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.
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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?
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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.
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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.
Reprinted with permission from Gold Goats ‘n Guns.
