The fuss about trade disputes

What does a small-scale farm-holding, two presidents, some tech companies and their respective local currencies all have in common?

The answer might be obvious if you have been paying attention to the so-called trade war between China and the US in the news lately.

But why is it of concern and what are the far-reaching implications for the rest of the world?

Well, active involvement in international trade is a vital sign of a country’s financial health and a significant input to its Gross Domestic Product (GDP).

GDP measures the value of all goods and services produced in a country from raw materials (input costs), to value added (assembly and skilled labour costs) to come up with final goods or services.

And though “domestic” implies that this refers to a country’s internal economy as a whole, the contributions can be extended from a services perspective.

This occurs when the country places emphasis on or relies on income from Foreign Direct Investment (FDI) to help boost its economy via its GNP. GNP is a similar measurement but slightly different from GDP as it incorporates.

Importance of trade

Fact is, all goods and services come from the price or costs starting with that of the initial extraction/acquiring of raw materials.

These then undergo the production and assembling process leading to the product or service of intrinsic value for both local and international (via exports) consumption.

An ideal situation for a country is to export more then it imports to maintain a positive balance of trade. So basically more money flowing in than out.

The extra surplus can be ploughed into the economy via the fiscal budget and can supplement a shortage of funds raised from domestic taxes.

The opposite, which isn’t always a bad thing, (called a trade deficit) would have to be managed and nursed like any other loan.

The US has often criticized Germany for exporting a lot (of its cars, trains and machinery) and not importing much and thus not being ‘fair’ in trade practice. But trade itself, arises from market forces, priorities and consumer demand.

Everyone loves a BMW, Audi and Mercedes Benz so these German-made products will always be in demand compared to US car makes.

Who you chose to trade with will often give rise to favourable balance of trade if you are engaged in a trade agreement or part of a trading bloc.

Why this is also a big deal

The demand for your country’s goods and service will directly impact the strength of its local currency – more trade means more of your currency is required to pay for goods and thus the value of the Dollar, Euro, Yen or Naira etc., goes up.

A strong local currency leads to stronger purchasing power for its citizens and residents. This comes in handy when you plan things like holidays, purchase goods online, invest or just send cash abroad as gifts.

So, you can see why a strong Dollar or Euro is always favoured and why sometimes drastic measures are taken to keep it that way.

“A higher demand for a country’s goods and services has a direct positive impact on its currency and exchange rate”

A quick glimpse of the world in terms of the input costs for goods and services that gives countries a competitive edge when it comes to trade.

USintellectual property, services, weaponry;

Germany – steel and engineering machinery giving rise to high performing automobiles;

Many African countries – mineral resources such as oil, tobacco cocoa and precious stones;

Israel – military intelligence,

South America – agricultural produce;

India – IT and customer services;

China – agriculture, building/(manual) labour and of late technology.

Country Trades

The beef with China

The said technology that China (no.2 on the list) offers the rest of the world is the subject of hot debate. The alleged theft of US intellectual property for tech gadgets and software by China.

This is one of several unfair trade practises and motives for why the US recently decided to start imposing heavier (punitive) tax-like increases on multiple goods imported by China.

These extra costs, referred to in trade terms as import tariffs, have a spill-over effect on the costs of production.

China then reciprocated by hitting the US with tariffs (mainly on agriculture produce) causing the trade war that drives each country to protect its own economy.

The higher input costs naturally, lead to the price of the product going up and reducing its competitive advantage and demand. Higher input costs can also affect the local labour force for the worse too.

Factories, multinational corporations and industries such as farms (both commercial and subsistence) will have to cut the cost of labour. In worse cases which we have seen, workers are laid-off in a heartbeat to stop or prevent accounting losses.

These factors would have hopefully been taken into consideration by the respective leaders before pulling the tariff triggers. Acting with emotions rather than looking at the far-reaching implications is irresponsible and affects all recipients of the goods and services.

Have the talks of the trade war impacted productivity and the global trade economy? So far its just the stock markets (securities and commodities) reacting.

Only time will tell.

The ramifications will also depend on the price elasticity of demand of the commodities under the tariffs. That is, how markets and respective industries affected react to the sentiment versus the actual economic activity they engage in.

