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The Weekly Economic & Market Recap
May 17, 2019
Economic theory suggests that a country’s optimal tariff or trade restriction is zero regardless of other countries’ trade policies. Despite well-reasoned economic theory, trade tariffs are frequently not zero, and trade wars do happen largely due to political considerations. There is a compel-ling argument that if the U.S. can shrink its trade deficit, we could boost economic growth meaningfully above the 2% trend line rate. Our current annualized net trade deficit is roughly $600 billion, which is 3% of our $21 trillion economy. China is by far the most significant contributor toward our trade deficit. The U.S. has a negative trade balance of $420 billion with China. The U.S. imports $540 billion worth of goods and services, and exports only $120 billion to China. The Trump administration would like to oblige the Chinese to buy more products from us, which would boost our exports to China, thus reducing the negative economic drag of such a large trade deficit. The actual trade deficit element of the dispute can be solved relatively easily. The non-trade aspects such as intellectual property protection, forced technology transfer, software piracy, and export controls will be far more challenging to resolve and even more difficult to enforce. Intellectual property (IP) theft can be accomplished through several methods, such as corporate cyber attacks and espionage. The U.S. Trade Representative has estimated that the annual loss to China is between $225 billion to $600 billion. Not only is IP costly for companies, but it has a dampening effect on product development, and it inhibits innovation. IP issues and the trade deficit have been a concern for over two decades – why has it become a kerfuffle that the Trump administration feels the need to address today? China, along with the U.S. and the EU block, has become an economic power and has the potential to dominate high-valued manufacturing (artificial intelligence, robotics, etc.), much like how it took over low-valued manufacturing a decade ago. That is why the U.S. wants to level the playing field. The stakes are high and will have significant ramifications regarding economic and global leadership.
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