Current situation and expectations of the current commercial war

A then I show the chronology of the current trade war, for simplicity we omit the actions taken against Mexico and Europe. 

Go to Diario El Mundo - Chronology of the Commercial War

2018: STARTING POINT

March 8

The United States announces a rise in tariffs on steel. For its part, the EU denotes its concern about a possible trade war: "it would be a real disaster for both of us and for the world." The Trump administration imposes a 25% tariff on steel imports and a 10% tariff on aluminum.

April 3

The government of President Donald Trump makes public a list of Chinese goods whose importation would have a total value of 50,000 million dollars. The main sectors affected will be mechanics, appliances, chemicals and electrical equipment. The 58-page document includes a total of 1,333 products. According to statements by the White House, this punishment is imposed for the theft of their trade secrets, including software, patents and other technologies.

April 4

The Asian giant imposes tariff sanctions of 25% on 106 products imported from the United States worth 50,000 million dollars. The affected products are soy, cars and airplanes.

June 2nd

China and the United States open to a new round of negotiations with the intention of appeasing the spirits and avoiding a possible trade war.

July 6th

The negotiations of the past days do not reach a midpoint. The White House announces new levies on Chinese imports for a total amount of 4,000 million dollars. China strikes back with similar measures, mainly attacking the technology sector.

July 11

Five days later, Trump orders new levies for China, of 10% on imported products, worth 200,000 million dollars.

August 23rd

The administrations of both countries launch the second phase of tariffs on a total of goods worth 50,000 million dollars. Its actions reach a group of imports worth 16,000 million dollars.

August 27

After several months of attacks, China denounces the US to the WTO for the various tariffs imposed on its products.

24th September

The United States imposes levies of 10% worth 200,000 million dollars on Chinese products, affecting this time the textile sector. In this context. Beijing attacks US $ 60,000 million in levies on US products, with direct effects on liquefied natural gas.

December 1st

Washington and Beijing announce an agreement to stop trade war and tariff escalation after the G20 meeting in Buenos Aires. They also commit to generate negotiations to finalize a commercial agreement, setting a limit until March 1. In case of not reaching an agreement until that date, the US indicates that it will raise tariffs on Chinese products again by a value of 200,000 million dollars.

2019: VOLTAGES INCREASE

February 25

The US president decides to postpone the rise in tariffs to China thanks to the progress of the negotiations. Internationally, the decision of the White House to delay the increase in levies on Chinese products worth 200,000 million dollars. According to Trump, both countries had made "substantial progress" in trade negotiations, which caused Chinese stocks to rise almost 5%.

May 10

The deterioration of the relations of both powers is evident and the truce ends when Donald Trump announces the increase of 10% to 25% of tariffs for Chinese imports of more than 5,000 products.

may 13th

Through Twitter, Trump states that he found "no reason for the US consumer to pay for the tariffs on China that come into force today. China should not retaliate. It will only make it worse!"

15 th of May

The US president declares his country in a national emergency and prohibits companies in his country from using telecommunications equipment manufactured by Chinese companies, under the argument that they were spying and threatening the national security of the United States, thus attacking the Asian giant Huawei .

May 20

The main technology companies in the US, including Google, will stop selling components and software to Huawei and begin to lower sales of electronic devices of the Asian giant.

May 21th

Huawei denies that US restrictions are going to affect its products or the deployment of 5G technology, in which the Chinese company says to outperform its competitors.

June 1

China increases tariffs. There is a difference of 14 percentage points in the average tariff imposed by China on its US imports compared to other partners.

June 30th

Both powers decide to take a break in the commercial war, after the G20 meeting in Osaka and undertake to restore trade talks between the two nations, interrupted since May. The United States decides not to impose new tariffs on its Chinese imports and will allow its companies to sell Huawei technology products.

July 9th

The United States announces anticipates the end of the blockade to Huawei and that US companies can resume their relations and sell their products.

August 2nd

The US ends the truce and imposes more sanctions on China. Trump announces the imposition of new 10% tariffs on Chinese imports valued at $ 300 billion as of September 1.

August 5

China defies the White House and depreciates the Yuan at levels that have not been seen since 2008. The exchange rate is 7 to 1. The stock markets around the world are going down.

Since the beginning of the Trump Administration, the media have been carriers of news related to the events of the commercial war. Worldwide, expectations have been generated about the impact this phenomenon will cause on the behavior of economic agents and the fluctuations of the most important variables. It is these expectations that have exerted relevant economic influence in the real world since the direct effects of the current commercial war have not yet materialized in the global economic development.

