I have been warning about the increasing likelihood of a serious global trade war for quite some time.
That warning is now my baseline scenario. Unless there is an immediate deescalation of rhetoric and a return to rational thinking, a very destructive global trade war is baked in the cake.
I seek ways that a global trade war does not start, but I come up short.
China is upset because the EU and US Rejected China’s Market Economy Status over alleged steel dumping. In response, Beijing fired counterattack charges at the WTO.
China has launched a legal challenge against the EU and US over their reluctance to treat it as a “market economy” under World Trade Organisation rules.
Beijing is unhappy with a provision that allows trading partners to use a special formula and prices in third countries to calculate punitive tariffs for non-market economies in anti-dumping cases. It is pushing for the provision to expire with Sunday’s 15th anniversary of its WTO membership.
But the EU, US, Japan and other WTO members have resisted the move, prompting China on Monday to take the first step in launching a case with the global trade regulator.
In a statement, China’s commerce ministry said it had requested consultations with both the EU and US and would seek to have a WTO panel rule.
“China has communicated through many channels for the third-country comparison to expire. What’s very regrettable is that EU and US have not acted to allow it to expire. It has had a severe impact on Chinese exports,” it said. “China is protecting its lawful rights and acting appropriately to maintain the WTO rules.”
In the EU, fears of an onslaught of cheap Chinese goods prompted the European Commission to recommend a fundamental shift in how it conducts anti-dumping cases. Under EU rules, Brussels imposed a 21 per cent tariff on the same steel products that were hit with a 266 per cent US tariff in 2015.
In a sign of the commercial stakes, the US on Friday imposed punitive anti-dumping tariffs on Chinese-made washing machines, imports of which into the US were worth more than $1.1bn last year. It also announced the launch of an anti-dumping investigation into plywood imports from China, which were also worth more than $1bn last year.
Those US cases and the fight over Beijing’s market economy status point to the trade battles already being fought with China even as Donald Trump, the incoming president, promises to get tough with Beijing over trade and other issues.
“One of the most important relations we must improve . . . is our relationship with China,” Mr Trump said last week. “China is responsible for almost half of America’s trade deficit [and] they haven’t played by the rules.”
“They have acted like a non-market economy in so many respects with their state-owned companies, with subsidies, with dumping . . . there are more dumping cases brought against China than against all the other countries combined,” said Sandy Levin, the top Democrat on the House ways and means committee.
A US official said it would continue to fight any attempt to grant China market economy status at the WTO, pointing to “serious imbalances in China’s state-directed economy”.
“China has not made the reforms necessary to operate on market principles,” the official said. “The United States is prepared to defend its right at the WTO to protect American workers and firms from the damaging effects of persistent distortions in the Chinese economy.”
Boeing Faces China’s Wrath
Please consider Boeing Faces Prospect of China’s Political Wrath Thanks to Trump.
“China Inc.,” the combined group of airlines and lessors directed or controlled by the government, is Boeing’s largest customer, an analysis of the company’s’ backlog at Dec. 5 shows.
Boeing’s website lists “China” with 292 orders in backlog. Fifty of these appear to by Unidentified orders. LNC arrived at this figure by viewing the Chinese customers in Boeing’s identified list, which amounts to 242 orders. Some believe the number of Unidentifieds attributable to China may be higher.
The data shows just how much Boeing has at risk with the so-far unpredictable foreign trade policy espoused by President-Elect Donald J. Trump.
Will the EU Benefit from a Trump Trade Policies?
After reading the above snips, readers may conclude the EU will benefit from Trump actions.
Banish the thought. Instead consider Iran, Boeing reach agreement on big aircraft order; Trump casts cloud.
Iran and Boeing reached an agreement on the 80-airplane order that includes 50 737 MAX 8s, 15 777-300ERs and 15 777-9s.
The final contract still has unspecified contingencies before it can be booked as firm orders, Boeing said. One of those contingencies is clearly President-Elect Donald Trump, who criticized the larger Iran-US-allies deal of which the Boeing order is a part.
Airbus has 116 orders pending that could also be upended if Trump, upon taking office, vitiates the deal.
The US House of Representatives passed a bill to prevent any US-sourced financing for the Boeing purchases. The Senate hasn’t acted on the bill and President Obama vowed to veto it. The legislation doesn’t kill the Boeing deal, per se–just US-sourced financing, leaving open non-US financing.
