Trade Wars are Good?


Trade War 2

Once he entered into his second year of becoming the US President, Donald Trump initiated trade disputes with numerous global trading partners inviting opposing critique describing him as initiating a “trade war.” He then responded saying that “Trade wars are good, they are easy to win!”  As we have truly entered into a new era of tensing up global trading relationship after US imposing 10% of US 200 billion worth of Chinese import and China retaliated with 10% of USD 60 billion US import, the world we live now has entered into a new venture of global trading dealings. Will these trade wars bring an end of this bull market and usher in the next global recession?

Global markets have different level of response to the rhetoric at play between US and China leaders before the actual implementation. US markets ignored such recession threat and resumed its bullish uptrend, while China market went into technical bearish market trending.

The greatest threats to global economy this trade dispute has caused would be such as; China will go into recession earlier, US inflation rate rises and the economy will eventually suffer and global supply chain being hit etc.

China Imminent Recession

In fact most negative analyst fear that China will go into recession caused by this trade war was based on a lot of assumption and emotional fear. They have not gone into the factual detail particularly on how China economy has recently evolved into. China has long been moving away from being an export oriented country to be a consumer driven economy. Some mega infrastructural spending such as road construction, high speed train system have driven China economy with “full cylinder firing.” And of course the major ambitious project of one belt and road initiative has provided the main thrust of China’s future dreams.

The total export to US goods has merely stood around 19% of its total foreign export according to latest statistic shown in 2017.

Export to US
China goods export to US stands merely in a proportion of 19% in 2017.

Besides, this goods is not totally scrapped off. It would most probably just affected with lesser volume. Furthermore, Chinese exporters would find a reroute or relocating their factories to other countries in order to avoid the US tariff hiking too. Therefore, the impact of the trade war to Chinese economy could be very mild or bare minimum if we analyze it rationally.

Effect on US Economy

As far as Trump is concern, he said he liked trade wars and trade wars were easy to win.  What behind his mind could possibly be that, even if China or other countries are not willing to yield to US demand, tariff hike is the best way to settle trade imbalances. US government would have collected additional treasury revenue. This collection would compensate any losses due to recent corporate tax cut, long standing trade imbalance lost, and could even use to compensate those who incidentally suffered or victimized by other country’s retaliation measures like recently compensation given to farmers.

If ever inflation rises in the country, deflation on the other hand would have caused can practically off set this issue. The inability to export product massively due to retaliation initiated by other countries, prices of those products which stagnated in the country will be deflated. This has happened to poultry products recently, such as pork. Prices of pork product dropped.  That’s probably the reason why Trump and his hard core team like the trade war initiatives.

Global Supply Chain Disruption

Global Supply Chain
Analyst suspects global supply chain disruption might happen due to trade war

In terms of the effect on disruption of global supply chain, this issue is very complex and hard to quantify.  No one has really know how extensive the disruption would be. This is probably a mere concern than it actually is. In this liquid economy system where many countries have not stopped their quantity easing program like the European block, most businessman will be able to find their ways out to settle their supply problem.

As a reason, the prediction of the imminent global recession caused by trade war could be probably over exaggerated than the reality.  Just like the Fed’s view of the US and global economies, the health of global economy outlook still stands firm. This could be true until unless economic data is showing otherwise. Consequently the next US corporate earnings report in November will be critical for this aspect. For the time being, we are still at the best opportunity to keep our investment intact until otherwise.

Thank you for reading and happy investing but invest safely!

 

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RISK WARNINGS

The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions.  This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to make up individual investment decision.

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