That is why, for example, the exchange rates and the indicators of the Mexican and Chinese stock exchanges, fundamentally, have suffered falls in their quotes since they fully reflect the expectations formed since the beginning of the commercial war .

In the same way, this influence has been felt on the Euro, some European currencies and some European exchanges; However, the effects have been overlapped by other factors outside the commercial war.

These negative expectations have also left their mark on the prices of raw materials, especially oil, thus exercising the commercial war its influence on Latin America. Middle East and Russia.

Oceania and the rest of Asia do not escape devaluations and contraction in stock market indicators, since they are suppliers of food, raw materials and intermediate goods in China.

The other side of the coin we notice when we see that, since the beginning of the trade war, the dollar strengthens, the indicators of the New York stock market are rising more and more, unemployment practically does not exist and even wages rise. This is due to the fact that, in the United States, the expectations associated with the commercial war are absolutely void since the economic and political agents have perceived that the commercial war will not have any effect on the economy and on the political equilibriums established in that nation. However, sometimes, expectations do not become rational.

Since 2016, numerous analysts have pointed out the danger that Trump's triumph in the presidential elections and the subsequent execution of his commercial war would represent for the United States, but in 2019 it is the moment when the spokesmen of the Federal Reserve they affirm that the world economic recession that is approaching will have a negative influence on the United States and, even President Trump has said that he will work to increase trade with Great Britain and Brazil, suggesting that, possibly, US trade relations will be guided, simultaneously, by protectionism in the case of some countries and by free trade in the case of others.

During the year 2019 there is a decrease of about 10% in the US trade deficit with respect to China and it is expected that during the fourth quarter of that year there will be significant increases in the price of imported products, especially those from China.

The sharp decline in Asian imports does not yet generate real negative effects on the global economy since it is assumed by the companies affected as a reduction in production and sales volumes that, while decreasing the profits of Chinese entrepreneurs, will not cause the closure of Asian companies or their commercial transfer.

The companies that should be bankrupt in the second half of the year 2019 and first quarter of 2020 due to the commercial war, will be those small or medium-sized companies that provide services to business conglomerates that, in turn, supply intermediate products or materials premiums to Chinese corporations that are selling their products in the United States. In this sense, the economic sectors formed by small and medium enterprises located in Oceania, Asia and Latin America, which are suppliers of China, will be the first victims of the commercial war.

However, we do not believe that the Trump Administration is satisfied with the magnitude of the trade deficit reduction achieved so far; in such a way that the batteries of tariff increases against China, Mexico, some European countries and some Asian countries should continue. This will continue until foreign companies located in these territories and who sell their products in the United States leave the US market, either to close their doors permanently, or to move their commercial operations to other markets.

At this time, the effects of the commercial war are an exclusive consequence of the role of expectations and it is likely that the effect of these expectations will end long before the actual effects begin to appear, in fact, it is expected that certain values ​​of type of Exchange and stock market indicators stabilize quickly despite the continuing commercial war, but always before the real effects appear.

The initial real effects of the commercial war will be felt throughout the planet except in the United States, with greater or lesser intensity depending on the case. High inflation, product contraction , unemployment and high interest rates will be a universal constant. This negative outlook will be enhanced and accelerated by new expectations that will once again depreciate many currencies and discourage investment.

The beginning of the global economic recession, as a consequence of the real influence of the commercial war, must be announced by a panic situation, such as maxi-devaluations , a sharp fall in stock market indicators or a transcendent political event, such like coups. For some time we will see how , while the world is suffering from the rigors of a major economic crisis, the United States will continue to enjoy its economic boom.

Finally, the real effects of the commercial war will reach the United States, but without being announced by a panic situation since they will enter the US economy very slowly. Little by little it will be increasingly evident that American companies will not be able to adequately meet the needs of the American consumer and the shortage-inflation binomial would be being installed for a long season in the United States with many American companies receiving fabulous profits.

The characteristics of the inflationary process looming in the United States as a result of the commercial war will be such that they will prevent the Federal Reserve from carrying out effective actions that control it. At most, policy makers will be able to choose between continuous inflation or permanent recession; since it is not an inflation created by the difference between the aggregate demand and the aggregate supply but it will be an inflation caused by the creation and consolidation of a gigantic number of captive markets governed by corporations and large American companies, or by medium or small companies that can lift barriers to entry in the markets they control.

The general discontent that results from an extremely long, if not permanent, inflationary process must activate the political channels for the end of the commercial war; if American society succeeds in establishing a partnership between permanent inflation and commercial warfare.

