Unintended consequences

The Economist reports thatInvestors were skittish as 2018 drew to a close, fretting about global economic prospects. Fears about a slowdown in China have swirled in recent weeks: the pace of GDP growth fell over the course of 2018, as did retail and vehicle sales. The purchasing managers’ index survey, released on January 2nd, suggested that manufacturing activity in China had contracted in December … [so, it might have seemed that President Trumps trade war with China was working, but, then] … Later that day Apple said it was revising down its earnings expectations in the fourth quarter of 2018, largely because of lower sales and signs of economic weakness in China. The news rapidly infected financial markets. Apple’s share price fell by around 7% in after-hours trading and the decline was extended to more than 10% when the market opened. The dollar fell by 3.7% against the yen in a matter of minutes after the announcement, before rapidly recovering some ground. Asian stockmarkets closed down on January 3rd and European ones opened lower. Yields on government bonds fell as investors fled to the traditional haven in a market storm.” Oops … was that a US company that was hurting because of Trump’s attacks on China?

The report goes on to say that “In a letter to investors Tim Cook, the company’s chief executive, said he expected revenues in the fourth quarter of 2018 to be $84bn—around 10% lower than the company had pencilled in two months ago. Mr Cook pointed the finger at escalating trade tensions between America and China, which he said had hit retail footfall. Sales in China account for around a fifth of the company’s total revenue … [thus, it appears that] … President Donald Trump’s trade war may be inflicting damage on companies at home … [and] … Kevin Hassett, his economic adviser, warned that “a heck of a lot of companies” may join Apple in announcing lower-than-expected profits because of the trade dispute. A sharp decline in America’s purchasing managers’ index added to investors’ worries and exacerbated market falls in early Wall Street trading.

There are other reasons why Apple may be losing ground in China but I would guess that one of them is that Chinese consumers are simply less willing to shell out big buck for US products when their own economic outlook is gloomy. It’s, at least partially, that old ‘law of unintended consequences‘ thing, again.

My point, however, is that despite what Donald J Trump thinks (or says, anyway) trade wars are almost never won by anyone … in this one both American companies and American consumers are just as likely to ‘lose’ as are Chinese companies and Chinese workers. It is true, as I quoted Gordon Ritchie as saying yesterday, that “China has taken extraordinary advantage to flood richer markets with low-cost consumer goods, while importing, borrowing or stealing technologies from more developed countries,” but there must be better ways to address what China has done than a trade war which is bound to have unintended consequences.

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