With the U.S.-China trade war escalating and with neither side seemingly ready to take a step back towards reaching a conclusive deal, industries in both countries influenced directly and indirectly by tariffs are absorbing the side effects of this grand economic bout. People are losing businesses, consumers end up having to pay more for goods and services, and the Chinese Yuan has crashed down to an 11-year low. However, no one seems to be talking about how this conflict is affecting the blockchain industry and the cryptocurrencies therein.
Understanding the trade war
The U.S. imported $3.1 trillion worth of goods in 2018, but exported only $2.51 trillion. This means that the country has a trade deficit of about $600 billion. However, of those $3.1 trillion, $539.5 billion (17.3%) come from China with the U.S. exporting only $120.3 billion (4.3%), meaning that China is making a lot more out of this trade relationship. In the end, $419 billion (67%) of the entire trade deficit of the U.S. comes from China.
And therein lies the problem. The President of the U.S., Donald Trump, has identified that and has subsequently began trying to balance the situation out by placing tariffs on Chinese goods coming into the country.
What is a tariff? A tariff is simply a tax placed on a good that is being imported. Here’s an example. Let’s say that we have a company making pencils in China and it costs the company $10 to make 1 pencil. They import the pencils in the U.S. and sell them for $15 a piece. Then we have another company, a local business in the U.S., that also makes pencils however, their cost is $15 per pencil. So, in order to make profit, they have to sell these pencils at a higher price, let’s say $18 a piece. They can’t compete with the $15 pencils coming from China, so eventually, the company essentially has three courses of action:
- Find a way to improve the cost per pencil through innovation.
- Close operations.
- Complain to the government.
In our example, if the U.S. government decides that China is unfairly killing U.S. businesses by undercutting the price of pencils to a non-competitive stature, it might place tariffs on the product. For instance, to continue our example, the U.S. places a $7 tariff per pencil on all pencils coming from China. This means that if the Chinese company keeps selling their pencils at $15, they won’t be able to cover their costs ($10 a piece) and will not make a profit at all. So naturally, they will have to increase the selling price, which will subsequently allow local businesses to compete more easily with the products being sold.
This of course is an over-simplified example, but it is essentially how tariffs work. In the ongoing U.S.-China trade war, both countries have already placed (and afterwards increased in some cases) the tariffs on a lot of goods being imported. The repercussions echo through both economies as businesses affected by the tariffs lose a lot of money and ultimately go bankrupt. How exactly does this happen?
To continue our example, the Chinese company, which now has to pay a flat $7 tax on each pencil sold in the U.S., can no longer afford to sell pencils at $15. So, they increase the price to, say, $20 a piece. They lose market share because of that since local businesses also sell at this price or even lower. Now the Chinese company sees a drop in revenue, workers begin being let go, the growth of the company stagnates, productivity vanishes, and we basically have a death spiral on our hands – something which companies find very hard to recover from.
What’s the real motivation behind the trade war?
The continual capitalism versus communism duel is an obvious driver of the conflict however, there are other reasons, far more specific than the battle of political ideologies. At the core is the 2025 Made in China plan, which has one very simple goal – make the country the greatest economic power the world has ever seen. That spot is still occupied by the U.S.
The 2025 plan includes several key points, some of which are quite disturbing. For instance, China requests companies that want to do business in their country by entering certain industries such as energy and telecommunication, to more or less reveal their trade secrets by forming ventures with local partners. Essentially, they want to copy innovations and make their own versions of them, something that is already happening on a very large scale.
The country also encourages investments in U.S. companies with the sole purpose of stealing the secrets that give these enterpises a technological edge. Patents in the U.S. only apply to U.S. companies, resulting in the largest intellectual property theft we have witnessed so far. All of your beloved brands that have defined the 21st century, most of them coming from the innovative environment that is the U.S., have their own “mirror” copies in China.
And with so much cheap labor, China can afford to sell essentially the same product at a much lower price, winning the economic race with sheer numbers, not so much with innovation.
What about the U.S. debt?
The U.S. currently owes China $1.13 trillion, with an interest rate of 3.4% per 10 years. So, seeing as the trade war is not slowing down and that the U.S. has more leverage over China, being in a trade deficit, can’t China just sell their debt and win the trade war overnight?
Technically they can however, if that happens, the 2008 economic crisis will look like a tea party compared to the chain reaction that will follow if China actually decides to do that. Pulling the debt is, in simple terms, similar to a nuclear war – neither country will win and it will only end up hurting the entire economic landscape.
How is the crypto market being affected?
Since cryptocurrencies are neither imported nor exported in any of the two conflicting countries due to their distributed nature, they are not directly affected by the trade war. Tariffs and intellectual property is where the battle rages at the moment. Neither of those directly influences cryptocurrency. However, there are many side effects of a large-scale trade war such as this.
The stock markets are losing value, reacting almost instantly to announcements of tariffs. Talks of a recession as a result of the downtrend are also stacking the deck in favor of fear. In the end, the fear that the economy is decaying and the uncertainty of the outcome of the U.S.-China trade war is what’s influencing the crypto market.
The burst of life we saw in June was quickly squashed by the Huawei drama and President Trump resuming trade war tensions by threatening to place tariffs on $325 billion worth of Chinese goods. The crypto market has quietly stabilized since then, but has lost all signs of explosive recovery, reverting back to its preceding dormant state. The governmental pressure on Libra certainly played a role as well, although not as significant as one might expect.
The psychological reaction of inexperienced asset holders to events they don’t fully understand is slowly dragging the crypto market back down. Sadly, this is a natural part of the economic cycle as people pull money out and stash them for the dark days allegedly on their way. And it seems that the crypto market is not immune to this process.
While there are some who view Bitcoin and other decentralized currencies as a safe haven to this economic deadlock, most are still crippled by doubt and concern, remembering the back-to-reality bear market of 2018.
Conclusively, it seems there are two things blocking the surge of cryptocurrencies at the moment – the uncertainty and economic crunch caused by the U.S.-China trade war and the backlash to Facebook’s Libra. Libra might have been integral to the interim switch from bear to bull market in the beginning of this year however, the regulatory pressure put on the project since its announcement has certainly brought down the hype back to conservative ranges.
Until these two situations are resolved, or until something else happens that overrides the current bleak economic outlook, I don’t think there is a good chance this year that we will see another full-scale bull run, or any bull run for that matter even remotely comparable to heydays of 2017. The good news is, one never really knows what will happen and 2020 is just around the corner, full of new possibilities.