Trump's big gamble on tariffs

Crazy like a fox or just plain crazy?

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And so the Trump 2.0 version of “trade wars are good, and easy to win” is already underway. It is a lonely, virtually unique perspective, to say the least.

The primary problems with this approach, according to study after study:

• Trade wars trigger job losses for all involved.

• Tariffs raise the cost of imported materials essential for manufacturing, leading to higher production costs typically passed on to consumers in increased prices.

• American products thus become less competitive globally.

• Tariffs are basically sales taxes paid by American consumers rather than foreign exporters, and it is a supremely regressive tax burden, harming the poor and working classes most of all.

• Increased prices (inflation) reduce what households can spend, further reducing economic activity.

• Consumers face the reality of lowered variety and availability of goods, typically triggering higher prices due to reduced competition.

• Trade partners will retaliate, permanently damaging US exports, as happened with ag products during Trump 1.0. Mexico is already promising this. Our auto industry is poised to suffer greatly.

• Long term, industries protected by tariffs tend to stagnate in terms of innovation and competitiveness. That’s just human nature. There’s not much point to invest in protected industries because the returns tend to be lower than what you can obtain elsewhere. This limits America’s attractiveness as a target of foreign direct investment.

• Studies show that industries affected by previous Trump tariffs experienced long-term declines in market share and employment levels. As before, our ag sector will suffer and, within that sector, small farmers will suffer most.

• Tariffs shrink the national economy by increasing prices and reducing consumption. They are not a growth trigger.

• In aggregate, favored industries naturally lapse in their dynamism, leading to a less dynamic economy overall.

And that’s the good news.

Populism is essentially the search for scapegoats, and right now that villain is globalization/globalism/globalists — basically anyone who accepts the reality that the global economy is now more competitive than ever, meaning we need to up our game versus trying to re-negotiate our way back to a trade supremacy that can never be recaptured by merely curtailing access to our market. Back in 2000, the US accounted for 20% of global imports. Now, we more like 12%.

Trump is supremely confident in his negotiating skills, despite a long-term business record fundamentally defined by sequential bankruptcies.

Understand, America currently carries a massive sovereign debt that is — day-in and day-out — picked up by the outside world BECAUSE they believe in our economic future and our adherence to the global system that we CREATED and ENFORCED these past seven decades.

Now, as we threaten to, or actually, abandon that global rule set of our making, Trump’s all deals are off approach will trigger copycatting by our trade partners.

China could, for example, engage in a currency war with the US.

What is that?

A currency war is when you intentionally devalue your own currency to gain a trade advantage over a trade partner. That can go tit-for-tat very quickly, as both sides counter with devaluations that make their exports cheaper and the other guy’s exports (or our imports) more expensive.

Per the NYT:

Beijing has a powerful tool for responding to President-elect Donald J. Trump’s threatened new tariffs on Chinese goods: It could start a currency war, a step that poses formidable risks for China as well as the United States.

Letting China’s currency, the renminbi, lose value against the dollar would be a tried and true answer to tariffs. A cheaper renminbi would make Chinese exports less expensive for overseas buyers, mitigating the harm to China’s competitiveness from Mr. Trump’s tariffs. Beijing did just that in 2018 and 2019, when Mr. Trump imposed tariffs in his first term.

A cheaper renminbi could partially or entirely offset the effects of the extra 10 percent tariff on Chinese goods that Mr. Trump said on Monday he would order on his first day in office.

Understand: Xi is already doubling-down on export-driven growth because he’s been unable/unwilling to facilitate domestic consumption as an alternative growth strategy. Thus, he’s already going down the most logical retaliatory path:

A strategic devaluation of China’s currency, which is tightly controlled by the country’s central bank, could allow Beijing to supercharge its powerful export machine. China’s overall volume of exports to all destinations already surged nearly 12 percent in the first nine months of this year versus last year.

Chinese consumer confidence will suffer, but Xi has shown himself willing to take that risk, confident that the Party can control any popular backlash.

Can Trump claim the same? Unknown. He does not like to be unpopular, or scary to Wall Street.

Plus, that seemingly easy target (Chinese exports) has moved on, reflecting the demographic dividend presently in play across SE Asia and heading rapidly to S Asia (India):

Chinese companies have substantially strengthened their manufacturing capacity in other countries in recent years, building factories that assemble components from China into finished goods for sale in the United States and elsewhere. This has allowed some of them to bypass tariffs imposed by the United States during the first Trump administration.

In short, most of those horses have already left the barn.

Yes, we are China’s biggest export market, but check out this Reuters’ graph:

In effect, neither side is the huge, decisive market for the other. China exports 6/7ths of goods to countries other than the US, and the US imports something like 85% of its good from countries other than China.

Which gets us to the weirder part of this Trump gambit: threatening a mere 10% tariff on China but a 25% tariff on all Mexican and Canadian imports.

Does this totally violate the USMCA (US, Mexico, Canada agreement that replace NAFTA)?

Per the NYT:

Under the U.S.M.C.A., goods that meet certain requirements are supposed to be able to move around the continent without being subject to tariffs. A 25 percent tariff on all Mexican and Canadian products would be a clear violation of that agreement, and could call into question the future of the deal itself.

So, yeah, it does.

Trump is essentially threatening to tear up what he previously alleged was his fabulous fix of NAFTA (it was more just a logical updating to accommodate the rise in digital goods).

Trump says he is making these threats to get our two neighbors to do better on limiting illegal immigration into the US, along with stemming the flow of drugs. Of course, making such linkages essentially contravenes the whole concept of duty-free trade as a value unto itself. Instead of the USG making such efforts on its own, Trump is essentially out-sourcing that role to other governments while expecting US consumers to pay the resulting bill.

In effect, he is pushing another “wall” paid for my Mexico, and we know how well that worked.

These thorny issues are, as I like to note, signs of a North-South world emerging. So, what does America naturally do?

We threaten our neighbors to the north and south.

Classic populism: they are always to blame and thus they must make the necessary reforms and suffer the necessary sacrifices — not us with our broken immigration system and our endless hunger for illegal narcotics. Those are problems for Canada and Mexico to solve!