Friday, July 20, 2018

The U.S. will lose the trade wars as long as we don’t retalliate

Well, I am doing one of my favorite activities again: sitting on a nice patio in the morning sun but this time not in my back yard of my Calgary condo but on a plaza of 12th Century’s Ootmarsum, a cute village in the Twente Region of the Netherlands, just a few miles from my birth city. Lately we are dealing with so much hype and untruths, the whole world seems to be made of noise. No wonder many investors feel uncertain and the investment returns from stock markets this year have been meager to say it nicely.  
Yet the North American economies are doing fine with ever more positive earnings reports.  Europe should be a mess according to the usual eurosceptics. Especially the Deutsche Bank is in a mess, but then when I talk to my relatives here in the Netherlands they say, Northern Europe is just fine and real estate is in a clear uptrend from the lows of the last downturn. My European cousins don’t know what all the fuss is about. At one of the busy restaurants I ate, the owner and his wife stand in the kitchen because they can't find cooks.
There appears to be just too much worry amongst investors all over the world and especially in the U.S. to think that we are in the last euphoric stage of a bull market. The markets are not overly expensive in terms of P/E ratios or dividend yields. China’s is dirt cheap. For the rest of the year we probably will muddle along, or investors get used to the noise and stock market performance reverts to the mean.
There may be a question as to who will lose the trade war… most. I start to suspect that just like OPEC overestimated its power over oil pricing in 2014-2015, that Trump overestimates the economic power of the U.S.   To be honest I do empathize with the U.S. regarding intellectual property theft, but that doesn’t mean that hacking and slashing at the rest of the world is the solution. I don’t think that is especially smart for a man who, from time to time, declares himself to be a genius. It more resembles the behavior of an angry, unfairly treated child.

I disagree with Trump’s stance on defense spending. It is the choice of the U.S. to spend such a sizable portion of its GDP on the military and its defense industry. In fact, this overspending is basically an unfair industry subsidy something he accuses the rest of the world to do to its domestic industries. Then he demands his ally/enemies to buy more from his defense industry and calls this ‘paying their fair share’. Not so at all! On their own, NATO countries are spending many times more on their military than their opponents, including Russia. 

About the trade wars and distorted NAFTA accusations by Trump, his numbers regarding Canada and probably also regarding other countries, are incorrect if not on purpose misleading.  For example, the Chinese trade deficit maybe overstated because it includes the fully assembled price of products such as i-phones to China’s trade deficit. Yet revenue for many parts and profits  of those phones go to other countries including the U.S. Thus China claims that the U.S. – Chinese trade deficit is exaggerated by 50%.  Even more distorted are Trump’s trade numbers regarding Canada and the claim that the U.S. suffered lots of damage from Canada’s Dairy Marketing Board (a system that I also abhor)! Especially when U.S. agricultural subsidies are included. Nor is the claim justified that because Mexico can harvest twice per year due to its climate that this is an ‘unfair trade practice’ versus U.S. producers. Yet, Mexico’s labor unions enforcing low-wages on its members is criminal, at least based on what I have read about it.

Because of all this uncertainty, the U.S. dollar has skyrocketed versus many other currencies, including the Canadian dollar. That affects its competitive position negatively.  Even more so, since the Fed’s interest rate policies also support an increasing dollar value and to top it off there are the Trump Tax reforms. To state that the U.S. is losing its competitiveness visa-vis the rest of the world is an understatement.

Higher interest rates while U.S. debt is at an all time high is not entirely harmless either. I guess Trump may have to raise taxes to make up for increased interest payments which, as we Canadians learned from the Mulroney years, is inflationary to say the least

Then there are the tariffs themselves. These tariffs are nothing but an import tax payable by American consumers and producers. It raises prices and often those tariffs are on products not even made in the U.S. such as the current idea of imposing a tariff on Uranium imports while U.S. uranium production is virtually nil.  The effects of the tariffs therefor are not necessarily protecting existing industries while U.S. manufacturing must often pay tariffs on its raw materials needed for its products making them, in turn, yet less competitive. Obviously tariffs on car imports will disrupt the North American car makers which are heavily integrated across borders. All this is not exactly helping the competitiveness of U.S. industries. But then exports are only a small part of its economy. 

The tariffs are stoking U.S. consumer prices and create inflation.  That goes straight against the goal of the Federal Reserve which is to contain inflation around 2% and it has been raising interest rates as antidote. I can’t see that all as very good for the U.S. economy.  Neither do I see that Justin Trudeau’s retaliatory tariffs are a smart response to all this. It enrages an already irrational Trump and it will be paid out of the Canadian consumer’s pocket.  I suggest that we just let Trump continue inflicting damage on his own economy. Yes, he may hurt the Chinese significantly, but I think he hurts his own economy more. And then there are the November elections…

In my view, all this trade noise may abate after those elections. Trump is like that blustering business negotiator allways shocking the counter party with excessive demands so they ‘compromise’ at the level Trump really wants. The blustering also helps to convince his electorate that he is ‘showing it to them!’ Them being the rest of the world which has ‘stolen’ all those U.S. jobs. 

I suggest that the U.S. economy is in a different stage than the ‘old rust-belt’ economy. There must be plenty of modern-style jobs in the U.S. economy with the current near ‘full employment’ levels. There are those who have given up finding a traditional job and who can’t adjust to new economic reality.  That is a weakness of the U.S. with its enormous division between haves and have-nots and its lack of good social net works. But even the employment participation rate, that reflects those that may have been left behind, shows declining numbers. 

Then who is the ultimate Trump voter?  A bunch of angry losers? Hmmm That may be a too simplistic answer but then that is a problem for the U.S. and that cannot be scapegoated onto the rest of the world. We have our own problems. Globalization is benefitting all of us. Globalization distributes the different types of labor appropriately for each type of economy across the world in the most efficient manner  and it allowed many emerging markets to ‘learn how to fish for themselves’, defeating extreme poverty.

In my books, Trump trying to reverse the U.S. to an old ‘rustbelt’ economy is hurting the U.S. more than anything else. U.S. voters may want to blame their problems on others, but just like Brexit shows in Europe, matters are not always solved doing so. According to me, the U.S. likely loses more than it will gain with these trade wars and everyone else will share in the pain - for now.

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