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Don't Panic If This Happens

Don't Panic If This Happens

January 22, 2017
Since the election, the US stock market has been breaking new highs, encouraged by the prospect of lower taxes and higher growth. However I believe investors have not paid sufficient attention to the prospect of a trade war.

To a large extent, the election of Donald Trump is a repudiation of globalization by a large segment of the US electorate. Even though the country as a whole has benefited tremendously from globalization, those benefits have by and large bypassed working-class folks.

Before 2000,  Apple made all of its computers in the US and its market cap never rose about 10 billion dollars. Since then, Apple has subcontracted all of its production overseas and only kept design and marketing in US soil. The result?

Apple has become the most valuable company in the world with a market cap of over $600 billion even though they only have 66,000 employees in the US. 

At the same time, Apple's contract manufacturer Foxconn directly employs over 1 million workers in China. The supply chain to Foxconn employs another two million people. 

While the success of Apple has lifted millions of Chinese workers out of poverty, it has made a relatively small number of Americans, mostly Apple employees and shareholders, very rich. There lies Americans' discontent with globalization.

Donald Trump was carried to the finish line by this wave of discontent no less by promising to withdraw from nearly all trade agreements and in particular to slap a 45% tariff on Chinese imports. 

If he should carry out his campaign promise, there is a good chance that would invite a trade retaliation from China. We are talking about a trade war between the largest and the second largest economies of the world with disastrous global consequences. As a point of reference, some historians argue that the Great Depression was triggered by a trade war between continental Europe and the United States. That's how serious it is.

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I can empathize with those who support Donald Trump because there are so many millions of people in America that need work and he promised to bring jobs to them. That being said, pulling away from China isn’t a solution to that issue. That action may create jobs in America but the repercussions of this is that prices will rise and this will be heavy on the backs on the middle to lower class citizens.

Arguments could be made both ways on this. We need more jobs in the U.S., but the key is to do this without triggering a trade war. Can this be done?

You say don't panic, but this sounds really bad. 

I'm really starting to think no one knows what to do. We're talking trial and error with the two biggest economies in the world. This could send shock waves around the globe. 

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