But President-Elect Trump said he opposed the Iran nuclear deal, which involves the US and five allies. Trump vowed to cancel the agreement, which would kill the Boeing order. It probably would kill the Airbus order, because of the US content in the Airbus airplanes.
Trump to Blame?
When this blows up, and it will unless cooler heads prevail immediately, Trump will undoubtedly take the blame. But as I have pointed out, Trump is no different than Hillary or Bernie Sanders.
I you disagree, please take my Trade Quiz: Donald Trump, Bernie Sanders, Hillary Clinton – Who Said It?
Close analysis shows that Hillary, Bernie Sanders, Donald Trump and even president Obama all have the same trade policies. If you disagree, please explain 266 per cent US tariff on China that Obama placed in 2015.
Dangerous Game
Earlier today I noted China Tells Trump “Nothing to Discuss” If US Drops “One China” Policy.
At best, Trump is playing a dangerous game. No one ever wins trade wars.
The Smoot-Hawley Tariff Act at the start of the Great depression is the classic example.
Retaliation
Threats of retaliation by other countries began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to increase rates against American products, even though rates could be increased or decreased by the Senate or by the conference committee. By September 1929, Hoover’s administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.
In May 1930, Canada, the country’s most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada.[18] Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 1932. France and Britain protested and developed new trade partners. Germany developed a system of autarky.
In 1932, with the depression only having worsened for workers and farmers despite Smoot and Hawley’s promises of prosperity from a high tariff, the two lost their seats in the elections that year.
For or Against Free Trade?
The above discussion ought to settle the hash once and for all, but economic illiteracy prevails.
Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, was the economic adviser to Vice President Joseph R. Biden Jr. from 2009 to 2011, has this March 14, 2016 Op-Ed in the New York Times: The Era of Free Trade Might Be Over. That’s a Good Thing.
In Defense of Free Trade
Sam Seitz, presents a nice case for free trade in his article In Defense of Free Trade.
I want to address NAFTA because it’s the bogeyman of the Left and according to Trump “a bad deal.” NAFTA was actually a very successful free trade agreement. When it was implemented, the number of American jobs increased. Of course, some low-skilled labor was displaced, but because NAFTA increased the size of the overall economy, it actually increased the demand for labor and boosted employment in the U.S.
Finally, I want to talk about trade surpluses/deficits because they are a common argument used by opponents of free trade. A trade surplus is just the total value of exports minus the total value of imports. However, it doesn’t mean that much. For example, the United States maintained a trade surplus throughout the entire Great Depression, yet it clearly didn’t make life easier or the economy stronger. Conversely, the U.S. has a significant trade deficit now, yet it has the largest, most dynamic economy of any country on the planet. What matters is not the total amount of net-trade income, it’s the amount of goods and services American citizens can access. To quote Thomas Sowell, “If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a ‘deficit’ or a ‘surplus’ in the international balance of trade.” It’s also important to realize that even though Americans don’t produce as much as the Chinese, we invent pretty much everything that other countries produce. So, while iPhones are built in China, the profits flow back to an American company that pays taxes to the American government and employs American computer scientists and engineers. Instead of focusing only on where the end product is produced, it is crucial to also account for the non-tangible elements of production: the innovation, R&D, and investment. It is easy to pretend that the U.S. is weakened because of the trade deficit, <atarget=”_blank” href=”http://www.slate.com/articles/business/the_edgy_optimist/2014/03/u_s_china_trade_deficit_it_s_not_what_you_think_it_is.html”>but if one actually accurately accounts for the value of American innovation, it becomes clear that the U.S. possesses a trade surplus with China. Just don’t tell Trump or Sanders.
The Question of “Fair Trade”
The best case I have seen for free trade comes from Ana Eiras, Senior Policy Analyst on International Economics, Center for Trade and Economics (CTE).
Eiras explains Why America Needs to Support Free Trade.
Eiras provides five well thought out positions why free trade is good. More importantly she puts a knife in the ridiculous discussion about “fair trade”. Let’s pick up the discussion from that point.
The Question of “Fair Trade”
Politicians, opinion makers, journalists, and businessmen commonly talk about the need to support “fair trade.” Seldom, however, does anyone explain either what fair trade is or–even more to the point–to whom trade should be fair. In the name of fairness, different groups advocate different protections for their specific industries and call the comparative advantage of other countries “unfair.”
