Mr. Tariff Ups the Ante on China

Donald Trump just jumped the shark calling himself, “Mr. Tariff.”  He believes a trade deficit is akin to stealing the wealth of a nation.  It isn’t.

Under normal conditions a trade deficit is simply a reflection of the difference in comparative advantage of one country’s workers over anothers.  And the value of the currency is supposed to rise and fall to offset that state of affairs over time.

Donald Trump has, in the words of David Stockman, “A 17th century view on global trade.”

It is one born of a complete misunderstanding of how and why trade imbalances occur, why they will re-balance if allowed and why, ultimately, they are irrelevant.

But, Trump can’t or won’t see it that way.  He refuses to accept that we are the creators of our persistent trade deficit with China.  That the trade deficit stems from running budget deficits and applying Keynesian counter-cyclical monetary policy or, worse, QE to protect domestic asset prices.

It also stems from our being the world’s reserve currency which places an insane demand on the Fed to keep the flow of dollars rising to liquefy global trade.

He complains that international tariffs regimes are unfair.  But, as Stockman has consistently pointed out tariff levels globally are nearly non-existent running at around 3% on average.  This is the period of freest trade we’ve seen in the era of the modern nation state, but Trump looks at these niggling things, these small things and can’t see the forest for them.

Mr. Inflexible

It speaks of ideological possession on the subject.  It speaks to inflexibility of mind.

“Germany taxes our cars too high, slap a tariff on them.”  He’s obsessed with German car exports.  Germans don’t buy GM’s because they are shitty cars, not because they are more expensive.

A level playing field won’t help a company handed over to the UAW, stiffing the bondholders, and run by morons.  The only reason GM still functions is because they make bad cars to sell to people who can’t afford a good car and ‘patriots’ who buy Silverados instead of F-150s.

“Canada won’t buy our milk,slap on tariffs and threaten NAFTA,” cries Mr. Tariff.  Not that NAFTA shouldn’t just be abolished completely, but whatever, Trump doesn’t believe in free trade, he believes in extortive trade because, ‘Merica First.

If China won’t import our oil but buys Iran’s instead, then they are our enemy then we sanction them and extort higher imports of it.

It’s all childish and immoral in a way that is, frankly, embarrassing to anyone with three working brain cells to rub together and make a spark.

But, the real undercurrent in all of this is Trump’s obsession with China ‘stealing our technology’ and leap-frogging the U.S. as a technology leader.

Which way on Huawei?

And that’s why Huawei’s CFO was arrested in Canada while Trump was negotiating with Chinese Premier Xi Jinping over the weekend over the company violating U.S. sanctions on Iran.

Leaving aside the pure insanity of Canada arresting a Chinese national for her company violating U.S. sanctions on Iran which China was not a party to, this is a dangerous escalation by the U.S. over what is, essentially, something that is ultimately not enforceable, U.S. technology licensing.

It’s simply bullying.  But, since Trump is a bully, what else is new?

But, the real issue here is that, in very short order, Huawei has become a global leader in 5G infrastructure technology which the U.S. is falling behind on.  And now with this arrest Trump is betting that he can scare everyone else into not buying their superior products through the ruinous application of sanctions policies.

The West has been systematically cutting Huawei out of the global 5G rollout because of ‘security’ concerns. More like profit concerns.  It is, simply, typical protectionism by Mr. Tariff himself.

And he’s made no bones about any of this.  Trump has stated quite emphatically that all a policy has to do is pass his ‘America First’ sniff test and it’ll get implemented.

And since he’s not a deep thinker, all he cares about are first-order effects and how he can sell it on his Twitter feed to his now brain-dead base who believes all of this ‘China hacked muh everything’ narrative we’re being inundated with all of a sudden.

Trump knows that now China’s tech industry isn’t just the manufacturing arm of U.S. multinationals.  We’re staring at equivalence in a lot of areas.  And the rate of catch up China is playing in this arena is threatening our long-term competitiveness.

