Circle of Competence Issue #30
Quote of the week: "A brand for a company is like a reputation for a person. You earn a reputation by trying to do hard things." Jeff Bezos
FOOD FOR THOUGHT
Since tariffs are such a hot topic lately given President Trump's recent rhetoric on waging a trade war with China, I decided that I would explore the topic more in depth in this week's column. I am not as interested in the partisan politics behind the protectionist vs. free trade debate, but rather more interested in the current policies' effects on American industry and the global economy.
First a little history. A big part of President Trump's campaign platform was getting tough on China's deceptive trade practices and the large trade deficit (-$375B last year), and it is well known that he has been anti-China for a very long time. Many believe that Trump's tariff tactics are a short term means of bringing China to the table on their intellectual property and technology practices, a way of creating a more level playing field in terms of global industry and trade, and a way to protect American industry and jobs. Others, like Alibaba's founder Jack Ma, sees this as the beginning of a very long trade war between the world's two largest economies. Either way - the 'why' is clear from the Trump administration: they view China as 'cheating' the free trade system by keeping its currency 'artificially' devalued (which makes their exported goods far cheaper than other countries' goods and harms other nations' industries) and for their deceptive trade practices.
Given where things stand with relations between China & the US, what can we deduce as possible outcomes of a US-China trade war? To do this, it is always instructive to look at history. One potential historic example that is interesting is the 1930 Smoot-Hawley tariffs. I found this interesting article overlaying the passage of the Smoot-Hawley Tariffs on top of a chart for the Dow Jones Industrial Average as it declined into the Great Depression beginning in 1929. Clearly, Mr. Market was not fond of such high barriers to free trade and economic activity. In the aftermath of th