So far, the trade war is limited to actions and reactions related to durable things that trade throughout the global economy—cars, steel, and aluminum for instance. Add bourbon and Harleys for good measure. But will that remain the battleground or should we expect greater contentiousness around services, specifically software as a service and CRM in particular?
America does hefty business with the rest of the world in services which can span things like banking and finance, insurance. Right now the retaliation seems to be against areas that went for Trump in the last election but there’s nothing that says the pain can’t be spread around to services.
Current target industries and their workers might not provide sufficient leverage that other nations need to put the genie back in the bottle. Some of the people who make bourbon and motorcycles or who grow soybeans are vocal about their politics and form part of the Trump base. But their actions seem mostly limited to reactions not initiative. They’ll support a Trump policy but they haven’t been out front advocating.
On the other side of the coin—and I accept that this is a simplification—the tech sector is, by definition, entrepreneurial and able and willing to initiate action. So attacking subscription providers by foreign nations could, in theory, motivate more reaction designed to stop the trade war. There’s a lot of potential leverage there because the US has a dominant share of the software as a service economy and the subscription economy generally. While US companies have been stepping up efforts to locate cloud data centers in many countries to support data residency requirements, their services could still look like imported services and thus be subject to tariffing.
You might buy a used Harley rather than a new one or switch from bourbon to rye temporarily but how do you go without data? Not very well. That’s why I think the services industry could be a big loser in any trade war. Data and information make the world run and many companies are only at the start of their cloud translations so retaliation against subscription vendors could cause real damage.
The tech sector is also vociferous, both pro and con on numerous political issues. For every Marc Benioff advocating for progressive ideas there’s a Peter Thiel supporting the administration. But the progressives might have the numbers if only because so much of the industry is based in California. So there’s all the more reason for foreign governments looking for leverage against American tariffs to target the tech sector and especially software.
So, US dominance in SaaS and the cloud generally is a dual edge sword. US companies have dominant positions but for this reason it would be easy to target the industry with, say, 50 percent tariffs. As with other industries, tariffs could be expected to slow growth and adoption and possibly cause some vendors to set up production in other countries as Harley-Davidson is.
Once a path is set and investments are made the shape of any industry could be permanently altered. It will be hard for any business to abandon sunk costs in other lands once a trade truce is agreed to. So we’re possibly looking at a generational or even secular shift in the shape of the cloud and its industries should a trade war infect tech.
A trade war could be a driving force that sends clouds scattering to the corners of the earth. That could be good for some businesses but bad for individuals whose jobs would be put in jeopardy. It would be an acceleration of the natural commoditization cycle with one key difference. There won’t be many new job openings for displaced American tech workers whose jobs depart for parts unknown.
When the idea of a trade war first surfaced about a year ago, some prescient commentators suggested that there would likely be unforeseen consequences. No one has perfect visibility into the heart or actions of an adversary regardless of the analytics used. But retaliating against what an adversary does well is an old story and it wouldn’t surprise me to see tariffs on cloud computing services should cooler heads not prevail. Those tariffs will have follow-on effects that we can only guess at right now but it’s doubtful that those actions will improve US’s standing in tech.
We should say this clearly but maybe just once: Not everything Donald Trump thinks or says is whacky.
The exception that might prove the rule is the western approach to trading with China and Trump’s initiative to put upwards of $60 billion in tariffs on goods emanating from the Middle Kingdom. Lest you think $60 billion is a tad rich, read on.
Last year, Trump also said that more than 60,000 factories (not jobs) had left the US for China since China was admitted to the World Trade Organization (WTO) in 2001, a claim that is right directionally but that fails to account for factories moving to other places such as Mexico and Canada to name two. But when you round up, the total number is solid. It comes from a US Census Bureau report in 2014.
China’s tactic on global markets has been decidedly mercantilist meaning its method is to accumulate foreign reserves by exporting finished goods while keeping its markets relatively closed to imports. Lots of nations do this, especially when they are emerging onto the world stage. Import tariffs were even an important part of US trade policy throughout the 19th century and into the 20th until the Smoot-Hawley Tariff Act (1930) contributed materially to the Great Depression. Open markets and global trading have been a hallmark of US commerce strategy for over 70 years but Trump wants to change the status quo.