For example, U.S. manufacturers think it is unfair that labor in China is cheaper than labor in the United States, and therefore ask for tariffs against Chinese products. But those tariffs would, in reality, be unfair to millions of U.S. consumers and producers who would be forced to pay higher prices for locally manufactured goods. “Fairness” assumes a dubious character in policies that pick and choose whom to treat “fairly.”
Others argue that America needs to enact barriers to free trade in order to strengthen national defense. For example, a tariff to protect steel would be justified because we need our own steel to support the construction of tanks, missiles, and arms. This argument is built on the faulty assumption that America’s wealth is at least constant. But a constant level may imply that the U.S. is falling behind other nations in relative terms. The strongest national defense depends on a relatively strong economy, and a strong economy is possible only with economic freedom.
Once economic barriers begin to emerge, a nation’s wealth begins to decline. America’s relative economic freedom and wealth have already begun to decline. In fact, according to the Index, the United States has lost considerable ground in economic freedom (declining from 4th freest economy to 10th freest in 2004), which means it has also lost more and more opportunities to increase wealth.
The only form of fair trade–if such thing exists–is free trade. When facing competition from Chinese manufacturing, U.S. manufacturers have two options: either adopt new technologies to cut costs and become more competitive or shift the focus of their operations to different areas in which they can be more competitive. Neither of these two options harms consumers, since they will continue to have access to the least expensive, best-quality products.
Most workers benefit as well. For some people, free trade requires change, but they also now have opportunities to use their skills in more efficient, advantageous, and productive ways that are created by the innovation and prosperity that competition promotes. Likewise, for a strong national defense, America needs the resources, innovation, and income that are derived from the absence of barriers to trade and investment.
Consumers Key to Debate
Consumers are key to this debate. If it’s good for consumers, it’s good for the economy, and bu default it is good for trade.
I encourage everyone to read the rest of Eiras’ excellent article.
Fair Trade Fantasy
“Fair trade” is nothing but a misguided fantasy from producers who cannot compete in the real world.
It makes no economic sense for US citizens to pay double or triple for underwear, TVs, phones or anything else to “save American jobs”.
The amazing irony in this debate is no jobs will be saved anyway!
NAFTA did not cause a loss of manufacturing jobs, productivity and robots did. No matter what Trump or anyone else promises, those jobs are not coming back.
Sure, the US has misguided tax policy that encourages foreign production. But that is a separate issue. At least Trump is correct on that score. Lowering corporate taxes is the right thing to do.
Tariffs are precisely the wrong thing to do. I fear we are going to find that out again, while the parrots all chant “Fair Trade, Not Free Trade”.
Related Articles
- Reflections and Reader Comments on Free Trade: “China Doesn’t Play Fair!”
- Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All?
- Obama’s Trans-Pacific Partnership Fiasco vs. Mish’s Proposed Free Trade Alternative; How Will TPP Function in Practice?
- Stacked Deck: US Bullies WTO, TPP Revisited
- Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP
Trade is not between nations. Trade is between individuals who make constant decisions about what and when to buy.
Tariffs distort that relationship, and only the weak produces benefit. Everyone else loses.
Consumers benefits are what’s important in trade.
No one wins trade wars. As as side note, and I as often pointed out, the Fed, and its foolish policy of insisting on inflation in a deflationary world is largely to blame.
For discussion of that point, please see Decade of Negative Real Interest Rates: Who Benefited?
Mike “Mish” Shedlock
The problem is not the Trade War, everyone knew it would happen.
China in its’ infinite “wisdom” leveraged its’ growth and production have maximum amount of fallout in a scenario where marginal demand is removed.
Ergo if you are less leveraged than your competitor whom borrows in your currency you do not even have to reduce the price just temporarily impede market access. If they didn’t know this would happen well…
China still can’t make engines for airplanes due to quality control issues what they want is wholesale transfer of blade (for the engine) which they won’t get. Neither Russia nor the United States will give it to them. No amount of copying will make it come true due to chain supply issues and necessity to actual control the alloy process from the ground up.
Steel dumping will come to fruition and other aspects but all of it will not absolve Chinese firms from debt liquidation they are about to experience and the wholesale destruction of working capital… Working capital destruction is the aspect they tried to avoid by expanding production into various sectors but too much growth too much leverage and too much expectation that their competition by hook or crook will not be responded to in kind.
