US-China Trade War – The Big Picture

US-China Trade War – The Big Picture

The highly publicized trade war between the US and China has largely been scrutinized for its apparent, short-term impact on the US economy. The conversation has narrowly focused on falling GDP growth and specific sectors of the economy which have been disproportionally hit the hardest, especially the American farmer. These are certainly important issues that should be continually considered and addressed.

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At the same time, it is imperative to analyze the trade war from a broader, long-term perspective. The chart below illustrates the trade relationship between the US and China each year since 2009. Generally, free markets should correct trade imbalances over time. However, the US and China have not operated in a truly free market. China has unilaterally engaged in a trade war with the US for over a decade, by limiting US companies’ access to its markets and by allowing Chinese firms to blatantly ignore trade and patent laws and copy US technology. These policies have resulted in over a $1 trillion trade deficit between the US and China over just the past three years.

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Even more alarming is the breakdown by industry of the US net trade with China depicted in the following chart. A significant amount of the net exports from the American farmer industry in the US to China are low margin commodities like farm crops, oil and gas, mineral ores, and forestry products. Most of the net imports are high margin finished goods.

American farmer

China is now doing to the US what colonial powers previously perpetrated on emerging markets. Unfortunately, this trade war is much worse from a global standpoint, as China and the US compete for business across a broad set of industries. The US is slowly losing its advantage as a global trading power, which has implications for the level of US exports to countries around the world, and ultimately the employment rate and real wages of its citizens.

If the US does not do something to narrow the trade gap, its economy and citizens will suffer major long-term consequences. The delicate question is when and how the US should act to protect its citizens who are adversely affected, such as the American farmer.

Currently, the world economy is slowing, sparking fears of a recession. Is this the right time to respond? The troubling truth is that the longer this persists, the worse it will become in the future.

In summary, free trade benefits all parties involved.  Unfortunately, the US has been subject to unfair trade policies with China for over a decade and is losing the global trade war. At some point the US must find a way to correct this imbalance or face major negative long term consequences.

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Don is the Founder and CEO of Agecroft Partners, a global hedge fund consulting and marketing firm. Agecroft Partners has won 38 industry awards as the Hedge Fund Marketing Firm of the Year. Don frequently writes white papers on trends he sees in the hedge fund industry, has spoken at over 100 hedge fund conferences, has been quoted in hundreds of articles relative to the hedge fund industry and has done over 100 interviews on business television and radio. Don is also chairman of Gaining the Edge-Hedge Fund Leadership Conference; consider one of the top conferences in the hedge fund industry. All profits from the conference are donated to charities that benefit children. Highlighting Don’s 35 years of experience in the investment management industry is having been the head of sales for both one of the world’s largest hedge fund organizations and institutional investment management firms. Don was a founding principal of Andor Capital Management where he was Head of Sales, Marketing, and Client Service and was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Previous to Andor, Don was a Managing Director and Head of Institutional Sales for Merrill Lynch Investment Managers (now part of Blackrock). At that time MLIM ranked as one of the largest investment managers in the world. Previously, Don was Head of Institutional Sales and on the executive committee for NationsBank Investment Management (now Bank of America). Don is a member of the Board of Directors of Help for Children (Hedge Funds Care), Virginia Home for Boys and Girls Foundation and the Child Savers Foundation. In addition he is a former Board of Directors member of the University of Richmond’s Robins School of Business, The Science Museum of Virginia Endowment Fund, The Richmond Ballet (The State Ballet of Virginia), Lewis Ginter Botanical Gardens, The Hedge Fund Association and the Richmond Sports Backers. He also served over a decade on the Investment Committee for The City of Richmond Retirement System.
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