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Decimal Digest
20 Jan 2017

Viva Le Trump ?

As Mr. Trump becomes President of America, there are talks about a brewing trade war with China. The specific charges made by the incoming Trump administration and his China trade advisor, Peter Navarro is that free trade with China is not free. He terms China’s new concept weapons of job destruction at the cost of American workers as the cause for decrease in employment in USA.

Mr. Trump lists currency manipulation, government subsidies, shoddy toxic goods, absent labor laws, environmental pollution and industrial espionage as sources of China’s competitive advantage against USA. In the year 2000, the WTO agreement with China brought it into the global supply chain networks of Multinationals. The regulatory and government capture by leading multinationals led to shifting of manufacturing base to China. Thereby shifting of relatively low skilled but well-paying jobs to China and decrease in its allied low skill service jobs. All of this was based on a promise that America would be able to tap into China’s domestic markets. However, the treatment meted out to a lot of leading American companies like Google and Apple made China’s mercantilist intentions clear. Mr. Trump’s “Make America great again” quip will work only if these jobs are brought back to America as Mr. Trump’s voter base comprises of workers whose skill levels remain relatively inelastic.

Chart 1: Complex System3

All this seems in line with Mr. Trump’s statements that a strong dollar policy might be harming the US economy. His tactic will be to lower the cost differential of producing in USA and provide for regulatory nudges to indicate the same. There is also a view that bargaining for more access to China’s domestic markets is also on the table provided China halts the Cyber and industrial espionage route to increase its ability to add value.

The effects, if the above plans are fructified may be inflationary for America as traditional low cost supply chains based in China are disrupted. Those, effects however can be minimized by automation and reskilling of the workforce for the new supply chains to be put in its place.


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