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Data (Gold) Mining

Let’s face it, if you really were going to quit Facebook, you would have a few years ago. Fact is, you should have asked the serious questions when the ‘free’ social media platform started turning over billions of dollars.

No free service can generate that amount money out of goodwill and thin air. So much that they could list on the stock exchange. So, we are not quite sure why everyone is acting amazed or why the knee-jerk #DeleteFacebook campaign is only now coming to light.

There really is no such thing as a free lunch. If you believe that all these online social platforms would keep it that way, then you are as naive as they are hoping you to be.

Think about it, the companies behind the platforms, actively recruit in pretty much tens and hundreds of cities globally.

And the simple fact of the matter is that in order for them to pay all their (global) staff of programmers, developers, executives, lawyers and other stakeholders. They need revenue.

What your data means

Facebook, Google, Twitter, Snapchat and pretty much any social media platform that has over 100 million users, therefore, sit on a goldmine for advertisers.

The commodity, however, is not just what their users wish to own in the short term, or their purchasing power directly for that matter.

The commodity is simply you, the user. So, your preferences, habits and views along with their personal data are analysed via machine-learning systems to study behaviours and habits.

The data in turn, is used for constant revenue maximization or in some extreme cases: political, psychological and social manipulation!

“Your ‘payment’ on a social media platform is your consent to have your information used for marketing purposes – opting out of marketing would give you true free use of the service. But no profiteering company offers that privilege today – the best you can get is a month’s free trial.”

Knowing your likes, spending habits, music preferences, political views, personal information including location and working habits is enough for any company or institution to cater their goods and services.

They can position their offerings (sometimes subliminally) into spaces where you are likely to indulge in them.

Social media platforms, in this case, become the marketplace for them to ‘mine’ data to use.

Most famous social network sites worldwide as of January 2018, ranked by number of active users (in millions).

Most famous social network sites worldwide

Source: © Statista 2018

How the mining actually works

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Data mining is not a new idea and completely legal if presented transparently in the terms and conditions of any service. The terms get longer by the day (and smaller in print) that we don’t bother to read them.

Microsoft envisioned this a decade ago and changed the way its operating systems work (beginning with its Windows 8 series). It’s operating systems are now more of a social, interactive and information gathering system. Allegedly designed to “help you” organize things better.

This is fostered by a voice-activated app called Cortana – all under one Microsoft account.

Amazon has its own ways of data mining via your shopping habits and Alexa – is own voice-activated search and information-providing device.

Google (owned by a group called the Alphabet company) has the biggest stranglehold of the lot and must, therefore, be the most cautious when it comes to data privacy and security.

This applies especially with its partnership with Android, which makes it a requirement for you to use for all their devices (phones and tablets) to link up all your data.

This includes phone contacts, emails via Gmail, pictures via GoogleDrive, apps (music, movies and games) orders via the Google (Play)Store and social media via Google+.

You can even have your search fields stored and synced onto your devices – from your laptop to phone and tablet via Google.

You are now having to (almost mandatorily) give up your telephone number, location, and other preferences indirectly to unknown affiliated marketers and partners of the tech giants. They get first dibs on this data – and paying good money for it.

Read more about Affiliate Marketing here

What is required by regulation

The main violation by Facebook, therefore, might not even be non-consensus selling of data to marketers. Such things could be countered with a clause.

They may have strategically stuck one in while you were busy posting selfies and liking random videos of cats.

The real issue is the potential use of the data for political or advanced manipulation of data for fraudulent purpose. This can be facilitated by the use of artificial intelligence to influence you without your knowledge.

Read more about the uses of Artificial Intelligence here

Full data privacy, though not conceivable, and absolute freedom from advertising on social platforms is possible – but at a cost.

This was reiterated recently by the COO of Facebook who admittedly confirmed that opting out of having your data sold or used would mean you will have to pay to use Facebook in future.

They had just not put this in place but will now forcibly have to make it a clearly visible option.

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The fact of the matter is we are in an era of Big Data, Internet of Things (IoT) and AI – all which require data to analyse.

These platforms are, therefore, here to stay and still serve their specific functions well. More importantly, they’re also the livelihood for many small-to-medium-sized businesses.