As we can see, US inflation will acquire such characteristics that it will be very difficult to combat it. We do not say that the entire economy of the United States will become an immense captive market, we say that a large number of specific markets will become captive markets. We do not say that in these specific markets monopolies or oligopolies will appear, we say that all the companies that supply a specific market will be surpassed by an uncontrollable demand. We do not say that the commercial war will create a new demand in some specific sectors, we say that the demand will remain intact, only that, due to the departure of foreign bidders, there will be a demand that cannot be absorbed by US bidders, pressing with this to the rise in prices in these specific markets.

In the same way, the shortage that will appear in the United States as a result of the commercial war will not be an absolute shortage , but will only be limited to the specific markets to which reference has already been made. Nor will this be a definite shortage because US companies will not stop producing, but will not have the capacity to make a quick replenishment of inventories at the time of exhaustion. On the other hand, as the North American consumer is warning of the shortage situation, he will replace the products used to buy with others with similar properties. In any case, these are elements that are part of a situation of widespread discontent.

Of course, the North American authorities can create a system of indicators that allows to detect which are the specific markets that are generating scarcity and inflation to be able to apply the corrective measures, but, given that for the first time in history a process of mass expulsion of foreign products, there is no knowledge or experience about what these corrective measures could be.

Thus, the phenomenon of permanent inflation in specific markets in the United States will appear because in these markets it will be extremely difficult for an increase in the number of bidders to meet the demand "released" by the reduction in imports. On the other hand, given that the US economy will find its potential product , it will be increasingly expensive for producers established in these markets to find the necessary elements for production. This is how the permanent US inflation will be formed by two components: one that allows to discriminate customer in a market in which demand greatly exceeds supply and another that allows to cover the increasing unit production costs.

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.

Two characteristics of the current commercial war: unpublished and ineffective.

The current commercial war is unprecedented because, for the first time, it appears within a context of globalization and under international trade rules established under the imperfect free trade scheme. Another element that gives this trade war a new character is that it now loses the condition of being bi- national and becomes global because, at the moment, the productive processes present a high degree of linkage between many national economies; in such a way that such confrontation will impact, in the long term and indirectly, on hundreds of sectors of productive activity located within dozens of countries.

On a planet whose economic activity is marked by free trade, the chain of productive activities and globalization; It seems, in theory, unlikely that a commercial war that has global reach. This can only happen if the nation that initiates hostilities has a power to purchase imported goods of colossal magnitude whose origin does not come from international commercial activity but from global financial activity, but, not only this is enough, it would also require that this nation It does not have a high degree of integration with global value chains.

The current commercial war is also ineffective because it will not allow the nation to initiate hostilities to achieve the objectives set by the protectionist trade strategy adopted for these purposes. Quite simply, the reduction of the trade deficit does not generate economic growth and, therefore, does not improve working conditions or raise wages.

Undoubtedly, a high trade deficit causes concern for economic agents, but it is not a phenomenon that requires immediate attention because the behavior of the trade balance depends on the economic structure of the nation in question, which, in turn , is determined by the competitive advantages she possesses. Obviously, it is a circumstance that is impossible lo alter in the short term.

There is no evidence to certify that the massive application of tariffs reduces the trade deficit; It has only been possible to confirm that the rise in tariffs creates captive markets that are exploited by domestic producers to increase their profit rate inordinately.

However, even so, it is expected that the application, in the USA, of successive batteries of tariff increases will eventually cause, in the long term, the contraction of imports carried out by that nation. This reduction would be the result of the disappearance of the North American market of those foreign products that are not very competitive or have a low level of added value. In the same way, the proliferation of expectations and uncertainties within the operation of the North American commercialization channels will also expel foreign products from the Yankee showcases because foreign companies that intervene in supply and production chains will not be able to properly plan the production.

Go to: Marketing91 - Definition of marketing channels

So, in the long term, despite the reduction in imports, the US trade deficit cannot be expected to improve since the global economic crisis caused by the new coupling of global value chains will cause contraction. of North American exports.

This is how, in the short term, the volume of US imports must show great rigidity and should not react to the first waves of tariff increases. This rigidity rests on the immense purchasing power that Americans have for the purpose of acquiring goods of foreign origin. This purchasing power is created by wage differences and differences in the rate of productivity that exist between the US economy and the rest of the world. In addition to this, the overvaluation of the dollar allows the North American consumer to acquire more foreign products.

Definition of current commercial war

Below are some definitions of commercial warfare.

