.

However, this gets more complicated when you take the revenue and funding of these corporations into account. Remember, many of these companies are propped-up by the government.

Let’s take the Chinese steel industry as an example. Chinese steel mills make efforts to produce steel at the lowest feasible price and sell at lower than the competitive market rate in the US. By doing so, they are able to price-out US competitors. Like Amazon, these companies are willing to take a net loss if the upside allows them to fully control the market.

And what ultimately allows these companies to stay in business? A major factor is that they are not entirely dependent on revenue from these steel sales.

Instead, they have government support.

Another major factor is currency-competitiveness. China can artificially keep their currency low against foreign currencies, thereby making it more attractive for other nations to import Chinese-produced goods.

These are unfair advantages specifically designed and manipulated to take advantage of the current system and provide China with huge growth opportunities and market control

And on top of all of this, China makes strong efforts to limit imports into the country.

Using managed trade.

When the state controls firms that do the importing into the country, it’s incredibly easy to unofficially stop imports significantly.

 
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They’ve done so with Canadian canola, Australian coal, game consoles, US Soybeans, and US automobiles to name just a few.  

What is the Solution?

We’re not talking about absolutes. This is not a conversation about is a trade deficit good or is it bad for a globalized economy. Instead, the question should be: “Is too much deficit, generated because of taking advantage of a system rather than working within, bad?”

And we think the answer is yes.

If so, the most effective way to change this is to close the loopholes and balance the trade agreements so it is fair for all sides involved.

Reduce the trade deficit by renegotiating unfair and outdated trade agreements, import less from China to rebalance the source, and create more international goods to be exported more easily into countries. This will maintain a healthy, self-sustaining economy that can weather harder storms than this.

How does the United States protect domestic companies? By reducing the federal corporate tax income rate and promoting “Made in America.”

How are Corporations Reacting to Increased Tariffs?

According to Reuters, BMW is increasing production of one of it’s cars in South Carolina and China in efforts to reduce the impact of the tariffs.

Prior to this change, the plants would produce parts required for BMW to sell vehicles in China. The issue is that due tariffs from the US-China trade war, BMW has had difficulty importing those goods at a reasonable cost.

 
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What BMW announces in this quarterly is their intent to ramp up more production, and jobs, in South Carolina and in China so to optimize parts manufacturing to eliminate shipping car parts across the globe. This effectively circumvents the tariffs and managed trade measures put in place.

This represents potential positivity and pivoting due to the trade war, the recognition of the frailty of the system, and a viable solution. 

Parts and jobs are created within the United States, for the United States market.

Or in other words, bringing back jobs to the United States.

The exact same can be said for China, which will generate more jobs producing domestically consumed products, potentially accelerating their consumer base and increasing general wealth (in GNP terms).

It’s a solution with clear benefits for both sides.

Stay tuned for more…

 

Peter Pham