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Trump, China and the Tariff Conundrum

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Written by Tom Luongo; Originally appeared on strategic-culture.org

There are so many reasons why sanctions are terrible. Chief among them is that they are immoral. Tariffs are just sanctions applied to a country’s own population.

Governments should not be restricting trade between sovereign individuals finding mutual advantage in trading goods and services. But that’s not the world we live in.

Governments which are angry at other governments use sanctions and tariffs as a blunt instrument to make up exchange rate differences between them brought on by ruinous policy of one which the other feels it needs to respond to.

Trump, China and the Tariff Conundrum

In the case of tariffs it is generally a response to currency debasement. Country A prints too much money. The demand for that money on a unit basis falls and that is reflected in the exchange rate.

That falling exchange rate lowers the relative cost to produce the goods in Country B demanded in Country A, whose people then respond to this new incentive by directing their trade away from domestic producers to those in Country B.

Tariffs on imports are supposed to level this playing field. But, they don’t. They simply distort trade further, sending the wrong signal to domestic producers that the government will protect their business from ‘predatory’ importers.

But remember it was Country A that couldn’t keep its hand out of the money jar in the first place. Tariffs are a band-aid and a political trick to buy votes from those that either don’t understand this basic relationship or don’t care, because, “those [insert evil foreigners here] stole our jobs.”

No, sorry, you gave your job away by giving the power over the value of your money to politician. Who then squandered it buying your vote and ignoring the basic laws of economics.

And that is the easiest thing for politicians of all stripes to demagogue on the campaign trail. Those on the right argue for tariffs to protect workers. Those on the Left demand a ‘living wage’ to compensate for the inevitable domestic inflation which will almost always exceed real wage growth.

Either way, purchasing power of the domestic currency falls over time.

Because all tariffs do is keep input costs artificially high if they are first-order goods like steel and consumer goods high because domestic producers don’t get the pricing signals to innovate and drive costs lower.

Consumers, not producers, drive the economy. They initiate economic activity or withhold their consent and therefore they are the marginal demand for money.

Tariffs raise the costs to consumers which means, at best, low real growth during the boom years of high money printing. And, at worst, it means an exacerbation of the slowdown when the boom ends.

Because the source of domestic inflation comes from the very money the government overspent relative to its tax base. Eventually, higher prices for basic necessities and payments on the new debt consume all the ‘juice’ from printing the money in the first place. Tariffs simply bring forward the day these things balance out.

Oh, and by the way, wealth inequality skyrockets.

When the price inflation starts to hit and the global bust occurs, it is usually a Republican president (Bush, Trump) that responds with tariffs on input goods like steel and softwoods making the problem worse.

Modern economists can wish it away all they want but more money chasing the same number of goods is the definition of inflation. Prices rising are a consequence of this. The government just directs who gets the money.

In the case of the post-2008 years the money went to the banks who speculated in the equity markets while offering mortgages and new car loans at insanely low interest rates, encouraging more consumer debt to be paid to…. the banks.

David Stockman’s latest book, Peak Trump, details just how awful the past 40+ years have been on the US taxpayer who has seen stock market and real estate prices rise by an order of magnitude over that of real wages. Previous to this monetary experiment we’ve been in since August 1971, real wage growth mirrored these things.

It’s important to review these basic concepts while trade talks go on between the Trump administration and China. China has benefited greatly from our unwillingness to stop printing money. They have run a classic mercantilist empire for the past 35 years. Trump is angry about that but he’s directing that anger at the wrong people.

China just took what we offered them. Trillions in cheap dollars, recycled into domestic economic jet fuel. Where the US is angry with China is that it won’t open up its capital account to allow Wall St. and the Fed to first invest in and then gut China after the juice runs out. China took that wealth created and is trying to hold onto as much of it as it can while becoming a new center of global finance as the US falters.

That is the basic problem here. This is not to say the Chinese are saints. There are nuggets of truth to Trump’s complaints about IP theft and the rest. But, it’s not like the US is a beneficent God-Emperor or anything, despite the views of some Italians.

But, those are secondary consequences to the structural problems the US brought on themselves through fiscal and political debauchery.

And Trump, like all politicians, refuses to accept blame for the problems created by their own actions. Yes, he inherited a mess but he’s not fixing it, he’s making it worse.

I said from the beginning that I was worried about Trump’s mercantilism. Those fears have been more than validated.

Trump should have cut spending alongside his tax cuts not increased it. He should be reversing the currency debasement dynamic not accelerating it. If he did these things he wouldn’t need sanctions and tariffs and everyone would be better served by this, especially Americans, who he professes to love so much.

But, since he’s a big project kinda guy that means needing low interest rates because that’s the only way they are profitable, we have the situation we have now. But, to do those big projects you first have to heal the balance sheets on Main Street while stopping the flow of unearned wealth to Wall St.

