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Trade Wars

June 2019

At Harbor we subscribe to the theory of Comparative Advantage as first described by Economist David Ricardo in 1815. In simplest form it suggests that if different people, with different skill sets, in different geographic and economic circumstances can make stuff more cheaply that others…it pays to do what you are best at, and to trade for things produced by others.

In the language of economists…it is rational to produce goods and services in the country which can produce them at the best combination of price and quality. In this model we trade for what we do not produce well or economically. This maximizes overall consumption of goods and services for each of the trading partners.

Tariffs add cost and reduce the efficiency of the world trading system. Classical economists suggest the best rate to tariff trade goods is zero.

We agree that China abuses existing WTO (World Trade Organization) trade laws. We disagree with the use of unilateral tariffs as a way to combat this abuse. Use of multilateral trade agreements, such as the TPP (Trans-Pacific Partnership), to reduce tariffs and encourage good trade behavior, makes more sense to us.

Continuing the trade war against allies as well as adversaries risks tipping the world into recession and broad bear markets in equities. It is a clearly dangerous tactic.