Three characteristics of the commercial war: disastrous, reversible and asymmetric

The current commercial war is disastrous because its negative consequences will be very serious, it will simply cause a global recession.

At the end of the 50s, each industrial nation imported the raw materials necessary for the production of the goods it needed for internal use and for export; To do this, it required having a manufacturing facility of significant size and having competitive advantages in the manufacture of some products. These are tasks that demand a great effort, demand favorable economic conditions and provide a high degree of economic autonomy. Under this context, commercial hostility applied to another country does not affect other manufacturing economies.

Faced with this situation, the businessmen and executives of the most important corporations choose to specialize in the production of intermediate goods and to import more and more intermediate products in which they do not possess a high technical level. This is a different situation than the one prevailing at the end of the 50s, where either the same corporation manufactured the intermediate products it needed or acquired it from another company located in the country.

It is obvious that the current trade war will abruptly interrupt the production and supply chains of the world economy.

But what will happen after the global recession is established in the global economy ? Can we expect the economic recovery to return again ? The most likely event scenarios for a global post-recession situation are:

• permanent economic stagnation.
• "economic cannibalism", appropriation of the resources of other countries through one way or another, military occupation, for example.

The United States began the commercial war not the goal of achieving economic and social goals, will it reach them ? Obviously, the trade war should not impact the US economy in the short term, however, the same cannot be expected for the long term. 

Before the announcements of increase in tariffs, each foreign producer evaluates the consequences of this measure on its cost structure, whether it is the producer of final goods or intermediate goods, and will decide whether or not to continue producing. Those who sell directly in the North American market and decide to stop supplying them are the ones that will cause the decrease of US imports, the rest of the foreign producers will continue placing their goods on the North American shelves with a higher price.

It is at that time that the US buyer will decide whether to continue acquiring the foreign product at a higher price or replace it with its equivalent manufactured in the USA, if it exists. If most Americans decide not to acquire the foreign product at a higher price, then it will disappear from the market. If this happens, even if you do not believe it, American products will also disappear, although very slowly, since almost all the demand will be turned towards them; originating periods of unusual inflation accompanied by situations of scarcity.

Although the US economy has a higher productivity rate than the rest of the world, this advantage is nullified by the high salaries of that country and the overvaluation of the dollar. Therefore, it is not expected that North American entrepreneurs increase direct investment to increase the US product and thus be able to substitute imports or solve the problem of scarcity. As we see, the disaster situation will also extend to the USA.

The current commercial war is reversible because it is impossible for protectionism to be established definitively.

This reversibility process will begin due to the general discontent of the American population, which will be caused by the deterioration of the value of the most important economic variables of that nation. However, this will not be an automatic process since voters will need to associate the state of chaos with the commercial war and for this it will be necessary for the media to assume a fundamental role. This general discontent cannot materialize in a concrete political proposal until the protectionist political cycle ends.

In such a way that the end of the Trump Administration is not enough to stop or reverse the current commercial war since at the moment the American protectionist current has immense political capital that will serve as a shield against initiatives coming from any of the political parties USES.

In addition to this, the reversal process will have as obstacles the reprisals intended to warn the nations harmed by the current commercial war, such as the execution of a financial war that seeks to minimize the use of the dollar in international transactions and hinder the acquisition of US financial assets.

Thus, the end of the current commercial war and protectionism must go through a long and intense negotiation process between the United States and the affected powers. This activity could include the payment of compensation and repairs, the seed being sown for a second commercial war.

The current trade war is asymmetric because the economies harmed by the process of raising tariffs carried out by the US have no proportional response capacity and cannot be protected in some way from this process. Therefore, given the wave of tariff increases applied by the United States, most foreign companies must leave the US market to move their commercial activity to other markets; not all of them will survive, those that do not succeed will go bankrupt. However, if a large number of companies successfully carry out the commercial transfer then the commercial war will not generate the emergence of a global economic crisis.

The commercial transfer argument is not very convincing because the profit margins offered by the North American market cannot be matched by other commercial points. The commercial transfer can only be successful if foreign companies make radical transformations in the operation of their production systems in order to significantly reduce the average unit cost; In addition, at the same time, these entrepreneurs will need management philosophies that show how to run businesses with a tiny profit margin. In any case, these goals seem unattainable because the productive practice that develops outside the USA is characterized by not generating technology or completely indigenous management models.

Go to: PWC - Commercial strategy or commercial war

A much more realistic approach would argue that the aforementioned commercial transfer will only succeed if the companies that execute it manage to buy American technology and management models suitable for this purpose.

Since the beginning of the trade war, China has intensified its efforts in diplomatic matters to conclude agreements and grant financing to a considerable number of countries, in what appears to be a movement that shows the intention of that nation to move on the route of the transfer commercial.

On the other hand, the spokesmen of the European Union have made statements that show their sympathy for the commercial transfer projects but without there being any concrete action that certifies that Europe will follow in the footsteps of China.

Of course, the results obtained by foreign companies that sell their products in the United States in terms of commercial transfer will depend fundamentally on the cost and commercial structure they present at this time , which we can see through their financial statements, and how these structures will change after the corresponding modifications have been made.

If most foreign companies achieve success in their commercial transfer process, then the asymmetry that characterizes the current commercial war would be broken and the affected nations may reorganize to respond to the commercial war with a financial war.

Although the asymmetry is the result of privileges that the United States has in international finance, this does not imply an advantage in the current commercial war because the United States will always be harmed, in one way or another, by it.