Because real wealth is built through thrift not low interest rates. And despite the best mathematical and rhetorical manipulations by the Mixed Monetary Theory guys, debt is NOT savings.

But, hey, it’s clear we live in Orwellian times.

That’s why there really is no solution to the problems between us and China. China knows that it can continue with things the way they are, recycle the $600 billion a year in trade surplus into projects to build out its own infrastructure needs and open new trade routes across central Asia.

It doesn’t matter that likely half of them are malinvestments, China has, and will continue to, let countless companies go bankrupt.

And no matter how much Trump complains about it, until we get our house in order there’s no sustainable incentive for anyone to change. Sanctions and tariffs at this point are simply redirecting business that could be for Americans and pushing it to other producers, like China’s partner-in-crime, Russia who just posted another record monthly trade surplus thanks to US sanctions keeping the ruble cheap despite the recovery in oil prices.

When you raise the cost of doing business past the point of profitability, the business goes elsewhere. And then competition will grind out the US’s profitability on exporting debt down to zero. At which point, it’s problems cannot be avoided via the printing press.

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  • marcusbond

    Although there is the tariff angle, which has put China under pressure. The USA also has a military angle at its disposal. It’s already threatened world trade with several regional military options, which could seriously upset Chinese exports, if it doesn’t get its own way. China has a potential domestic debt problem brewing at home. If their economy contracts, there would be enormous fall out. I think they are in a really difficult place.

    • Harry Smith

      1. Does the USA debt equals zero?
      2. What military option has USA and were it can apply it? Is that place Venezuela? Or maybe it will be a limited operation at the Spratly islands? What if USA fails?

    • Sinbad2

      I think you might find the shoe is on the other foot.
      The US owes China a lot of money, a lot more than the $1 trillion in treasuries.
      If the US stops China trading, what would happen to all the US companies that get their products made in China, and the Chinese investors that support the Us economy?
      The Chinese economy will contract, because western consumption is in decline. China has been trying to create new markets in central Asia Africa and Latin America in preparation for the western collapse.
      The western collapse has been inevitable since the US defaulted on the Bretton Woods agreement.
      No country wants to face the reality of the paper money system, so the can keeps getting kicked down the road. But you simply cannot defy the laws of nature forever.

      • marcusbond

        Yeah, I might be wrong. But at the moment China is giving way bit by bit to USA demands to open up.

        • You can call me Al
          • marcusbond

            Hardly… what?

          • You can call me Al

            It is basically stating that the Chinese government has acknowledged it and has /is taking measures about the debt……

          • marcusbond

            Well the USA seems to be getting its way….

            2nd Dec 2018 G20 Meeting Chinese release :

            “The two sides proposed a series of constructive plans on how to properly resolve existing differences and problems. China is willing to expand imports according to the needs of the
            domestic market and the people, including the purchase of marketable goods from the United States, and gradually ease the trade imbalance. The two sides agreed to open up the market to each other and gradually resolve the legitimate concerns of the US in the process of advancing a
            new round of reform and opening up in China.”

            14th Dec 2018:

            China’s Ministry of Finance announces that it will temporarily remove additional 25 percent tariffs on US autos and five percent tariffs on certain US auto parts for three months, beginning on January 1, 2019. During this period, US auto imports will be subject to China’s standard 15 percent tariff rate on foreign autos. The suspension of these tariffs will affect 144 auto products as well as 67 auto-parts and marks the first concrete concession since the 90-day trade war truce made at the G20 Buenos Aires Leaders’

            China also resumes its purchase of US-soybeans, with reports showing that a large purchase of 1.5 million tons of beans was made.

            9th Jan 2019:

            China pledges to purchase a “substantial amount of agricultural, energy, manufactured goods, and other products and services from the US”

            31st Jan 2019:

            US and China hold in-person talks in Washington D.C., with Liu He leading China’s trade delegation. During the negotiations, China offers to buy five million tons of US soybeans.

            Today:

            China and the US are thrashing out a way of dealing with US concerns about trade imbalances in certain sectors, and structural issues such as forced technology transfers, intellectual property protection, and non-tariff barriers.

          • Joe Kerr

            Internal structural issues are China’s business and are non-negotiable, as China has continually stated. The surprise is that the U.S. thinks it can force China to submit to such demands. Arrogance before the fall.

          • marcusbond

            The Bloomberg article is out of date. A few days later China formally announced they were cutting the tariffs on passenger auto’s and trucks etc to 15 percent from 1st Jan 2019.

        • Sinbad2

          Just crumbs, to lure the beast into the trap.

    • Joe Kerr

      The U.S. may have had a military angle 20 years ago when in bombed China’s embassy in Belgrade, but not anymore. Try it now and see what happens. Domestic debt isn’t as much of an issue as external debt is (particularly for China), which is why the U.S. need for others to buy its T-bonds is a noose around its neck… all China needs to do is push away the stool and watch the U.S. suffocate.

