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China-US Trade War: will it badly affect emerging markets?

Paul Gambles, Managing Director


The latest round of trade wars is about to begin. How will the likes of Thailand fare?

As the impact of the US government’s tariffs on US$200 billion of Chinese goods starts to kick in, the hyperbole is cranking up to red. The Chinese authorities have even given to publishing anti-Washington advertisements in a local newspaper based in the heartland of American manufacturing.[1] Given that China and the US are by far the largest export markets in many Asian countries, including Thailand,[2] it’s tempting to look at the trade war as a major threat.
However, going down that line of thought would be to assume too much importance on the very notion of trade wars and the positive effect free trade has on developing economies.
We’ve just reached the ten-year point since the fall of Lehman Brothers, private debt rates are as high as ever, liquidity is down, economic growth in the world’s major economies is minimal, central banks are exacerbating the situation and stock markets are massively over-valued.[3] Imposing tariffs is a diversionary tactic by the Trump administration: despots tend to focus their anger on one bad guy at a time. For now, Trump is focusing on China.
Looking at previous examples of trade disputes and protectionism shows that they tend to be merely a symptom; not the problem itself. Take the 1930 Smoot-Hawley tariff act, for example. Alan Reynolds – a firm believer in the supply-side economics of free trade, lower taxes and decreased regulation – argued that the tariffs the Act imposed on imports to the US played a major role in the Great Depression of the 1930s.[4] But then, with his beliefs, he would, wouldn’t he?
I’m not convinced by Reynolds’s rationale that the negative effect on share prices caused by Smoot-Hawley’s passage through Congress fuelled the October crash and then further shrank the economy after Black Thursday, exacerbating the Great Depression. If you look at key indicators prior to 1929, such as ballooning private debt, low production rates and crop prices, the Fed’s interest rate and gold policies, it’s very clear that the factors were already well in place for the US economy to fall into deep economic malaise.
Yet, along with the believed link between 1930s protectionism and depression, there seems to be a global consensus (embodied by the WTO[5]) that free trade is a panacea. It isn’t. It benefits developed, capital rich economies alone.
The main theory behind free trade is based on the early-nineteenth century writing of David Ricardo. The son of a stockbroker, Ricardo made his fortune, after having observed the Battle of Waterloo, by rushing into the London Stock Exchange, shouting “Sell, sell, sell.” Traders assumed that Wellington had lost to Napoleon and followed Ricardo’s lead; at which point Ricardo started to buy assets at a bargain price, only to sell at a premium once Bonaparte’s defeat had been confirmed.[6]
Ricardo accrued enough of a fortune to buy himself a seat in Parliament and dedicate himself to philosophising on international trade. The big economic superpowers of the day were England and Portugal and there was great political debate over Ricardo’s proposal to abolish grain tariffs. Opponents pointed out that Portugal would undercut England in all industries if the latter took away its tariffs. Ricardo, however, believed that free trade would benefit both countries: if there were no trade barriers, England could devote all its workers to producing cloth and Portugal could concentrate on producing wine. Even though Portugal also produced cloth cheaper than England, specialisation would make both more efficient.[7]
The slight flaw in Ricardo’s theory is the assumption that a country’s industry can change at the drop of a hat – that you can convert machinery from doing one task to another. As Steve Keen so eloquently put it, in Ricardo’s example you’re effectively trying to turn a wine press into a spinning jenny.[8]
In the real free-trade world, less-developed countries concentrate production on fewer products or services. That renders the machinery they have useless and gives them fewer ways to invent new industries from which they could achieve widespread growth.[9] Harvard University’s Atlas of Economic Complexity proves that diversity generates economic growth, not specialisation. This, combined with the free movement of capital, enables the wealthier nations to exploit the less wealthy.
Proof of this is in Thailand, whose development has been badly hit. Its ability to impose tariffs to protect and develop the local economy should have provided a major boost away from an agrarian to a fully-functioning diversified economy. Instead it has been stuck in a middle-income trap since the early 1980s, when it signed up to the WTO’s predecessor, GATT, while developing Asian economies that have operated either overt and covert more protectionist policies have climbed out (see chart).

It’s hardly as if the aggregate effect of this free-trade dictum is helping the global economy move out of the post-GFC depression. Global trade has been down since 2011 and is now on the brink of recession.[10]
Instead of concerning themselves with whether the symptom (i.e. the US-China trade war) will damage free trade, governments should really be tackling the much more pertinent issues. Private debt is greater now than back in 2008. In Thailand, for example, the surge in debt since the turn of the millennium, and particularly since the GFC, has left the country much more exposed to any global financial event.

Last time there was a financial crisis (the GFC), Chinese credit saved the world from a greater collapse.[11] However, China has now learned how to make sure any more bailouts would only subsidize Chinese interests[12] and it is harder for liquidity to flow. Fortunately, the huge tailwind of the weak US Dollar in 2017 created enough liquidity to counter this issue,[13] but the Greenback has been recovering some of its previous strength since May of this year, mopping up liquidity. Not only that, the Bank of Japan’s long-running QE policy has meant that it has now bought practically everything Japanese[14] and a similar ECB policy is approaching the same point.[15] 
Recent events in Argentina, Indonesia and Turkey have demonstrated the problems the lack of liquidity is causing emerging markets.[16] This situation is far more worrying than any trade wars ever could be.

[2] The Atlas of Economic Complexity, Harvard University Center for International Development
[3] See previous MBMG IA Updates
[7] Ricardo, David (1817), On the principles of political economy and taxation (John Murray, London)
[9] idem
[10] OECD and World Bank figures


MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.

For more information and to speak with our advisor, please contact us at or call on +66 2 665 2534.

About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner. 

To read our previous updates, go to

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1. While every effort has been made to ensure that the information contained herein is correct, MBMG Investment Advisory cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Investment Advisory. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

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