Are Trade Wars Obsolete?
Trade wars are not only irrelevant, they’re obsolete, as underscored by the weak “settlement” the European Commission (EC) made with China over their $23 billion in solar panel exports to the EC. In the end, China agreed to not export solar panels for less than .56 euros—about 74 cents—per watt, which was about 25 percent lower than when the case began. So much for the negotiating skills of EC trade ministers. However, it does speak volumes for the ability of the Chinese to negotiate and exploit just how incestuous our global economy has become.
Undermining the EC’s negotiating position was the fact that other European countries that didn’t have a dog in the fight liked paying the lower cost for the Chinese imports and lobbied the EC trade commissioner to butt out. But the real fly in the ointment it turns out is that while Germany is the major producer of European solar panels, other German companies were supplying the Chinese with the manufacturing equipment needed to make the solar panels in the first place. Note to the U.S. in our own solar panel “trade war” with the Chinese: Quit while you’re ahead.
For the past four years, the U.S. has been spending about $20 billion a week more than we take in—roughly $1 trillion a year—which still proves that government can’t grow the economy. While it’s true factory orders are up, to unleash the full potential of our recovery will require the repeal, not the postponement, of Obamacare, which will give businesses the green light they need to invest their huge stockpiles of cash. In the meantime, U.S. companies can turn to exports to grow their sales, and they are. Still, it’s estimated that only 1 percent of all U.S. manufacturers export. That’s a staggeringly low number. Think what will happen when that number grows to 5 and then 10 percent—and it will. Even then, it will still be a fraction of the estimated 40 percent of exporters among all German manufacturers. The message is clear: The U.S. will become an export giant. Now is the time to invest in your business plan to accommodate this inevitable growth.
Remember Japan? Twenty years ago it was all Japan this, Japan that. They dominated the global trade conversation while China’s biggest export contribution to the world was fireworks. With a national debt 2.5 times their GDP, Japan is still in deep Wasabi but poised for an exporting comeback under its new Prime Minister, Shinzo Abe. Part cheerleader, part global trader, Abe is stumping across Japan and personally jumpstarting its economy. It’s highly risky, because Abe plans to deficit spend even more government funds in an attempt to stimulate Japan’s economy. If it works, great. If it doesn’t, Japan will be plunged into an even greater economic sinkhole. This is not the time for the U.S. to isolate Japan. We saw what that led to 72 years ago. A healthy Japan is good for the world which is why I’m encouraged to see the U.S. include Japan in the latest Trans-Pacific Partnership (TPP) trade agreement. However, it remains to be seen if the Japanese are willing to trade on an even field.
Media Rule No. 1: Don’t believe everything you read or hear. Just last week I read where container export volume was down. However, those statistics typically lag what’s happening by several months or more. On Aug. 1, the Institute of Supply Management—a trade group of purchasing managers—noted its index of factory activity jumped to 55.4 percent, up from 50.9 percent in June. A reading of 50 or more indicates growth. And factory production is at its highest level since May 2004. If that weren’t enough good news, factory hires are at the highest level in a year. As they say on the farm, now is the time to make hay.
Have you heard of the General System of Preferences (GSP)? Sounds like a yawner, I know. But this little sucker may be eroding your profit margins. Here’s why: GSP is a 37-year-old program that allowed duty-free imports from developing countries, including many raw materials, parts and components used to manufacturer goods in the U.S. both for domestic consumption and U.S. exports. Congress let the program expire July 31, thank you very much. As a result, U.S. manufacturers will now have to pick up the tariffs on these goods and pass it along in their costs. Talk about an unnecessary speed bump to our recovery. Perhaps one day to be elected to Congress you will have to pass a course in global economics. I’m not holding my breath.
Relax. China Isn’t Taking Over!