Trade Wars And Government Shutdowns Can Be Fishy Business

We have written with some regularity about the consequences of trade wars.

The Apple story and the potentially larger economic slowdown in China are a case in point. There are consequences to all of this for all parties involved. In general, we do support free trade in the ideal world where there are no barriers to trade. Basic economic theory suggests that these friction costs disrupt the maximum benefit available to all people when those who can produce most effectively and efficiently are not properly rewarded, thereby driving up overall costs for consumers. With lower or even no trade barriers, the law of comparative advantage is allowed to work unimpeded.

But theories can become problematic as the messiness of politics and practical concerns such as product quality, labor fairness, and environmental considerations are added to the equation. President Trump’s decades-long interest in seeking fairer trade deals for the US with other countries is now being acted upon, creating a disruption of the status quo, which in turn creates shorter-term uncertainties. Whether the long-term scenario is destined to create freer and fairer trade among countries as a result of the current trade negotiations and brinksmanship is yet to be known. We do know that it takes a fair amount of chutzpah to challenge the status quo in trade, even if the potential benefits are to lower overall trade barriers in the long term. However, the president seems to have a ready supply of chutzpah. We, like many others, are monitoring the trade war situation that impacts the financial markets so heavily.

In the meantime, there are the really practical concerns of trade uncertainty, many of them very unpleasant, that are felt at the business and entrepreneurial levels. Markets and businesses prefer certainty in order to chart the future and to make plans. Uncertainty slows down business and puts people and markets into a wait-and-see mode of operation focused on risk management and capital preservation. Adding tariffs or even threatening more tariffs has specific short-term consequences, creating disruptions and costs that will ultimately reach the consumer in real ways. There are hundreds of anecdotes of the personal costs playing out now across many industries as a result of these trade uncertainties.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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