Hence going after Huawei, a phenomenal success story, and ZTE.  While Apple focuses on tactical things like end-user products — phones, watches, and media services — Huawei started there, creating homegrown Chinese variants of the iPhone and built a company focused on the future of communications infrastructure, 5G, with the end-user product the face of the company to build Apple-like brand loyalty in China.

This is the public face of the future trade war.  Will Americans continue buying, say, iPhones and watches over their Chinese knock-off counterparts at half the price?

Flow not Stock, Don

So, I understand completely Trump’s problem with the current situation and the past that led to this state of affairs.  What I disagree with is the magic of tariffs to reverse the flow of capital out of the country.

He’s taken some steps in the right direction — tax cuts, tax amnesty for repatriating offshore corporate profits, lowering certain regulations — but that’s not nearly enough.  It can’t and won’t solve the real problem of the expense of doing business in the U.S.

His critics on the left are right that a lot of those tax breaks didn’t go to fund new sustainable growth and that a lot of it went to fuel buybacks and pay dividends.  But they miss the reason why, it isn’t because Trump wanted to repay his corporate overlords, it’s because idiotic leftist policy inertia and insane monetary policy has kept the cost of business expansion higher than protecting the corporate balance sheet or returning the money to shareholders.

His $1 trillion per year deficit, itself a source of the trade imbalance with China, will explode now that his growth story is dying, emerging markets are starved for dollars, supply chains are freezing up because of the U.S.’s increasingly erratic behavior and debt levels around the world choking out growth.

Trump wants a weaker dollar, and for a little while he may get it as the market misreads what’s happening here.  Any Fed dovishness will be seen as dollar negative versus being globally accommodative to worsening economic conditions amplifying debt servicing costs.

His classic mercantilist mindset will applaud this and it might abate the worsening trade deficit numbers for a time, but it won’t change the trend against him regardless of the Fed raising rates or not in 2019.

The world economy is deflating and Trump’s tariffs, arrests and sanctions only tell people that capital is not welcome in the U.S.  His only saving grace in 2019 is that the leadership in Europe is even dumber on these issues than he is.

The consumer is ultimately sovereign.  It’s their money and its their time.  If you are so arrogant as to believe you are indispensable to your customers you will find out very quickly what they think of that.  And customers of the U.S. dollar are rapidly coming to the conclusion that the cost of doing business in it is too high.

In the game of global capital you don’t have to be good, you just have to treat it slightly better than everyone else to see the inflows come your way.  Trump is alienating everyone and ensuring that companies like Huawei find ways to never do business with the U.S. ever again.

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47 thoughts on “Mr. Tariff Ups the Ante on China

  1. From a Canadian of long life here.
    Most Canadians, from what I just heard, are disgusted with Canada and Great Pretty Face falling flatassed backwards on this Huawai arrest. But there is a lot of talk about the hand of John Bolton.
    Trump, who I supported, does seem now to be led around hither thither.
    By the usual lobbies . Consider Trump’s sanctions on Iran!!!!!!!!!!!!! And the demands of the tiny Mideast land.
    Even a cantankerous bull, with a ring in its nose, often becomes most submissive.
    For Canada, getting desperate for new trade. This could be disaster.

  2. EXCELLENT notes as usual sir! Quick thoughts on mega complex issues.
    A consideration to keep in mind is he is not a old beltway politician. His background dealing with the union construction bosses, and banksters in the N.Y. and world environment has taught him some street smarts for dealing with thugs and strong men. Now trying to correct decades of screw ups against the country. Ross Perot on NAFTA, “that sucking sound is our jobs leaving”. Yup.

    You do not take a knife to a gun fight, and going into a negotiation for serious bucks, you must have some serious cards to lay out to negotiate with. Canada dairy tariff there was, I recall 28%. Having lived in Vancouver B.C. for several years, that is not a isolated tariff for everything USA to protect them from all the outside world. When I moved back south I went and got a U Haul to go back across the line, and they would not let me in the country with it.
    What can he negotiate with if not the Guns to the head of tariffs into the worlds number one consumerism economy?

    The Dollar issue is for sure a huge deal, and I surmise a POSSIBILITY that our bonds being bid up is perhaps an indication of the worlds flight to SOME quality. Japan, or EURO countries like UK for any semblance of safety and reliability???

