Trump, China and the Tariff Conundrum

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.

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.

By Tom Luongo
Source: Strategic Culture

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