Data mining is here to stay

Though many were reluctant at first, pretty much every company now has a Facebook, Twitter or Instagram page to showcase and communicate with their clients via the newly termed phrase ‘social engagement’. This has turned out to become a strong branding and marketing tool for them.

And if you think you are out of it by leaving one platform, just remember this: Facebook owns WhatsApp & Instagram; Google owns YouTube; Microsoft owns LinkedIn and so on.

There is nowhere to hide if complete online privacy is important to you.

And let’s not forget your web-browser. Not many of us actively use ad-blockers unaware that even your browsing data is being scanned and processed always by external third-parties companies.

If you aren’t using a Virtual Private Network (VPN), you should seriously consider it! Along with some good plug-ins to help secure your online browsing from all types of behind the scenes snooping and ransomware.

It will be interesting to see the outcome and verdict of the probe into the Facebook case.

Rest assured, many other heavily used platforms will be deleting and removing ties with data mining marketers. Especially ones that have had a similar agenda to what Cambridge Analytica was accused of conducting.

A change in verification of marketers, data storage and data security laws (such as the new GDPR law) were long overdue. Facebook will now be the scapegoat to enforce data security laws on social media.

Nurture State Treasures

There are many schools of thought on how to manage natural resources. The idea that a non-renewable resource “gifted” by nature to a country is something that should be considered a once-off benefit begs the question of how forward-thinking that nation is.

If your country happens to have a wealth of a mineral resource, should the current generation use it for their benefit alone or should future generations of the country also benefit?

This also raises prognosis into an important distinction is between wealth and income.

Defining wealth

A non-renewable resource is a good that can only be consumed once such as oil and gas.

They are distinct from renewable resources such as forests and fisheries in such a way that, if managed properly can give a sustainable stream of income for all time.

Some non-renewable resources can, of course, be recycled, and most metals and some fossil fuels fall into this category.

A goldmine, for example, should be viewed as a source of wealth (and not just income and profits for the company mining the yellow stuff).

And while this sounds normative, no single generation has the mandate to spend that wealth in their lifetime.

The wealth must instead be preserved for future generations and only the income (mainly in the form of interest) from that wealth be used by the current generation.

A shining example

Norway* (if not now one of a few) is the only country in the world that consistently applies the principle of intergenerational fairness.

The revenue that Norway contracts from oil and gas have since 1990 been collected in a fund that currently stands at over $1 trillion. This number is growing every second!

The wealth is converted into money and the value preserved. This (sovereign) fund is maintained for future generations, and only the interest earned from this wealth is used for the current generation.

In this way, all future generations will benefit from the ‘lucky situation’ of the country.

The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population – Norges Bank (The managers of the public fund)

In intergenerational economic terms, this is the only correct way of using the non-renewable assets of the country, and it is encouraging that other countries are looking to the Norwegian model.

Other ways of re-investing

A different school of thought is that some of the wealth can be invested to create future growth that will provide better sustainable income for the country.

Many Middle Eastern countries are prime examples. They invest the revenue in construction projects to create a platform for economic prosperity.

This is seen in the vast projects in the UAE cities of Dubai and Abu-Dhabi. They aim to produce sustainable income for the region when the oil runs out.

It is an interesting illustration of Say’s law – in which supply creates its own demand.

Will the investment in infrastructure enable these countries to sustain their level of wealth for all future generations or will they 200 years from now be vast cities in the desert. A legacy to a time where opulence and abundance purveyed?

Read more about sustainabilty and human irrational behaviour here.

In most developing countries, like most of Africa, there is no consideration for future generations. The wealth of non-renewable resources such as gold, platinum and diamonds are used in today’s budgets. This is with little thought that this wealth could one day not be there and should not be spent now.

The wealth inherited from previous generations is thus used to finance an unsustainable level of consumption.

Conclusion

The main lesson to take from this is that a non-renewable resource can only be used once. It is a precious endowment that is bestowed upon the country by luck or good fortune and it is therefore selfish to use it on the current population.

It is not income, but wealth. This distinction is alien to most but is very important. Wealth is something that should be preserved.

The three basic options facing a country are: spending it, as most developing countries do; preserving it, as Norway does; or one can invest it in future sustainable growth.

The choice is ours.

*Revised and originally written by a Norwegian economist working for a Sovereign Fund company that has since moved to the Private Equity sector.