Wikipedia
The commercial war consists in the adoption by one or several countries of tariffs or barriers to trade with one or several third countries. This term is antonym for free trade. Economists as a rule believe that this type of war is very unproductive, with a great negative influence on the social and economic welfare of the nations involved; However, political scientists consider the threat posed by a trade war as an important aid in obtaining concessions of other types.

Go to: Wikipedia - Trade War

Economic zone
A trade war is a situation in which two or more countries take measures to restrict imports from the other country, to protect local industry. Generally, trade wars begin when a country increases its import tariffs. The producers of the goods reached by the increase of the tariffs, in the exporting countries, are harmed because their products become more expensive in the country that initiated the commercial war.

Go to: Economic Zone - Trade War

Investopedia
A trade war occurs when one country retaliates against another by increasing import tariffs or by imposing other restrictions on imports from the opposite country. A tariff is a tax or duty imposed on goods imported into a nation. In a global economy, a trade war can be very damaging to consumers and businesses in both nations, and contagion can grow and affect many aspects of both economies.
Trade wars are a side effect of protectionism, which are government actions and policies that restrict international trade. A country will generally take protectionist actions with the intention of protecting national companies and jobs from foreign competition. Protectionism is also a method used to balance trade deficits. A trade deficit occurs when a country's imports exceed the amounts of its exports.

Go to: Investopedia - Trade War

BusinessDictionary.com
Conflict between two or more nations regarding trade tariffs with each other. This type of conflict generally arises because the nations involved are trying to improve imports or exports for their own country. Trade wars have the potential to increase the costs of certain imports if the nations involved refuse to make a commitment.

Go to: BusinessDictionary.com - Trade War

Trade wars are intended to be justified by means of arguments that point to economic and social goals as a fundamental objective of the countries involved in the confrontation, but, given that these motives are not credible, it is possible to assume that their true origins are political. These presumed political intentions generally cannot be determined precisely because the game of power interests prevents them from transcending into the public sphere.

Modern history suggests that the trade wars undertaken by some European nations during the 18th and 19th centuries can be interpreted as the effort of the political factors involved in preserving the metropolis-colony link.

In the same way, we can dare to affirm that, the unilateral increase in tariffs carried out by the United States during the 19th century, rather than an economic growth strategy or world domination strategy, was the answer to the strong political pressures brought carried out by American circles of power that wished to make the most of the colossal economic growth that the nation experienced at that time.

Another example is the process of establishing high tariffs that occurred immediately after World War II and carried out by most of the underdeveloped economies: rather than reaching economic and social development goals, as proclaimed by the discourse proposed by Development Theories, they created captive markets that could be easily exploited by inefficient producers associated with the circles of political power of these backward nations.

For sure, it is impossible to determine, right now, what could be the political ends that trigger the reappearance of the trade war in the 21st century. However, the most sensible proposals point to the desire of the status quo to stop globalization, or well, contain the thrust that has been dragging the digital economy and even, we can not rule out the intention that a Fourth Industrial Revolution does not appear.

In the past, trade wars did not trigger economic crises. In reality, the negative impact of trade wars was limited to specific areas of the economy. However, the 21st century trade war threatens to create a global economic crisis by forcing the world's productive structures to make a substantial change in their operation.

Proponents of the 21st century trade war claim that the global economic crisis will not affect the US economy, but that it will benefit from the flow of investment and import substitution. However, several examples reveal that, in a situation of global crisis, investors' fears reach even the strongest economies. In addition, the United States is not able to carry out a process of import substitution, for this it would require massive robotization and mass migration.

As we see, we are in the presence of the first commercial war that will generate a global economic crisis.

On the other hand, the conduct of the commercial rivals of the nation that starts the commercial war is notorious. China, Mexico and some European countries, faced with the US position, assumed a position of confrontation and not of conciliation; knowing the consequences of corresponding to the "commercial aggressions" of the USA.

Again, the now commercial rivals of the USA, are assuming a political position and enter into a strategy that, while extremely dangerous, can give them a lot of benefit. Obviously, the now commercial rivals of the USA lack the capacity to respond to the rise in tariffs carried out by the USA, but, by transforming the commercial war into a financial war, they can do a great deal of damage to the US economy: the Federal Reserve is not capable to protect the United States from a financial war because this confrontation would attack the operating structures of the international financial system. These "financial attacks" should be linked to the use of the dollar as a currency for international use and the acquisition of US financial assets.

Undoubtedly, right now, Chinese, European and Mexican advisors must be very busy calculating the aftermath of the financial war and how to treasure its benefits.

Soon I will be writing about the fundamental characteristics of the 21st century trade war.