Readers are familiar with our thesis that the world responds to a situation of too much debt and not enough growth with first currency wars, then trade wars, and finally shooting wars. Currency wars consist of one country cheapening its currency to promote exports, discourage imports, import inflation and increase its GDP.
This works in the short run, but always fails in the long run because of retaliation when trading partners respond to devaluation by devaluing their own currencies.
The currency wars are eventually followed by trade wars in which countries try to improve GDP by raising tariffs on imports from trading partners. Trade wars fail for the same reasons as currency wars – retaliation.
Tariffs are met with counter-tariffs until world trade contracts and the entire world is worse off. Finally come the shooting wars, which actually do improve growth through war manufacturing and post-war rebuilding, but at a very high cost in death, destruction and war debt.
This pattern occurred in the 1920s and 1930s and seems to be happening again. The currency wars began in 2010. The trade wars began in 2018, and the shooting wars will not be far behind. This article makes the point that trade wars are not limited to tariffs and reduced trade.
As with any war, there is a lot of collateral damage. In the case of the China-U.S. trade war, this collateral damage consists of reductions in direct foreign investment, deferred capital spending, reduced merger and acquisitions activity, and supply chain disruptions.
The China-U.S. trade war is not a short-term bit of posturing. It is serious, dangerous and will get worse before it gets better. Let’s hope that the historical segue into shooting wars does not occur this time.
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