Sunday, March 25, 2018

US TRADE WAR..SILK ROAD,BUYING BONDS & REPATRIATE OFFSHORE FUNDS


Before I begin the analysis I would like to draw the attention of the economist and financial world across the globe towards this point that Trade war by the US is based on product and not on the manufacturer.To support repatriation of profits which is lying outside of US is a herculean task for the US economy despite Tax rates were slashed. We all know that low cost of production and shift of consumer market over the last 2 decades have resulted in a flow of jobs and capital out of US. For decades, U.S. multinationals have shifted profits abroad and deferred their taxes on them. Moody's estimated in November that U.S. companies were holding about $1.4 trillion in cash offshore. Forget about the number of billions of profits lying outside the US, the important point is that will lowering tax rates would bring back this capital back to the US. No. Since the broomstick even used in American Houses are made by American companies producing in China.

In 1965, manufacturing accounted for 53 percent of the economy. By 1988 it only accounted for 39 percent, and in 2004, it accounted for just 9 percent. With the birth of the North American Free Trade Agreement in 1994, Mexico became a major recipient of outsourced U.S. manufacturing jobs.  For example, Boeing 20 years ago, most of its aircraft parts were manufactured domestically, while today, sadly, up to “70 percent of the airframe of the company’s next-generation 787 Dreamliner will be made overseas, including key parts such as the fuselage and wings.” Even the engine will be produced outside the U.S., while workers inside the U.S. are left with layoffs.

Now, this was history which we all know. Now, what we need to know how strong this trade war game will go ahead. It is a strong challenge given by the US to China as US wants manufacturing to shift to the US and which leads to repatriate the capital lying outside of US. The trade war is based on product and not on the manufacturer. US ban means getting back the US-based manufacturing companies back to its own country. This is the grey area on which Trump has emphasized indirectly. All he wants is that his offshore funds to come back to the US and then buy its bonds to fund its budget and fiscal deficit.

Another prime reason to get into a war with China is that US companies based in China will soon get access over the next decade or before that to sell its goods through the silk route which is being developed by China connecting many countries. Once this happens hardly any US based company manufacturing in China will ever come back to its home country.  Silk route will open up huge growth for China as a whole economy and would make its largest economy in the world in the coming days.   Hence trade war would put brakes on the Chinese government income through taxes etc earned from these US-based companies operating in China.


Getting the offshore money back followed with getting the business pulled out of China is the key factor being strategized by the US economy. Further is China gets the silk route developed US exports from their own country would hardly find buyers and would find significant blackout for its own economy. The trade war is just to get the manufacturing out of China and get back the offshore funds back to its own country to buy bonds to manage the deficit.

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