By Professor Ricardo Ulivi, Ph.D.
The English vote last Thursday has caused some important financial losses and may result in additional ones in the near future. Analysts have given many reasons for the vote results, including uncontrolled immigration, and the loss of good jobs due to the effects of free trade agreements and globalization. All are very good reasons, but the major one is not talked about much. That is, China!
What political leaders throughout the industrial world seem to either ignore or don’t understand is the disruptive effect China’s emergence as a world class factory has had on employment. What Uber has done to the taxi business, and what Airbnb has done to the hotel industry, China has done to the previous economic powers.
The pizza for beer trade
Let me explain this situation with a simple example that is traditionally used to explain the benefits of free trade. Assume Rick makes pizza, and Bob makes beer. How can each be better off? Through trade, Rick can give some pizza to Bob, and he will give Rick some beer. Both are now better off. That’s the advantage of trade.
However, while Rick and Bob are now happier than ever, a disruptive effect is about to take place. Wang, a Chinese factory owner, has figured out how to make pizza and beer cheaper than either Rick or Bob. So, Wang offers Rick beer for less money than Bob does, so Rick starts buying only from Wang. But, Wang now offers Bob cheaper pizza than Rick can, so Bob buys pizza from Wang. In other words, Wang is selling beer and pizza to both Rick and Bob.
What happens to Rick, Bob & Wang as a result of free trade?
Rick become poor because nobody buys his pizza, and the same happens to Bob because he cannot sell his beer any longer. Wang, on the other hand, is richer than ever. What does he do with his new wealth? He is afraid that Rick and Bob will gang up on him, so he builds a strong military. Next, of course, he realizes he can beat both Rick and Bob, and so he launches a war. He wins, kills both Rick and Bob, and takes their wife’s and children as slaves and whatever wealth they still had.
Welcome to the negative effects of free trade! Or, if you prefer, to the benefits of producing goods and services at a lower price than your competitors.
Who shall we blame for the current mess?
Our politicians have allowed China to sell, sell and sell to us and not buy, buy and buy from us. China has taken away jobs from England, from Europe and from most of the world, including the USA. Are you surprised then that the English public is upset? Are you surprised to see the Trump phenomena in the USA? You should not be. China is the culprit. Blame our politicians for acting as representatives to the lobbyists that get paid for allowing un-balanced free trade agreements.
While you and I maybe cannot do much about the current state of affairs, being in the investment business, the obvious question for me is: How can we benefit from these disruptions being caused by China? I don’t taxis any longer; I hail an Uber. What’s the investment equivalent of Uber or Airbnb in the investment area? I’m searching for the answer. I am thinking; In the meantime, stay safe and increase your caution. We are in for some turbulent times.
I am still available to help you with your investments and your retirement planning. Just email me or call me at 1-714-771-6000