      • marcusbond

        There does not need to be any direct Military action by the USA against China. The USA is threatening such action in many other locations of the world that would indirectly affect China, and other countries. And the global fallout on say trade could be quite large. No one really wants to risk that. So the USA is slowly getting its own way. I don’t think they are getting more than what they can demand, just that the threat of a conflict that could affect the global economy is focusing minds.

  • Barba_Papa

    Economics is a very complicated beast, and anyone or anything who thinks they can present a simplified picture is probably deluding both himself and his readers. An article like this pleases the confirmation bias of SF readers, myself included, who love nothing more then to see a US collapse. The idea alone gives me a happy. But I fear the picture may be far more complicated then we like to believe. And no 2 economists fully agree on anything. It’s more complicated then climate change, if only because human beings are such irrational actors, and for every economist who predicts a US collapse there is probably one who doesn’t.

    • Harry Smith

      Historically, every empire has to fall. And if we look at the sings of precedent falls, we can freely find them in the today’s USA. I.E. at the Rome decline the most popular heroes for the teens were artists and not warriors like it was at the Rome apogee. At contemporaneous USA the teens heroes are Kim Kardashian, Nikki Ménage and other Bibbers. And there is a lot of such parallels.

      Just want to say, that economic issues are not the root, but just an arbor. The root is the decadent ruling elite. And as elite degrades, same process starts at other social groups of citizens.

      • Barba_Papa

        Then again Americans WORSHIP the ground that their soldiers walk on. Support the troops and stuff. And Rome had a pretty long decline. All the way from the 3rd century AD to the fall of Constantinople. With often a lot of upswing.

        Either way, better not to try to apply historical Roman analogy to the US, as they are utterly useless and often damaging. While they say that history repeats itself I daresay that those people aren’t real historians. While history appears to repeats itself, every case is still unique in itself and often has a lot of differences.

        • Harry Smith

          Well I said Rome, not Roman Empire or Byzantine. Let’s say western Roman Empire. And I agree with you that every case is unique. But the tendencies are quite similar, at my point of view. All stars with elites degrading. That was in Rome, that was in Constantinople, in Madrid or Paris. Even in Russia in 1917 and 1991. Last one case I witnessed with my own eyes from the inside of the process, that’s why for me is easy to detect the parallels. USA now similar to USSR somewhere in 1985-1987, when elites lost their sens of objective reality.

        • Sinbad2

          “Then again Americans WORSHIP the ground that their soldiers walk on. Support the troops and stuff”

          That is simply not true, America waves flags and gives the veterans pats on the back, but when it comes to paying for the medical care for wounded soldiers, the US just throws them on the garbage dump.

          • Barba_Papa

            There’s a difference between how the US public worships veterans and the utter indifference of the US government has for them. Remember, governments and the people living in a country are never the same.

            Hate governments, not the people they rule over!

          • Sinbad2

            Americans consistently vote for politicians who send their sons to war, and then ignores their pain when they return.
            130 million Americans voted for war last election, the rest couldn’t be bothered to get up off their fat asses.

            I will choose to blame the American people because it is their apathy and or blood lust that caused the American government.
            Saying it wasn’t me didn’t cut it for the people of Hiroshima, why should Americans be treated any differently?

    • Sinbad2

      “Economics is a very complicated beast”

      No it isn’t, yes the people of Wall street have created lots of complex structures to tax the global economy and obfuscate reality, but at its core it is extremely simple.

      If you produce more than you consume, you grow rich.
      If you consume more than you produce you grow poor.

      • Barba_Papa

        As a rule of thumb I never trust people who say they have simple solutions for complicated social problems. As I said, humans are not rational actors. Anything involving humans requires more psychologists who understand people then economists who only understand mathematical equations.

        • Sinbad2

          Since when has economics been a social construct?
          Try and understand that words have meanings.

          An economy is an area of the production, distribution, or
          trade, and consumption of goods and services by different agents.

          Social, relating to society or its organization

  • Joe Kerr

    Interesting is that today India advised its oil refiners and their agents to find alternative business arrangements that exclude the U.S. financial system, a blowback from Trump’s obsession with sanctions. The end of the rule of the petro-dollar is in sight, and the cliff that the debt-ridden U.S. economy will fall over is getting closer. Time is on China’s side, and both Xi and Trump know it.

  • Sinbad2

    The idea that the US can undo 50 years of work to move American manufacturing to China in the short time the US has left is just plain stupid.

    The US could save itself, but won’t, for exactly the same reason it cannot withdraw from Syria.
    To misquote Don Henley and Glenn Frey, America is a prisoner of its own device.

    • marcusbond

      The USA and it’s allies can just muck things up for everybody else. It’s got an enormous military advantage, and it’s waving this around as a threat – if it doesn’t get its needs met. Nobody dare call it’s bluff.

      Any US military conflict, particularly in strategic locations. could threaten global trade… that would hurt China and other states, but wouldn’t be too bad for the USA and it’s allies.