Our REAL problem is that we do not have a REAL economy. There is no small tiny piece of it that exists due to a free market. period. All the talk of solutions, of “free trade” or capitalism is NUTS, given we are trying to analyze a system deliberately designed to be unresolveable, complex and multilayered with government incentives and disincentives layered on top of each other making it impossible to ever get a clear picture. Would it be possible to run these deficits with a gold backed currency? Is the fact that we have an entirely uncollateralized debt fiat system funding our purchases the ONLY reason our trade imbalance can persist over time? Will individual profits blind us to the circumstances of the whole? That is what the Chamber of Commerce believes as they constantly brag of their corporate members great success while we watch more and more businesses fail and the deficit grow. Why IS IT that the facts we SEE and personally experience are invalid anecdotal crap and only the corporate/government statistics believable?
I have been listening to these people swearing to me that open borders do not take American’s jobs, that what I DO for a living is not good enough for Americans and SHOULD be delegated to immigrants sneaking through in the night, while I have WATCHED as Americans have lost their decent paying construction jobs and ended up jobless for years and ultimately ending up on welfare or some other low paying job. In Texas it is almost impossible to get construction work unless you speak Spanish.
96 million without jobs, not because they were priced out of the market, but simply because they were too good to work. 30 years and construction work barely pays more today, and NOT in real dollars.
People who so nonchalantly suggest that all of this is normal and good economics, simply have been insulated from its effects….BENEFITING from its effects in cheap prices and advanced technology. The financial consultant or economist has not had his job threatened by low wage illegals or cheap Chinese imports. BUT, his beloved technology might hit him where he ain’t looking. An algorithm may have his name on it.
When China ordered 787s from Boeing, they wanted the engineering plans for the plane and Boeing refused. The order was renegotiated into an order for “X” amount of 737s instead. This is still a developing situation, but it’s clear that the Chinese want more out of the deal than just the physical aircraft, they want the business. Airbus has run into the same treatment.
Newcomers from China, Russia want a piece of aviation market
http://www.sandiegouniontribune.com/sdut-china-russia-want-a-piece-of-own-booming-aviation-2016jul15-story.html
Yes China wants a great deal more. China’s fledgling aviation industry is ramping up and when it hits its stride we can expect cutthroat competition. China is investing big in this vision with its State media touting the “advanced technologies” that will be used.
This means we should not expect this industry to grow organically but it is logical it will be engineered by an aggressive government with a mission. Expect competition in this field to rapidly intensify.The post below delves into how rapidly China is moving and the implications.
http://brucewilds.blogspot.com/2016/09/chinas-aviation-industry-quickly.html
All China has to do is make it so that the USA factories in China shut their doors due to insane regulations, and the USA companies and the USA economy will crash for a few years. China may have a few more unemployed, but the USA will have goods shortages that will cause massive unemployment and shortages across the supply chains in ways nobody has yet considered. China has the upper hand, and Trump is a practical enough guy who will bend to that reality.
The steel union criticized Trump for not saving enough Carrier jobs, and the union head called him a liar, etc. So, do not expect Trump to do anything more for steel other than urge the union and employers to negotiate amongst themselves. Trump will cut the business taxes, if Congress goes along, and beyond that he cannot control the local permitting processes that deep-six and consign projects to limbo (expect perhaps in Indiana, where Pence has some sway). Trump will find ways to be friendly with Taiwan without ruffling too many Chinese feathers. China and the USA will get along, as it is in the best interests of the USA, and Trump is USA First. China will probably switch agricultural orders to Argentina and Brazil first, and Iowa governor/ambassador to China will be at the White House on behalf of USA soybean and grain farmers real quick in case Trump needs a reminder.
Free trade is the most obvious answer to promote growth however it tends to fail when more focussed nations do not open their economies, are not prepared to share production of goods or to minimise purchase foreign products (or just steal ideas). The Germans and the Chinese are guilty of single minded unequal mercantilist mindset (and the German problem is destroying Europe). Japan also but less now perhaps.
Thank God for China,,,, they were the ones that really invented Rap Music and Hip Hop.
I’m all for free trade.
But one staggering situation I noticed years ago is how little ‘free’ trade exists in other countries. I can sell my used electronic equipment in LatAm for at least twice the price I would get here. You could buy a ‘cheap’ TV in LatAm for $300, or get a quality TV here for $120 and ship it for $60. Have done this myself.
Europeans come to the US and bring an extra suitcase, because they can save a bundle by buying here when they can.
In Mexico, an identical toy can have double the price of the same toy here. And don’t even get into mentioning the tariffs that other countries add to foreign cars.
The US should insist that such tariffs or taxes or fees or whatever it is be removed by other countries if they want to sell to us.