    Further to Trump. If you have a swarm of large stinking rats, in your basement, breeding more large stinking rats to chew the foundations of your house up, you call the exterminator. When he arrives you care not what his truck looks like, how he smells, dresses, or speaks. Just kill the damn rats!

    • The problem for Trump on these issues is that in total, they all make up less than 1% of the U.S.s trade deficit. David Stockman went over all of this recently. And it’s simply silly to make such a big deal out of so little money when the big problem comes from the $1 trillion budget deficit and the Fed’s insane monetary policy.

      And I didn’t even get into the real effect of tariffs, which is to disadvantage domestic consumers while protecting already inefficient and unresponsive domestic producers.

      As always government is biased against consumers because producers ultimately pay them the lobby money.

  3. Further to… President of U.S. Steel is on FOX business, just now, on how the tariffs bailed out the company. One entity in the complex issue worthy of note.

    • U.S. Steel is exactly the company I was talking about in my other reply. They needed to go under decades ago, but we keep propping them up through periodic tariffs and they never improve… they just muddle along and then some republican jerk-off who needs to win Pennsylvania or Ohio shores up his base with a tariff… this game is as old as taxes.

      • to true sir.
        Question is WHY are our steel companies not competitive, and how did the Chinese and
        N. Koreans ramp up their production to take advantage?
        Our environmental regulations, and labor costs needed to pay any kind of living wage?

        Selectivity on the complex issues is really difficult. Soy bean farmers for example.

      • According to your theory any business in the USA that cannot compete with $2 per day labor costs in third world countries are inefficient and should have closed years ago. Not to mention the cost of the myriad of environmental, safety, and other regulations that US based companies have to deal with. I believe the unresponsive domestic producers are long gone and those that survive do so with mostly government support. The responsive domestic producers did the only thing they could do; move production to a third world country with $2 per day labor costs and far fewer regulations, taking the jobs with them. It is apparent that you are a Trump hater. I agree that tariffs are not a good long term solution, however I believe Trump is using tariffs as a negotiating tool to negotiate better trade deals and even the playing field. As I commented on another site, what is the benefit of flooding the US with cheap goods if Americans have no jobs and therefore no income to buy them? A country’s economic future is based on production, not consumption. Consumption compromises 70% of the GDP of the US. That is unsustainable over the long term.

      • Im not a Trump hater. I’ve given him massive benefits of the doubt but he has turned his back on his base and reality embracing a war posture which is now becoming dangerous

        Reality is he’s draining liquidity with his erratic and lawless behavior. Its a shame it’s worked out this way

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  9. I support the tariffs. The people who bet on China are just angry that their investments are going under. David Stockman was having a meltdown on Twitter last night as the Huawei news broke. I guess he doesn’t care that China is a predator nation engaged in IP theft, violating sanctions, and harassing Taiwan.

    Anyways, Gerald Celente and Jim Rickards are big supporters of Trump’s trade policies. We shouldn’t have allowed China into the WTO.

    • Stockman is right and you aren’t. All of these policies of Trumps you support are the opposite of what he should be doing.

      • Tom, you’ve got a great group of commenters on this site..Ozmios, Cosgrave and others.
        It seems that some of us go astray once in a while. I’m also giving eltrumpo a lot of leewy
        since I voted for him. He appears erratic but let’s keep hope that some of the sludge is
        oozing out of the Swamp.
        Great site, Signore Luongo.

      • Thank you Nels. Look I’m happy to get back on the Trump Train if Trump would get back on the Trump Train. And the problem now is that Trump is trapped and nothing seems to be working at all.

        Also, don’t be distracted by little wins. Little wins are what he will be allowed to have in order to placate his base and salvage his presidency. This is how the game is played. And we now stand on a knife edge with Russia that is truly dangerous for the first time in my lifetime (I’m 50) and that is unforgiveable.

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  18. With all due respect, I guess you’ve never done real business with China?

    IP theft is real and China is about as open as a double-locked door.

