We recently had a discussion on LinkedIn about the trade war about possible causes and effects that will occur in the future. Some key points that were discussed were if China was a true manipulator of currency for trade benefits and some ideological differences from our governance to theirs.

The Chinese could impose additional tariffs against our exports. Additional tariffs won’t work because we buy more goods than the Chinese do ours and we can impose tariffs on a higher dollar value of goods. It’s a game of who can withstand the most economic pain. China has a tendency to restrict capital outflows often limiting to USD $100,000. The government and central bank doesn’t play games and adjusts to market conditions on demand.

Shanghai Composite Vs SP 500

If President Trump continues raising the stakes in his trade war against China, they will have no choice but to compromise. China is immensely dependent on a manufacturing base that sells to American consumers at a premium price. The communist party needs the economic base to help transition the economy towards a service/consumer base. Their state run economy is fragile as they make efforts to transition to a service/consumption based economy from a manufacturing base. The growing middle class and rising wages for consumption are promising and have helped lift poverty across the country, but a majority of the country survives on $300 to $400 a month of yuan.

The big risk China is taking by waiting to make a trade deal with Trump is if a change of administration (New Democrat President) would be more open to a trade deal on different terms. I think this outcome can hurt China as Elizabeth Warren has stated she wants other developing countries to adopt labor rights and environmental regulations favored by the liberals. Make no mistake, this would be significantly more costly than tariffs or a trade deal and would be non negotiable. If the left has proven anything, they are moving towards socialism and significant environmental regulations that would upend oil/coal dependent China. I believe Trump will give them the best deal possible with terms restricting intellectual property theft, concessions to purchase agricultural goods such as soybeans, meat and corn, as well as, repatriation of certain manufacturing jobs that make economic sense to relocate to the US.

Trying to understand the one party system is easy when interpreting impact on trade negotiations. China will never relinquish control over which companies have access to their markets. This statement illustrates the difference between capitalism and a one party state. We allow free access to markets, whereas the China has a say over most investment in their economy.  Look at Baidu, Huawei and Tenecent as market leaders compared to Google and Apple little to no market penetration. Some of this market share inequality can be attested to lower wages and consumers not having a large disposable income. Whereas most market share inequality between American firms and Chinese is because their government prefers to see Chinese firms fill a market void. The only way you can have full access to the Chinese consumer is if you play by the Chinese governments rules and give access to your business and intellectual property, something we are not willing to do. Times are different than when America relied on manufacturing to produce goods and drive GDP. These jobs are noble in nature, but one thing to look at is automation because manufacturing jobs will be eliminated in vast numbers over the coming years as manufacturers seek the perfect employee: a robot. 

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