Applies both ways SMF – why does USA restrict/control imports from Australia and fix subsidies on sugar etc
Nike hat – American price about $20.00.
Same hat in Caracas, Columbia is at least $150.00 American
New owner a Caracas 20 year old happy as hell cuz he got it for free.
Awesome. How to make the us a 3rd world shithole
Why is it illegal for private citizens to have prescriptions filled by Canadian pharmacists and shipped to addresses in the USA? Canada is not a hotbed of corruption and incompetence – they can fill bottles with pills just as well as US pharmacists.
Because it cuts into the insanely high profits of US pharma companies, silly.
Free trade is for the nobles, not the serfs.
Boeing, Airbus, et al. will be in serious trouble when China does figure out the metallurgy and manufacturing involved in producing jet engine components. They already manufacture a regional jet that uses GE powerplants (https://en.wikipedia.org/wiki/Comac_ARJ21).
We may be headed for an economy where robots do most of the fabrication. Better here in the U.S. than overseas.
to have trade war don’t u first have to have trade? hello,hopsing in Beijing sends us ship loads of cheap junk we send them garbage (literally)dept and soy beans lol,besides americans are china’s only real customer ie don’t piss off your only customer or he’ll take his credit card or gov’t paycheck somewhere else lol
China exports way more to other asian countris than the US. They also export roughly the same amt to Europe as the US.
http://www.tradingeconomics.com/china/exports
http://voxday.blogspot.com/search?q=trade
He has had several debates and I’m generally in agreement – there is no such thing as “free trade” and what we have (especially the managed trade) is destructive.
I think you and he should debate – it would be interesting.
I can make a case based on commodity money (gold, silver, etc.), but if you can run up infinite deficits, print the “money” you pay for imports or local wages for exports, or devalue your currency, it cannot by definition be “free trade”.
We have a 20 Trillion dollar federal debt and a larger private one. We aren’t paying for imports, we are putting them on the credit card. Since we have the reserve currency it makes it easy for China to export to us and use the dollars to invest in US Bonds. Right now China is working on imposing currency controls,
If we and China were both on a Gold standard, the gold would be flowing one way, which would eventually create a new equilibrium – one oz of gold would purchase so much more from the US that it would become cheaper to buy more from the US, and more expensive from China.
It’d not free trade we want. It’s FAIR trade. The arguments here are just as unworkable as Free trade arguments. Mr Seitz is correct in his assessment of trade surpluses. It’s exactly aligned with MMT which says imports are benefits and exports are costs.
Nafta ruined much of Mexico’s agricultural production. Subsidised corn imports undercut Mexico’s farmers, so that ended up fuelling a big migration across the border. was that a good thing. Not according to a lot of people.
Yup! as long as some Chinese guy is a slave banned from buying food and guns, I should be one too. Fair is fair, damnit!!!
US trade policy is not just about what is good for Boeing. Boeing faces competition from Airbus, Embriar (LatAm), and Bombadiere (Canada, I forget its new name). In addition, Russia makes all sorts of aircraft, including passenger planes.
If Boeing is allowed to dictate US trade policy, will Boeing pay every other company in the US enough to compensate us for lost revenue? Does Boeing (or GE) repay taxpayers for the endless loan subsidies they both get thru the taxpayer funded ExIm Bank?
Boeing hasn’t been involved in free trade in years, if ever. They rely on loan subsidies, special tax breaks, and military contracts. Boeing is a government sponsored entity, same as FNMA or a myriad of Chinese companies.
And when Boeing turns around and demands $4 billion for the new AirForce One (two planes at $2 billion apiece)? Come on. Talk about fleecing the taxpayers.
The flying palaces the middle east oil shieks fly around in “only” cost $500 million. Why should AF1 cost $2 billion? Its not like the plane doesn’t get fighter escorts thru closed airspace everywhere it goes. LAX airport runways are shut down so Bill Clinton can get his haircut. Lots of planes have satellite phones and TV and they don’t cost anywhere near what Boeing wants to fleece the taxpayers for.
Free trade is a good thing, as Mish points out. But Boeing is hardly an example of free trade. If China stops buying overpriced Boeing airplanes, Boeing will just keep fleecing the US military — which they are going to do anyway.
Government sponsored entities are bad news for free trade — and that applies to GSEs in the US (like Boeing) just as much as it does to Chinese GSEs. They are the same thing, and neither represents free trade.
