How A Trade War Works And What It Means For You And Me

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Wednesday, 9:44pm

Sheffield, U.K

Unless you’re completely switched off from the news – you know there is a trade war going on.

The US, China and the EU have their gloves on – and they’re not playing nice.

So, how does a trade war work, what does it mean for businesses, and what’s it going to mean for us?

In these situations, I find it useful to trot out a model from Robert Fritz’s book Corporate tides.

Basically, in any situation you have tension and resolution, yin and yang.

And, when you work through a sequence of tension and resolution steps – you are left with a feeling of despair at the futility of “solving” any problem – let alone one so complex as global trade.

So… let’s step through what happens.

One country, in this case the US, feels that it’s being taken advantage of by another – China, the EU, the rest of the world really.

US businesses are suffering. Not all of them, of course. Mostly the pain is felt by more mature industries that make commodities – things that can be manufactured anywhere in the world.

The people that work in those businesses are hurting.

So – any politician will do what is needed to help his people – and the obvious answer is to impose tariffs on all that foreign stuff.

Make it more expensive, and then the locals will be competitive, have room to breathe, have room to raise prices and the workers will be happy.

Only the foreigners will lose market share – and who cares about them anyway?

Well, they do. The foreigners do.

They’ve got people hurting as well – especially now.

So they retaliate with their own tariffs on the stuff that the US makes.

The US imposes tariffs on steel. China retaliates with tariffs on soybeans.

China steelmakers lose half their market. US soybean producers lose half theirs.

Now what happens?

Costs rise. They rise because imports are more expensive because of the tariffs. And they rise because local providers have room to increase prices.

Input costs for businesses go up and what do they do?

Well, they’re not going to watch their profits evaporate. All they can do is raise their selling prices – put the retail price up.

And what happens when things get more expensive for us consumers?

We feel poorer. Our money doesn’t go as far, and we wonder what’s going on and perhaps we should cut back on spending.

And businesses do worse.

Which, when we go back to where this all started – with the desire to make things better for businesses – is a bit of a let down.

All that’s happened at the end of all this is trade is down – and it’s going to fall by around $800 bn – as set out in this rather detailed play by play review of what’s happened so far.

This is the fundamental irony of economics.

Anything we do to try and “control” things usually results in something nasty happening somewhere else.

People in charge don’t like that – they want to be in control and make things happen.

Markets don’t take that well.

James Carville once said: I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

It’s taken hundreds of years to learn that.

Try and control the market and everyone becomes poorer.

Set it free – and people get richer.

The current move across the world – towards protectionism, isolationism and lots of other isms – are more likely to make things worse instead of better.

But… it’s not all bad news…

There’s always opportunity when things start to go wrong and people panic.

The question is – what will uncertainty mean for your business. Will you do better or worse?

And what can you do now to prepare for the inevitable slowdown?

You could do worse than remember the words of Charlie Munger – Warren Buffet’s business partner.

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Or… as the Hitchhikers Guide to The Galaxy might put it .

DON’T PANIC

Cheers,

Karthik Suresh

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