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Will Fed Policy Stoke a Tech Trade War?

In a world where the technology markets are more global and intertwined than ever, the dangers of a global trade war are grave. The impact could be broad, with damaging effects on the global technology supply chain.

On Nov. 3, the Federal Reserve embarked on an ambitious and controversial policy to stoke the US economy, announcing its intention to pump $600 billion into the system. (See the Fed statement here.)

The initial market reaction to this policy (much of which was anticipated and built into trading prior to the announcement) has been a weaker US dollar. A weak dollar has the potential to make US goods more attractive abroad, stemming the flow of manufacturing jobs overseas and making overseas goods more expensive. Many US trading partners are not happy about this.

Trade tensions already run high. At a recent meeting of the G20 economic powers, US Treasury Secretary Timothy Geithner suggested some measures to bring trade deficits under control, but he was largely rebuffed by the international crowd, most notably China, which called Geithner’s proposal to target trade deficits wrong.

China has also escalated its rhetoric and issued negative comments on the Fed’s recent actions. “If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for the world, it may bring a lot of negative impact to the world,” said China’s Central Bank head, Zhou Xiaochuan, in a BBC news report.

At the same time, new legislation in the US House of Representatives to impose more strict trade rules is awaiting the new Congress, which is ready to take advantage of the populist backlash against Chinese manufacturing growth. Technology executives are most certainly monitoring this situation closely. It’s a double-edged sword. Even though a weak-dollar action such as that initiated by the Fed is designed to boost the US economy, the fact is that the major portion of technology sales these days is international, and the US market has become less important.

For example, in its fiscal year ended in 2010, {complink 1131|Cisco Systems Inc.} announced that its most robust growth was coming in the Asia/Pacific region, which was growing at a 17 percent rate. International sales at Cisco are approaching 50 percent of total revenues. {complink 2470|IBM Corp.}, one of the largest global technology products and services organizations, sells more product abroad than it does in the US.

Combine the robust growth of global and emerging markets along with the global nature of the supply chain, and you can see how a trade war would be a problem.

{complink 379|Apple Inc.}’s iPhone and iPad products are a great example. Held up as the gold standard of technological product success, they are designed and marketed from the US, with most production taking place overseas. Apple clearly creates jobs and value everywhere in the world. What would happen to Apple’s products if Asian manufacturing costs escalated, or were disrupted by trade barriers?

The fact is that politicians often attempt to boil trade issues down to one trend: manufacturing jobs moving increasingly from developed economies to emerging economies. But it’s more complicated than that, because the global economy has become so diverse, integrated, and sophisticated.

A trade war won’t be good for any business, no matter where it’s located. Technology executives need to step up their efforts to fight the dangers of populist trade rage in the United States, urge politicians to avoid protectionist policies, and promote the concept of global growth.

6 comments on “Will Fed Policy Stoke a Tech Trade War?

  1. bolaji ojo
    November 8, 2010

    Scott, The “war” has probably started already. Several foreign government ministers are already complaining about the US government's action. In one report “G20 showdown likely over US Federal Reserve's quantitative easing” Angela Merkel, the German Chancellor, has indicated she will oppose the decision to devalue the dollar.

  2. Jennifer Baljko
    November 8, 2010

    Hi
    Great post. This knee-jerk reaction certainly will have longer-term global ramifications, stretching far beyond commercial trade. 

    Of course, something needs to be done to stimulate growth, improve consumer sentiment, and lower unemployment. But, US-centric policies and deliberate currency devaluation won’t help strengthen America’s position in the world community. It’s 2010, and we’re all living in the global economy the US and the Western world enthusiastically created. Let’s update our economic policies to keep pace, in good times and bad.

    Llike others on this site, I'll be interetested to hear what comes out of the G20 summit and what kind of pressure other international powerhouses can exert.
    Jenn

  3. Ariella
    November 8, 2010

    While  a weak dollar does seem to offer an advantage to American industry, it also has many negative effects on the economy.  It would be short-sighted to attempted to address what is wrong with the economy with such a simplistic fix. 

  4. hwong
    November 8, 2010

    Ben B is using QE2 as the final option to reduce government debt and boost up exports since Chinese RMB is not expected to devalue soon and our domestic consumption has been idling. Well, over 90% of consumer products are made in China. Dollar devaluation will also increase manufacturing cost because of the exchange rate, plus the job reduction in China due to their lower export will also hurt their spending. This kind of negative feedback effect might not result in more corporate hiring. In terms of trade war, there is no effective means to deal with devaluing dollar and Ben B does know about that.

  5. Scott Raynovich
    November 8, 2010

    hwong,

    I agreed. As usual, the Fed is not looking at unattended consequences. We drive up the prices in China, and the likely outcome is higher prices around the world. People forget how depressed labor costs in China have kept global prices of goods down.

  6. Scott Raynovich
    November 8, 2010

    Bolaji,

    Oh yes, it has definitely started! It will be interesting to see how other national governements — and the markets — react to this historic decision in the next few months.

    And, as you noted, there appears to be a lot more negative International reaction today.

    –Scott Raynovich

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