More news today about Boeing:
Boeing will cut 777 production in Everett next summer
http://www.seattletimes.com/business/boeing-aerospace/boeing-will-cut-777-production-in-everett-next-summer/
Poor widdle Boeing. I feel sooooooo sorry for the company that so blatantly overcharges on government contracts that it has the stones to ask for $4 billion for one stinking airplane.
Screw China–there are so many Chinese nationals on H1B visas working as IT professionals for federal government contractors here in the DC are that they represent a potential fifth column should we ever get into a shooting war with them. I hope Trump grabs the bastards by the balls and squeezes until they scream.
This is what passes for lucid Republican theory these days. Proud guys?
I see your emotional response, devoid of any substance.
We should have picked the crook! Drink.
So, first off, please explain what a trade war IS. Importing $800 billion more than we export “seems” like a war we are losing.
Smoot Hawley was imposed when America had a substantial POSITIVE trade balance. Given that we have a Major trade deficit that only gets worse with each new “Free trade deal”.
If NAFTA was so good for America, why is our trade deficit so much worse?
If Free Trade is the determining factor of a healthy economy and THAT is what provides our defense, how free was the NAZI economy at the time they built their military and damned near conquer the world. How about North Korea who has nukes pointed at everyone….free and strong? Is China free trade? I DON’T THINK SO.
And explain how running massive trade deficits for decades is paid for. It’s a bit simplistic but if I spend considerably more in my business that I take in, I quickly go broke. Or are we planning on simply printing and borrowing for as long as it lasts?
Discussion of the US imposing tariffs on plywood is down right funny. That case was in court and adjudicated years ago and was supposed to be implemented a couple years back…then postponed…then cancelled and now I suppose back on. The industries crushed by China plywood dumping are either long gone or still waiting. My suppliers tell me it was suddenly reimposed a few weeks back and made retroactive on their existing stocks so they now have to add those costs to inventory they likely will have a hard time selling. Government never gets tired of screwing us…for our own good.
This is true of all countries. The best thing to do is to not do anything. Instead politicians will spin it as saving industry, saving jobs and saving the country and go ahead and impose tariff which is nothing but handing out favors to the industry in disguise.
When Real estate industry in India came and made representation to Dr.Raghuram Rajan (not many like him unfortunately), when he was RBI governor, to reduce interest rates citing that it was due to this that there were no buyers, he simply asked them to reduce prices and see if that improves sales. This is a man with intellect and integrity. Such men are rare indeed. Instead you have men like Bernanke, who eviscerated savers and portrayed it as the right thing to do for the economy, who are venerated. Sometimes you feel people are getting their just desserts for not meting out the right punishment to those who deserve it.
I think the moment tariff is imposed on a product consumers should boycott the end product made out of this. Group action is what will get what is good for a group, e.g. let all people who think this war is not worth fighting far just refuse to get drafted (like Ali), let all Voters who think no candidate is worth voting for sit out the election, let no consumer buy a car if a tariff is imposed on steel or iron ore etc. Basically consumer groups should simply refuse to participate and wait for the fun to begin. Not participating is possible except for essentials. I know this is pure fantasy.
Till the group gets to act in this manner, we will all talk as to what is good for us and politicians will implement what will get them votes (and place people in position like the Fed, Treasury etc., who will abet them in this crime) and use propaganda to portray it as being the right thing to do.
But consider alternatives. In 1900 we funded almost our entire federal government with protectionist tariffs while imposing virtually NO taxes on domestic producers or LABOR. All taxes were borne by foreign producers. All while we were one of the strongest economies in the world.
Today, we tax our producers the highest corporate tax rates in the world and then tax their distributed profits again. We tax their business property, personal and property as well as ALL LABOR.
Now explain to me HOW that is superior to protectionism.
OK mad, not that I disagree with you BUT, you have to take into account the fact that in 1900 the US government required less than one tenth as much funds as it does now, because it did less than one tenth as much stuff as it does now. Those were the days, my friend.
I am not saying that there are other areas especially taxation that needs attention too. In fact Mish has been saying Britain should reduce corporate tax to 15%. This+that+that+….
