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Mid-Year Outlook 2018 | The Ubiquitous Chirp and Trade Tantrums

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Summary

The next in our series of Mid-Year Outlook articles look at the rise of the smartphone and the possibility of trade wars.

In The Ubiquitous Chirp we look at how smartphones have come to dominate our lives. In Trade Tantrums we consider how the current dispute between the US and China threatens the growth in free trade.

  • 01

    The Ubiquitous Chirp

    Few things divide the generations as much as technology. To the older generations, their handheld device is a ‘mobile phone’ or at a push a ‘smartphone’. To the young, many of whom will never have used a landline, it is simply ‘a phone’.

    Smartphones – defined as a mobile phone with internet access and a touchscreen – are the fastest selling consumer product ever, and their popularity has powered the most profitable maker of them – Apple – to become one of the most valuable companies in history. Around 60% of its sales are from iPhone, and it will sell more than 200m of them again in 2018.

    Given that well over 2bn people now have a smartphone, growth has begun to slow, with Citi estimating a mere 2% rise in volumes in 2018. Revenues will rise faster however as consumers trade up to new features such as facial recognition, wireless charging and better cameras and will inevitably pay more for the privilege. The latest iPhone X is the first to cost over £1,000.

    Can this continue? Almost certainly yes. Every survey you see asking people what they could not live without has their phone as the top response.

     

    “Smartphones are the fastest selling consumer product ever.”

    It’s not about the device itself of course, it’s about what it can do – it replaces your TV, camera, address book, diary, games console, music player, bank cards and lots more. But even more than this, there is increasing evidence that we literally may not be able to live without them.

    Your phone is constantly looking for your attention – it buzzes to say you have a text, beeps to say you’ve been tagged in a Facebook photo, and the red dots clutter your screen to say you really, really need to check your email.

    Scientific studies have noted we get dopamine hits when our amusing cat video gets ‘liked’ and dejected when it doesn’t. Psychologists talk of the Fear Of Missing Out (FOMO) – you are conditioned to look at your phone constantly in case you miss some vital piece of news, a lunch invitation, an important email. These gadgets are addictive by design.

    Indeed Apple are so concerned about the effects on individuals and society that they recently launched a Digital Health initiative to encourage users to spend less time on their phone.

    From the consumer’s point of view phones are a pretty good deal with the hardware costs not much more than £1 a day for even the most expensive phones – society’s other great addictions such as coffee and cigarettes cost far more.

    They are also changing society – music and video is increasingly streamed to a phone and the demand for data is soaring, indeed teenagers watch physical televisions for about half the time their parents do. Furthermore, we always keep our phones within reach and the convenience of shopping 24 hours a day is severely impacting bricks-and-mortar retailers.

  • 02

    Trade Tantrums

    Markets were unsettled in the spring after President Trump declared – via Twitter naturally – that he would impose tariffs on imports of Chinese metals and said ‘trade wars are good, and easy to win’.

    Do developments in the US-China relationship and within the G7 nations mean that globalisation is dead? Is the USA making the same mistakes it made in the 1930s when the infamous Smoot-Hawley Act introduced huge tariffs which caused global trade to collapse and worsen the Great Recession?

    Globalisation has become a dirty word – a catch-all insult encompassing everything from a dislike of capitalism to the pervasive nature of US culture (Hollywood films, Starbucks coffee and so on). It is also blamed for the hollowing out of manufacturing and wages in developed markets.

    It was originally about the free flow of trade and capital, and came out of the works of economists Adam Smith (from whom we take our name) and David Ricardo. They urged nations to specialise in what they are good at and engage in trade to increase global wealth.

    The US sees the issue through two lenses – the trade deficit with China (a $325bn deficit in goods) and the ‘Made in China 2025’ plan whereby Beijing wishes to become self-sufficient in technology and high end industrial production. On the latter they have been blocking Chinese purchases of US tech and telecom companies. And on the former, Trump has been very vocal on what is a very high and rising number and is targeting a specific reduction in the deficit using tariffs on Chinese imports to the US.

    In many ways, the US is right to have concerns. Since joining the World Trading Organisation in 2001, China has forced foreign companies to play by their rules in order to access the world’s largest market. As an example, foreign car makers have the choice of paying large tariffs to import into China, or to set up a local production company with a Chinese partner in which they would have a minority stake. Furthermore, strategically many in the US feel this is the last chance for them to slow China’s rise.

    It is important not to exaggerate the potential for an all-out trade war and draw comparisons to the 1930s. For now, there is no multilateral breakdown in the system of global trade. Europe is not in a trade war with China; China is not in a trade war with Canada; and Canada is not in a trade war with Japan.

    Furthermore, trade is now incredibly complex with huge quantities done as part of company supply chains. Just look at the iPhone as a prime example. On the back it says ‘Designed in California, Assembled in China’, but the iPhone contains parts from all around the world, including British chip design, German accelerometers, Korean screens, and Japanese memory. It is globalisation in a single hand held device. It wouldn’t exist – at least not at an affordable price – without globalisation and free trade.

    However the inexorable rise of China poses huge risks and opportunities to the balance of power that had existed since the Second World War, and the path to increasing trade and global wealth is becoming bumpier as a result of the current US administration.

Coming next week we look at how electricity demand patterns could change with the growth of electric vehicles and we remind ourselves of the attractions of the U.K. stock market in the face of political difficulties.

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Key Takeaways

The growth in free trade since World War 2 ended has helped unprecedented economic growth and lifted billions of people out of poverty. However the current dispute between the US and China threatens to end this process.

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