US trade war with China

The trade war rhetoric between economic juggernauts the U.S. and China are reaching a feverish pitch, with the Chinese lobbying the latest — but certainly not the last — volley by tacking a whopping $50 billion tariff on U.S. imports. Undoubtedly, it’s not a question of if the U.S. will counter-punch, but when, and whether it will be a jab, uppercut, or maybe even an attempt at a knockout.

As with all wars — commercial and conventional — there are winners and losers. And in this case, two unintended victims who will nevertheless pay a heavy toll for, frankly, being in the wrong place at the wrong time are entrepreneurs and investors.

Why is this the depressing — but inevitable — case? It’s because at the outbreak of a modern trade war, one of the first things to dry up between combating countries is IPOs. And indeed, according to Ringo Choi, the Asia Pacific IPO Leader of Ernst & Young, this is precisely what is happening as export-oriented Chinese listings are already launching their contingency plans, and delaying their IPO plans until cooler heads and more favourable economic winds prevail.

And of course, what’s bad for entrepreneurs who want to raise money, is often even worse for investors who want a piece of the ROI action. True, some of the capital will flow toward other companies. It’s not going into government bonds and under mattresses. But nevertheless, it’s an economic axiom that whenever the government involves itself in the (relatively) free market, there’s a welfare loss of one kind or another. Alas, what politicians potentially gain in votes, entrepreneurs and investors potentially lose in profits. It’s an ancient story.

However, there is a light at the end of the tunnel (and unlike the old joke, it’s an exit rather than an oncoming train). Trade wars force — whether they like it or not — combatants to communicate. Granted, for every one part of a progressive dialogue, there may be ninety-nine parts of bluster and posturing for the media. After all, it’s not going to play all that well in the U.S. or China if Trump and Jinping step out for a round of golf, or maybe take in a baseball game (which, by the way, is growing rapidly in China, for what that’s worth).

As such, sooner or later — and every economist worth his or her copy of The Wealth of Nations knows that it needs to be sooner, since trade wars are mutually destructive — there will be talks that could ideally lead to closer ties between the two countries, and which could pave the way for more cooperation, coordination and, indeed, IPOs like Xiaomi’s.

Still, between now and then things are going to be challenging. The drubbing that Wall Street has taken isn’t just spooking investors, it’s also affecting consumers (i.e. voters) who hold baskets of stocks in their personal and retirement savings. Indeed, as of early April the Dow was 11 percent off its record high. This doesn’t necessarily signal the start of another Great Recession, and office lobby signs in Wall Street firms aren’t likely to come crashing down as a result, but it’s certainly worrisome.

What’s more, unlike Jinping who recently secured a job for life, Trump will face the voters in 2020 (assuming he emerges victorious in the Republican primary, which some pundits don’t think is Reagan-esque a slam dunk). Chances are he won’t want to campaign for re-election with a Dow in freefall; especially since a rising stock market was something Trump repeatedly pointed to as a demonstration that his economic policies were working. If things go into the proverbial tank, it will be a hard sell (even for The Donald) to walk that back.

As always, time — and money — will tell the story. There’s a lot of runway left here, and we’re nowhere near the end. In fact, we’re not even at the end of the beginning.

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