Sticking to the topic of trade barrier in the guise of helping you and me (pray how – by increased prices? never ask whether you as a consumer would benefit from lower prices – inconvenient truth), taking the case you have stated above what essentially would have happened is it would have helped domestic producers to keep the prices at the landed cost of the imported goods. Either it would have helped producers to be inefficient and get away with it or have helped efficient producers make great profits. Either way consumer pays. Basically tariffs will make consumer pay and government will do impose it with the propaganda that they are doing us a favor. What can consumers do – just boycott goods which have tariffs imposed anywhere along the upstream production. You can bet your last dime that tariffs will not happen. Why? take cars, you stop buying cars and let it be known is because of tariffs, cars guys will start clamoring for tariffs to be removed (they will gang up against the steel guys) and have to cut production if done long enough. Starts hurting steel producers (no sales does this). Starts hurting government (no taxes from cars or steel now). Government when it has to choose between itself and steel company will throw the steel company under the bus. Tariff removed. Now consumers get to buy the car at the right price (in all likelihood lower) and not the inflated price. Problem of tariff solved.
It is basically a different version of the age-old British practice of divide and rule. Increase tariff to the benefit of a few – industry players, those having jobs in that industry and screw the consumers who pay a higher price. Use propaganda to back up your action (through stooges for good measure – so called “intellectuals” like Larry Summers, Paul Krugman, Ken Rogoff and press like CNN, CNBC etc. — never ask equally competent and accomplished guys like Thomas Hoenig, who may tell a few inconvenient home truths) and the deed is done.
Free trade benefits consumers. Barriers help inefficiency and profiteering. Period.
Problem is one society that out-competes will buy out the original consumers. That is to say China/Saudi will buy out the US if allowed by cheap labour ( i.e. working their buts off) or resource bounty in Saudi case. Not to forget China is working at level of state capitalist hand in hand with US gov. and corp. to tie a nice elite knot and the dumb consumer is getting screwed by his own who are first in line of the flows, and his own stupidity ( which to an extent is forgiveable as you do not buy more expensive for the sake of it, and nationwide decision and weight is beyond the individual) . In principle you are right, but the current framework is f.ed up. Currency rates would usually balance the trade but with CB, big gov., corp., it is out of hand and runs straight into society and to political control. Not good.
I would gladly pay twice as much for some products made in USA rather than China, if the USA still made some of those products. My experience with Chinese goods is that 95% of them are CRAP and they are never cheap enough.
I will say the Chinese are smart to take advantage of stupid Americans who shop based on price alone. The Chinese products last one-tenth as long and they sell a lot more stuff that way! Which of course costs the consumer more in the long run.
CJ,
That is fine. You are exercising your choice as is the guy who buys the Chinese product. But by imposing tariffs you are eliminating the choice for the guy who wants to buy the Chinese product, quality be damned. What if there is a Chinese manufacturer who can produce the quality you want at half the price. You are paying more for the same product do you really want to?) and help the producers to be inefficient or profiteering – take your pick. Not Free Trade. Period.
“No one ever wins trade wars”
The United States is a trade deficit nation. As such a trade war would inevitably be a net win for the American people.
ridiculous
From the end of the War of 1812 until the Kennedy Round of tariff reductions in 1967 the United States was the most tariff protected country in the world. The tariff Boogie Man did not get up. From the Civil War until 1900 tariffs seldom went below 40 percent and went above 50 percent on occasions. None of the ill effects free trade shills try to scare us with actually happened. Instead employment went up, wages went up, prices went down, and we overtook free trade Great Britain as the most advanced industrial power in the world. In other words free trades scaremongers got it wrong.
In the real world the Ivory Tower theory of free trade is antithetical to the real world experience of the United States. In the real world tariffs have been good for the american people wit free trade making us poorer.
With respect to a trade war as a trade deficit nation forfeiting imports which are larger than exports leaves us better off. Our real world history confirms that we can do well without significant imports.
The Ivory Tower theory of free trade is like Hillary Clinton’s Big Blue Wall. It works only when it can intimidate but falls apart when challenged in the real world.
Shoppers only benefit from free trade if prices are allowed to become more affordable because of trade (CPI deflation). If bankers print inflation, only bankers gain from trade (it allows bankers to confiscate additional goods by printing). Joe average has been going backward despite trade, because bankers have been confiscating the additional goods that trade generated, and then some.
Voters demand protectionism because voters don’t benefit. They have to switch jobs just to feather the nests of bankers.
We need a gold standard, and some good CPI deflation. Then the average person will gain from free trade, and machines improving productivity.
Free trade is the ideal but there does need to be a flat playing field on the environmental costs and worker protection/rights etc else degeneration to the lowest common denominator occurs.
Years back I was involved vs China/Far East in manufacture. We had environmental costs associated with disposal of tainted water. Competitors elsewhere could just flush into the sea and rivers so saving them $ but killing fish and marine life. We lost on price.
