Features, Finance and Economics, Strategy and Operations

The U.S./China Trade War: Lose Face, Lose Everything

No one can dispute that free trade should be fair to both sides. And no one can dispute that the U.S. and China trade relationship (the biggest among all nations) has been unbalanced in favor of China for several decades. But to be accusatory towards China for treating us unfairly is a bit hypocritical. Our industries were more than willing (maybe even happy) to relinquish huge chunks of our economy’s manufacturing base to China’s low-cost work force so that we could turn around and import lower-cost finished goods, that in turn would benefit our consumers with lower prices, stimulating more consumption, and, oh yes, perpetuating profitable growth (which at the end of the day is all our captains of industry care about).

Now some delusionary thought process among President Trump and his merry “Trumpets” has them all believing that, not only can they fill the government coffers with billions, they believe it will awaken the dead manufacturing industries. In fact, we already see the fallout: Harley Davidson and GM closed plants and moved to other countries.

The grandiose theory (that might have worked during the go-go explosive growth years following WWII and up to the 1980s) was the belief that by lowering corporate taxes, it would incentivize corporations to stimulate growth by investing in more plants, equipment and workers — plus providing higher wages (those workers, as consumers, would then use to consume even more). Sadly, this grandiose theory went the way of the buggy whip a long time ago. Quite simply, the theory rests on the assumption that somewhere out there across the nation there are millions of consumers chomping at the bit to consume more, and might even be willing to pay higher prices.

Do I have to go through my tutorial once again about the imbalance of supply and demand? Too much supply chasing too little demand began in the early 1980s, and it has continued to this day. The only reasons the mounting supply hasn’t created a bubble that would collapse under its own weight is because our smart captains of industry (not including Trump) keep finding ways to lower costs, and therefore prices, to keep the imbalance from crashing. How ironic is it that contrary to the grandiose theory, it will drive more companies out of the U.S. seeking better markets or others that will be forced out of business by consumers who will refuse to pay higher prices – mostly because they cannot, since the potential wage increases will be minimal at best.

In the general retail and branded apparel space, the only robust growth is coming out of the discount, outlet and off-price sectors, as well as e-commerce. The bad news is that it’s not organic or new demand growth. It’s being stolen from all of the other sectors.

Full circle, back to the tariff war.” In my opinion, it is a war, and China and the U.S. have already started it. And amazingly, the self-proclaimed business genius, President Trump, doesn’t have a clue that the U.S. consumer will decide who wins. They will not give in to higher prices, because they either can’t afford to, or they will just increase their shopping in the discount sectors.

Regardless, all retailers will likely take a hit on their bottom lines to prevent losing share in an over-saturated marketplace. These dynamics could very well push our economy into another recession.

This is a war between China and the U.S. with no good ending. Neither President Xi nor President Trump will succumb to losing face. The facts, numbers, economic dynamics and other variables in the negotiations won’t make any difference. Furthermore, in this era of 24/7 ultra-transparency saturated with dogged media coverage, they have no secret place to hide and hammer out their differences. Finally, Xi also has an advantage. He is President for Life and runs a state-managed economy that is growing at twice the rate of the U.S., soon to overtake it as the largest economy in the world. But even if Trump wins the trade war, he will really lose in the end because manufacturing will not come back and consumers will not pay higher prices. Again, a recession may follow.

An old Chinese proverb might be: reframed: “Man loses face, man loses everything.”

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