World trade - is globalization reversing?

I actually think this is too big a question for today, but people are really freaking out about the trade wars. For good reason, I guess. We have been living in a state of increasing globalization since…well, since World War II? Is that right? Yes. And now that appears to be a risk.

But two separate things are happening.

First, this new thing over Mexico is a freakin’ mess. It doesn’t make much sense. The tariffs will only hurt US consumers and workers, considering the impact this will likely have on the automobile industry and a number of other supply chains. But there is a good chance that it never actually goes into effect. Mexico will tell Trump that they will be tougher, and Trump will back down.

The Mexican foreign minister will be here on Friday, and hopefully there can be some compromise.

Let me get my priors out here: I am all for immigration. I think most any level is fine. But I do worry that certain types of workers are hurt by the rising number of immigrants, and so I can see why people are worried about a big influx. I worry much less about cultural issues - I think most of these are just about racism, and that after a generation or two, everyone is absorbed pretty well in the US.

Right now most immigrants are coming to apply for asylum, which the US system is not built for. But the increase has happened under Trump’s watch. More than 100,000 have arrived each month, and there 800,000 cases waiting for a hearing in the courts. This is a total mess.

One top official said simply: “The system is on fire.”

I sympathize with people trying to come up with a solution. Unfortunately, Trump is not the right person for dealing with this. He has no sympathy but more than that, drives away his allies, threatens to cut aid to countries where the people are coming from, and is unable to put together a plan that makes any sense.

Trying to fight trade wars on multiple fronts just seems stupid to me.

AIR CARGO. SOURCE: WORLDACD

Second, the war on China could be either good or bad. It would be good if it is focused on a) making sure that China fights fair (no corporate theft, IP infringement, less state support, etc) and b) that China doesn’t export autocracy around the world (particularly through its Silk Road initiative). On the other hand, if this goal is to stop China’s rise all together, I don’t see that working out well.

There is a view that the Trump agenda is actually to decouple the Chinese and American markets. The story would be: Chain supplies would move back to the US for a number of goods, and China would also have to start producing some of its own goods, like semiconductor chips. I have to think about this more, but in the short term, it seems like US companies have just moved to other countries to source these goods rather than trying to manufacture these domestically.

Another short term impact: Lower trade generally. In the table above at the right overall trade is falling basically everywhere. And in some cases, by a lot. Asia Pacific is being hurt the most.

Vietnam, right now, is benefiting from these wars. According to a Nomura report, Vietnam gained about 7.9% of GDP from importers sourcing products from the country instead of China, as they look for substitutes. Oh, look all the way to right in the chart below: both the US and China are hurt by the trade war.

But as we saw with washing machines (see my post from April 26, 2019), manufacturing can actually move pretty quickly.

I don’t want to get too worked up about this, because I think there is a way out, but unless someone tries to descalate, I’m not sure what that way out is.