In response to Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions Reader Craig writes …
“I was shocked by your commentary on 12. I thought for sure you would come out blasting U.S. trade restrictions as protectionist and leading to economic slowdown in the U.S. Instead, you basically said what Trump has been saying in every interview, and that is that China is playing us for fools and that we need to recapture our manufacturing from them. I thought you were a “free trader” to the max.”
Craig, I am indeed a free trade advocate and I certainly do not agree with Donald Trump and other protectionists such as Paul Krugman. I simply failed to point out every nuance in the article I disagree with. It is a mistake to assume I agree with “everything” in an article just because I agree with 90% of it. I made no specific comments on protectionism so there should not have been an implication of agreement.
I do not think the US gains by protectionism. Other countries will do the same and US exports will dive if imports dive as other countries retaliate. There is serious potential for another Smoot-Hawley with equally devastating consequences if Congress goes overboard.
Where I did comment and where I agree with Pettis’ contrarian thinking is that the brunt of the adjustment will be felt on trade surplus countries. Mathematically it has to, in any kind of rebalancing. Not every country can run a trade surplus. It is impossible.
Moreover, and as Pettis points out, the imposed austerity measures in Europe will impact Germany’s ability to export. The slowdown in China and the US will also impact Germany.
The question is whether or not adjustments come about in a reasonable manner or by trade wars and currency devaluations. No one wins in another Smoot-Hawley setup.
I have pointed out what I believe is the solution on many occasions. Rather than tariffs I have supported a return to the gold standard. I saw no need to bring it up yet again, but perhaps I should have.
Here are the pertinent links once again.
Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited
Michael Pettis Warns of “Virulent Political Turn Against Euro”, Adds Clarification to “Gold’s Honest Discipline”
To that I would add we desperately need to get rid of fractional reserve lending.
I also want to add a note that peak oil (some say “peak everything”) will impact China’s ability to have an investment led economy based forever expanding infrastructure. Add peak oil to the list of reasons China will slow, whether they like it or not.
Mike “Mish” Shedlock
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