World Trade Is Not A Zero-Sum Game

My Comments: I’ve long since concluded that many economic decisions and trade policies espoused and implemented by the current administration are foolish at best and potentially disastrous. I have no idea who they are supposed to benefit.

I minored in economics in college and have been professionally involved in the money business most of my adult life. It was in my best interest, and that of my clients, to maintain a working knowledge of economics and finance.

These words from John Mason realistically confirm we are going to suffer before we benefit to any degree. All this is happening in a world where negative interest rates are becoming more likely. And it need not happen this way.

August 25, 2019 by John N. Mason |

In my research, I have come to the conclusion that world trade is a win-win situation or a lose-lose situation, but it is not a zero-sum game.

The outcome of a two-country world trade negotiation may benefit one party more than another party, but, in the end, both parties are better off when further trade takes place.

This thinking also expands to multi-player negotiations. Parties to a mutually agreed trade agreement benefit. The result of the combination is positive for everyone–to at least some degree.

Therefore, I can only see the current situation between the United States and China as harmful to both countries over the long run.

Yes, the United States may be right that some of the trade agreements between the US and China favor the Chinese, have been abused by the Chinese, or have been ignored.

There may be reason to talk about some of these outcomes and how the situation might be resolved and worked out for better future relationships.

Threatening trade wars will not achieve this end.

In the first place the uncertainty that is created does not bode well for the future of trade. People do not like uncertainty. They cannot plan well. They would rather back off from commitments and watch from the sidelines and see what happens.

An interesting result that is coming from the heating up of the talk between China and the United States is the fact that stock buybacks have declined, one major reason being the uncertainty concerning how increased tariffs will impact trade.

Another piece of evidence the threat of trade wars is on the horizon, is the increased flow of “risk averse’ funds going into “safe havens.” Money is going into financial assets that are thought to be the safest and is not going into physical capital expenditures or investments.

Furthermore, the threat of trade wars can have an adverse impact on the supply side of the economy and on economic growth in general.

Most people look at what a trade war can do to the demand side. But, as I have been trying to show in recent months, supply-side effects can be a major drag on the economy by creating situations in which demand-side efforts to stimulate the economy, such as monetary and fiscal policies, may have little or no impact on raising up the economy.

And it is here where the major longer-run impacts of a trade war can have its most important effects. If businesses no longer have to face up to the competition coming from another country, then they can let things like the growth rate of labor productivity drop off. This just exacerbates the problem.

Historically, we can see that a slowdown in labor productivity also has an impact on the growth rate of the effective labor force–a double whammy.

These outcomes cannot be combated by the demand-side efforts of federal government policy. This is not a good outcome. Unfortunately, we seem to be in the middle of a game of chicken.

There is nothing that I see in this picture that is good for the economy.

The Federal Reserve has even been talking about lower numbers than it last put out for the June meeting of the FOMC. Here, 2019 growth was projected to be 2.1 percent, followed by 2.0 percent and 1.8 percent in 2020 and 2021, respectively. For the longer-run, Fed officials projected a 1.9 percent rate of growth.

It has been expressed by some at the Fed that these projections are optimistic. I agree.

As the U.S. president says, the United States may have the strongest economy in the world–but I am not sure that is anything to cheer about.

Furthermore, a new relationship is being established between the stock market and the Fed. For the past 10 years or so, the Federal Reserve has been the basic underwriter for the rising stock market; however, this relationship has ended. And we don’t really know where things will be going between the Fed and the U.S. stock market in the future.

Fed Chairman Jerome Powell has basically said that monetary policy will be difficult to set given all the discussions that are occurring concerning the trade policy of the United States. That is, future monetary policy is going to be heavily dependent upon future trade policy–certainly not the stock market.

And, what does this really mean? A trade war is not a zero-sum game.

But, the trade war, right now, is being determined by two men. The U.S. Congress is contributing little or nothing to the trade war. Hence, uncertainty spreads.

But uncertainty causes a slowing down. A slowing down generally causes even more slowing down.

Because of this, investors must keep up with the news and stay loose as far as their positions are concerned. Volatility is the name of the game. And it looks as if the two primary contestants are not in the mood for backing down.

And no one knows what surprises are in store for us as we move further into the election cycle.