More importantly, Trump is also focused on a more important aspect of relations with China, intellectual property (IP) theft, which has been going on for a long time.
The New York Times reported in 2013, that IP theft was a specialty of the People’s Liberation Army (PLA) unit 61398,
The hackers were behind scores of thefts of intellectual property and government documents over the past five years, according to a report by Mandiant [a security firm], in February that was confirmed by American officials. They have stolen product blueprints, manufacturing plans, clinical trial results, pricing documents, negotiation strategies and other proprietary information from more than 100 of Mandiant’s clients, predominantly in the United States.
This is in addition to the other requirements western companies face when setting up shop in China including technology transfers and taking on Chinese companies as partners.
None of this is news. In “The Great Industrial Wall of China,” in The American Prospect, a liberal leaning magazine, Carolyn Bartholomew noted back in 2009 that,
In order to provide an advantage for Chinese industries and companies, and to attract U.S. companies to locate in its country, the Beijing government manipulates its currency, showers subsidies on favored industries, provides low-interest loans from a state-owned banking system, tolerates and even encourages the theft of intellectual property, and ignores WTO rules.
So there in a nutshell is Donald Trump’s not-so-crazy case against unfair Chinese competition, but justifying tariffs is an entirely different matter. The time for this approach to fighting back was before China became a powerful global economy by taking the markets for the goods, not the factories, admittedly on other presidential watches. But all presidents have messes to clean up from previous administrations. Most take this in stride.
Trump’s approach to solving difficult problems or cleaning up messes, has been to simply wish away the problem by rolling the clock back but that’s impossible. His promises to bring back coal are a good example of how this approach fails. Coal is now more expensive than natural gas because advanced techniques like directional drilling and hydraulic fracturing, have produced a glut. It’s also less polluting. So the odds of bringing the coal industry back to its former predominance are nugatory.
Similarly, China is now in a position in which it makes a great deal of the products consumers need, which were once made locally. The Chinese took markets, not jobs or factories. They now make things at a fraction of the cost of western goods because their labor costs are much lower. There is good reason to think that production jobs that left first world locations will not be coming back for the same reasons that natural gas is ascendant in power generation. Notably, gas will have a brief time in the sun because the alternatives are becoming cheaper and replacing all kinds of fossil fuel power production and because, in the long run, they are far less polluting. That’s the way markets work.
Some industrial migration can’t be stopped because it is a natural part of economic evolution—part of how countries climb the economic ladder. But industrial espionage in which a country makes off with blueprints, strategies, research data, and other intellectual property is different. It steals the future as well as the capital and effort that go into creating the IP and in the long run it impoverishes the victim of the theft.
A tariff might be proper given what’s gone before and $60 billion per year may sound large—and it is in comparison with the $375.2 billion trade gap between the countries and it is certain to grab the attention of the Chinese. But it has to be part of a larger strategy. Tariffing Chinese goods in general doesn’t make sense for goods that carry no IP developed in the last few decades. Such tariffs only make everyday goods more expensive for consumers without changing the equation. They are like the zero-sum moves in a checker game.
If the goal is to make trade more equitable then the strategy should include much better adherence to the WTO rules of globalization and an agreement that recommits the parties to fair trade. In a less well publicized move Trump has said the US would file a trade case in the WTO against China.
But also, other countries are feeling the same pressure from the Chinese that the US feels. So it would make sense to form a coalition with allies to confront China with one voice. But Trump continues to alienate allies at the same rate he antagonizes adversaries (except Putin). This is a chess game that plays out over time and Trump has not shown the savvy or the patience to pursue.
But this is all vitally important because when the trade war gets going, the Chinese aren’t going to retaliate over consumer items, they’re going for the things that will hurt like not buying our airliners (Boeing), heavy equipment (Caterpillar) and just about anything that emanates from Silicon Valley and environs.
On the other hand, trump’s negotiating strategy includes making a ridiculously high demand followed by downward negotiation when the other party comes to the table. If so the trade war might look a lot like the steel and aluminum tariffs which builds loopholes for almost all other nations.