The WelderDestiny Compass

Trade Wars And DAO's - Issue #058

Wednesday, March 07, 2018 / Perth Australia / By Niekie Jooste

In this edition of "The WelderDestiny Compass":

• Trade Wars And DAO's
• Drivers For Trade Wars
• Real Outcomes Of Trade Wars
• Influence Of DAO's
  

Trade Wars And DAO's

I was intending to get to some examples of potential DAO's in the welding and wider engineering field, but the big economic story of the last few weeks has presented an opportunity that seems too good to pass up. The economic story I am talking about is the blossoming trade war between the USA and most of its trading partners.

In case you missed it, president Trump is proposing a 25% import tax on steel, and a 10% import tax on aluminium. The idea being that this will grow jobs in the USA, and help to "make America great again." In short, president Trump is spoiling for a trade war.

Seeing as our beat here at The WelderDestiny Compass is to try to predict the future job market, the economics of such trade wars are obviously of great interest to us. Especially if we can cast it in the light of our current topic of Decentralized Autonomous Organizations. (DAO's)

Today we will take a cursory look at the issue of trade wars, and what role DAO's could play in future trade wars playing out.

If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: compass@welderdestiny.com) or complete the comment form on the page below.

Now let's get stuck into this week’s topics...

Drivers For Trade Wars

President Trump has often pointed to China as a currency manipulator, and even said that America was being "raped" by China, as could be seen in the large trade deficit that the USA has with China. So, on the surface this whole steel import duty looks like it is aimed at China. The facts do however not support this assumption.

Only 2% of the steel imports into the USA comes from China. The largest quantities actually come from Canada, South Korea and Mexico. An import duty will therefore have a much bigger effect on those countries than on China. It looks like the measures may have more to do with the North American Free Trade Agreement (NAFTA) that with the Chinese.

At any rate, the fundamental reason for any such trade war is for one country to try to gain some competitive edge over another through economic market distortion. Exactly the same reason that a country would resort to currency manipulation.

It sounds like this is a good idea, because higher priced imports should lead to greater local production, leading to more jobs and economic activity within the home country.

The fundamental underpinning of such trade tariffs is globalization. The idea being that countries with lower production costs have an unfair advantage, leading to reduced economic activity in the countries with greater production costs. It is argued that by imposing the import duties, the playing field can be levelled between different countries.

Real Outcome Of Trade Wars

So, would import duties on steel help the American steel industry, and by extension supply more jobs within that industry? We can go into big philosophical debates about this, or we can just look at what the broader market thinks.

After the news of the proposed steel and aluminium tariffs came out, the stock prices of American steel companies increased by between 4 - 9%. This suggests that the broader opinion of the market is that such tariffs are good for the USA steel industry, and could indeed result in more American jobs in that industry. Unfortunately that is not all that happened in the market.

The stock prices of many manufacturing companies that make steel products dropped significantly. It is clear that the market did not think that this tariff on steel was good for those companies. Particularly hard hit were the American automotive industry.

So, let us think about this. The obvious goal of import tariffs is to result in higher prices of steel available in the American market. This will result in higher input costs for American companies manufacturing products such as automobiles, machine tools, agricultural machinery and construction machinery.

In short, the American manufacturing sector will end up with even greater foreign competition than they currently face. This must be good news for the Asian (Chinese, Korean, Japanese) and European (German) manufacturers of automobiles and construction equipment.

Oh yes, that tariff on washing machines may not end up being such a bargain, because now the American washing machine manufacturers will have to pay more (up to 25% more) for their steel to make their washing machines!

Despite any effect it may have on foreign trade partners, at the very least these tariffs will increase the cost of goods within the USA, in effect leaving the broader American consumer worse off. That import duty is really just an indirect tax on all the end users of the American made products.

All of this is even without the trading partners taking any "tit for tat" punitive actions of their own.

This kind of analysis is relatively simple, and does not take a genius to see that in all probability trade wars do not leave people better off. Unfortunately trade wars sometimes result in shooting wars. Let's all pray that does not happen here.

At any rate, the nett result of all this will be distortions in the market, resulting in winners in one industry and losers in other industries. It is a win-lose deal, so it is at best a zero sum game, and at worst leaves most people worse off. In the final analysis, such tariffs will transfer money from the general American populace to steel industry insiders, steel industry shareholders and government coffers.

Trade wars are just another tool of the political class to achieve their own agendas.

Influence Of DAO's

The main feature of DAO's is that they are not pinned down in any geographical jurisdiction. Even their money systems (crypto currencies) are operating across political boundaries, and are not at the mercy of any single country or political system. In other words, they are the epitome of a level playing field. Anybody that does not like the "rules" according to which the DAO operates is free to modify those rules, by developing an alternative "application" that sits on the data of the current system.

The barriers to entry for new entrepreneurs are really low in such a system, so any market gap will be speedily filled, and the unrealised economic gain will be released.

In essence, any industry in which DAO's play a major role will not have the economic drivers to enter into a trade war. Obviously parties within the DAO's network will try to advantage the transactions for themselves, but any lopsided transaction will not be used, because it takes at least two parties to agree to its use. Both those parties need to believe that they are experiencing a win, or the transaction will not take place.

The only real market imbalances will therefore relate to legislative and tax differences between countries. People will have to nut those out with their own governments. There will be a loss of revenue within the countries with poor business and personal taxation environments.

DAO's hold the promise to decouple the "political influence" from the economic output. This can result in a balanced globalisation environment with far less manipulation and market distortions from central organisations.

When impoverished countries are pulled out of economic hardship through the action of a DAO, then everyone that is contributing will get to benefit from this progress. For instance, DAO's could be a ready tool for empowering economic growth and change in a country like India. In exchange, those that are part of the DAO's network from any other part of the world can also benefit. There would be no need to feel that India's growth was taking away wealth from developed nations that were helping it to grow.

The Initial Coin Offering (ICO) way of funding DAO start-ups also means that capital raising is global and decentralized. This immediately eliminates the imbalances in venture capital funding that is obvious between different parts of the world.

ICO's must be seen for what they are. They are "speculative investments" in start-up businesses. At least 90% of start-up businesses go under, so expect that at least 90% of "alt coins" to go to zero! They are also not short term investment vehicles. It takes 5 - 10 years for a business to become really successful, so that should be seen as their investment horizon.

It should also become clear that typical economic measures of the strength of an economy will have to change in the world of DAO's. The old GDP measures will just not work any more.

The interconnectedness associated with DAO's will drive globalization. By decentralizing the business structures across political boundaries, and decentralizing the currency system, globalisation will be able to circumvent the central power structures aimed at channelling most of the money and power to themselves.

Decentralized Autonomous Organizations could go a long way to eliminating trade wars and distributing wealth more fairly!

Yours in welding

Niekie Jooste

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