    Just ask Autodesk. The #1 CAD package in the world… can’t get any traction in China. And, oh yes, ADSK did win at the World Court against Chinese CAD company ZWCAD for stealing their code.

    Just one example of many…

    • Thats not what this arrest is about. And IP theft is the responsibility of the owner of the “IP” which I don’t really believe in anyway not the US government

      • Not when it’s government sanctioned… as it is in China.

        This is EXACTLY what this arrest is about… to send yet another signal to China that we’re not going to tolerate cheating on Trade any longer.

        If you don’t believe that — if you’re not *rooting* for that — well, then, again, you’ve never done any real business in China.

        Here’s something incredibly telling:

        This summer China tried to do an end-around and create some kind of “united partnership with Europe against the U.S.”, and despite hating Trump, Europe flat out turned down the Chinese overture.

        Turns out they hate China more than Trump, and for good reason since China has been sticking it to *everyone* for decades.

        You know things are bad when the, “enemy of my enemy is my friend” maxim can’t apply!

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  22. To me you are missing some major points even though the bulk of the post is accurate. You say ‘under normal trade conditions’ and then describe how currencies work under those conditions implying currencies are not manipulated. Well they are, particularly by China so a more useful post would be how Trump should react to a country that deliberate manipulates it currency for economic and political gain.

    Tariffs are simply a weapon Trump can use, they aren’t the answer to everything but they are successfully sending a very clear message. And yes, Americans should be happy to pay a little more for US made goods if it means retaining a viable manufacturing base. There is a world of difference between US producers and their current competitiveness and say Franco’s Spain when consumers had to buy Spanish junk as imports were taxed out of existence.

    Visit the UK sometime to see what losing your manufacturing base means to the people who worked in those industries. Look at the garbage jobs they have now ignoring those now paid by the bloated State out of money we don’t have but that’s OK as the debt is a problem for the next generation.

    • We are the worlds biggest currency manipulator. Or didn’t you read the post? So the useful thing would be for you to think through the consequences if US monetary policy as a weapon which it is

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  24. I think it’s a very interesting psychological study to see Trump Derangement Syndrome from some folks other than from the American political fake-binary (RepubliDemocrats).

    This indicates that this clinically observable psychological phenomenon isn’t so much one that’s tied to a specifically ideology, but rather to a epistemic malfunction. Fascinating.

    • I think you are over simplifying my position based on reading one article. I am the last person you should be accusing of TDS

  25. I give Trump credit here for finding a way to potentially blow up the dollar that fits within the existing entrenched trade/Fed policy line. I heard amazingly, the truth, from news reports, from France, Russia, elsewhere, that taking Mr. Tariff’s methods or just the policy attitude to extremes, along with blocking out Iran, a nearly century old favorite would mean a massive dollar exit. Painful for us, US, yes. It begs the question. It makes you think. It’s all Mr. Tariff can do. And all the better if he looks like a dunce doing it. Stockman on CNBC? Who’s winning? Mr. Tariff! What’s the punchline Tom? Tell me something I don’t already know. Come to the aid of Mr Dunce Tariff and give us the right plan. The one that’ll work. I’m tired if living like this. I think I’d rather blow it up and get it over with quickly before I’m dead. Sputnik brought me here. Answer your own question. How do we get out? And do it in a way that the illuminati can’t stop it.

  26. Hi Tom,

    Do you happen to read Moon Of Alabama’s blog? There’s an entry on the arrest of Huawei’s CFO. It goes over Huawei from it’s beginning to today. Seems like the U.S. is afraid of them spying on them, because they did it first! Also, it’s harder to hack their equipment because they’re not a U.S. based company. I found it interesting, for those reasons and that the U.S. has been lobbying other countries to not use their products. Thought it might interest you, for some reason.

    • I did read the MoA piece. b. has been doing great work lately and he’s right about our putting pressure on people not to use Chinese technology because that is the face of the real war Trump is waging.

        mOa is tops with me, next to Ron, Lew, Justin and The Mises Gang. My wife and I, I thinki I
        may have mentioned, have spent some time with the Pauls. He and I grew up dairy farming, he in Pittsburgh area and I was in Belfast back then.

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