Wednesday, June 27, 2018

IS THIS US ECONOMIC CRACKS RECIPE ???


US cost competitiveness and its economic impact is now being ignored but will cost the economy huge in the long term. I will discuss on these lines later in the article. Economic growth can be achieved in many ways, either through innovation and framing policies or through just copying the growth of other and building the same at home.  China does the same through copying the strategies and growth formula and building the same within his own economy.  This is the very reason why US is now against china.  The copy-pasted economic growth has currently rattled the global economy with trade tariffs and other things. China economy will face more slowdown which is hard to be measured currently. US coming up in a hard way to prevent some Chinese companies from investing in U.S. technology firms.

 This is going to be another blow which is beyond the measurement of any economic theory. We all know that Silicon Valley created a huge growth for the US economy. Now the 2nd round of Technological growth has been easily achieved by China through its judicious access to the intellectual property rights of US.  From the inside sources, it has been found that the Treasury Department is coming up with rules and regulation where a Chinese firms that have a 25% or more stake from a buying a U.S. company that is viewed by the Federal government as having “industrially significant technology.” This is major slowdown trigger for the Chinese economy.

 Well those who are thinking that this is illegal and against globalization well the US has an act already in place the International Emergency Economic Powers Act of 1977 gives the  US President board authority to engage in acts to protect the citizens of the U.S. It was used after the Sept. 11, 2001, terrorist attacks. The trade was will take a new route and new shape which will only slow down many economies and their consumption pattern.

 On the other hand, Trump has reduced taxes and has lead big boon for the US corporate sector. But the surprising part is that major investment drive in US is being carried by Tech Giants and not by the non IT segment of the industry. Companies like Alphabet and Amazon are spending billions to upgrade and create new dimensions in the economy swallowing up the SME segment.  This investment climate is not good since it make me remember the Tech Bubble. A balanced investment approach which benefits the society is the most ideal economic growth.

 I find that trade war with EU would lead to a flight of investments into US by these trading countries so as to keep the US happy and comfortable. Trump is already started attracting overseas investments.For example, a new survey from the German Chambers of Commerce Abroad shows that half of the German companies currently in the United States plan to boost their investment, with 53 percent also planning to hire more staff. In the last two weeks, Innogy, E.ON and EnBW all announced new American projects.
 Flight of investments to US is about to begin and the biggest factor to be watched is that they how much these economies will balance the investments compared to relaxation of trade barriers.  At the same time its big threat for US since if these countries subsidiaries decide to get out and shift their investments out of US since US is no longer a larger market for consumption compared to other countries. For example, Harley-Davidson who took the decision to shift some of its production out of US. These things will slow down the US economy also and a mixed reverse scenario would happen in the long term.  The trade war will go beyond to corporate war where the impact will be long term and not short lived.

  
If We make quick look towards the investment pattern by China within US and the after effect it can have due to the new guidelines one can measure the depth of the problem which US will face in macro front and also the fall of subsidiary profits by Chinese companies. China can divert its funding to other countries and hence it can have a short-term affect whereas US might have a long-term effect.
The number of deals declines and drop in investments might be argued with this point that US has given a tax cut down to the corporate so that they can start investing but the point is who will buy from America if there is a trade war with importing countries. This is going to be really game to watch where how the economic balances are being executed by the US economy. Will US corporate will execute the investments which they have promised since the announcement and real investments are two different theories actually.

If we look at the investments across the industries executed by China over the last decade almost we find that finance and real estate are the two biggest segments which attracted a substantial amount of investments in to US. The problem may not be with technological IPR issues but with the US treasury holding and safeguarding the dollar from the clutches of China as a foreign reserve currency.


The paradox is that US investments in China is much more than what China has. US shifted its production plant to acquire the rising class of consumption form the 2nd largest economy and also other Asian economies.  Investments in rising interest rate scenario has to adjust with cost inflation and designing product cost structure based on the importing countries cost competitiveness . This is highly grey area which is not being taken into account by Trump.  I will cover this in my 2nd part with broader examples where the Tyre will never meet the road.

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