When there are common standards for environmental control, worker safety etc then free trade benefits all. Without that people and the planet take the hit.
Free & Common Standard Trade.
Not a lot of standards as a barrier, just important ones.
Yup!
No matter what trade policy the US adopts the Chinese have an advantage. This is due to two factors. First their population size dwarfs their competitors. Second is their government control or intervention in certain industrial sectors. They have built new cities which are vacant. The funding came from Beijing based on the belief its better to have everbody working then being idle and plotting against the political elite.
The US has a comparative advantage in printing the global reserve currency.
The global reserve currency could change faster than US economy can adapt
“At least Trump is correct on that score. Lowering corporate taxes is the right thing to do.”
Fine but just remember that the revenue lost from corporate taxes is going to have to made up by someone/something else. Politician’s hate to see their revenue’s decline!
Is it 3 trillion is sitting over seas, untaxed?
Revenue doesn’t have to be made up if spending is cut. Spending is always the problem. Politicians are happy to spend your money, Joe.
There were more ballot propositions to raise the sales tax. locally.
Another one to create a new parcel tax. It will cost more to own a home and go to the store and buy things.
The teachers union thanked for the passage of prop 55, extending what was supposed to have been a temporary emergency tax for 12 years. In their radio ad they mentioned they were going to promote social justice, which is not a function of providing an education to children.
People have been calling for spending cuts since time immortal. As I said, politicians hate to see their revenue cut. Spending cuts are NOT going to happen in any meaningful form. You can huff and you can puff and you can rant on internet forums but it isn’t going to have any effect.
So that money is going to have to be made up somewhere. And it most likely is going to come out of the pockets of the regular taxpayers. Be careful what you wish for. It might come to pass.
New Approach to Corporate Tax Law Has House G.O.P. Support
By STEVE LOHR
DEC. 12, 2016
President-elect Donald J. Trump has vowed to protect and create American manufacturing jobs, even threatening high tariffs on imports to help achieve that goal. So far, though, his plan seems to lean heavily on one-at-a-time deals, like the one struck late last month to save jobs at the Carrier plant in Indianapolis.
But proponents of a more far-reaching approach say it could achieve many of Mr. Trump’s goals without tariff walls or presidential jawboning: a sweeping overhaul of the corporate tax system that embraces a concept endorsed by Republican leaders in the House, in their blueprint for tax reform, announced in late June.
“It would be the biggest change in business tax law ever in the United States,” said Martin A. Sullivan, chief economist of Tax Analysts, a nonprofit tax research organization and publisher. “It might actually work, and I don’t think it’s a partisan issue.”
A central idea is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed by Washington while exports would not. Tax experts call this a destination-based consumption tax.
This would be a sharp departure for the United States in a number of ways, but taxing imports but not exports is in step with nearly all of America’s trading partners, which have so-called value-added taxes. The import-and-export tax treatment is known as border adjustment.
…
http://www.nytimes.com/2016/12/12/business/economy/new-approach-to-corporate-tax-reform.html
Mish,
I read the articles you posted. I didn’t find any that presented any actual evidence of enhanced prosperity by free trade, just theory. Oversight?
They usually miss the point that you have to be content not just to benefit, but that you have to be at ease with the other party benefitting and by how much he does. No one is able to well calculate if it is better to do 2hrs work and not trade or 1hrs work but trade – sounds simple but there is a compromise involved that most miss.
“I want to address NAFTA because it’s the bogeyman of the Left and according to Trump “a bad deal.” NAFTA was actually a very successful free trade agreement. When it was implemented, the number of American jobs increased. Of course, some low-skilled labor was displaced, but because NAFTA increased the size of the overall economy, it actually increased the demand for labor and boosted employment in the U.S.”
…
What a load of crap.
NAFTA passed into law December 2003. Just when trade deficits began to soar.
http://www.tradingeconomics.com/united-states/balance-of-trade
…
Manufacturing jobs correlate with trade. Since NAFTA how have mfg jobs fared?
January 1994 … US had 17.623 million mfg jobs … out of 109+ million total jobs.
http://www.bls.gov/news.release/history/empsit_020494.txt
November 2016 … US had 12.260 million mfg jobs … out of 145+ million total jobs.
http://www.bls.gov/news.release/empsit.htm
The overall economy has grown courtesy of massive increase in debt … not trade growth.
Unplug your ears and take the blinders off!
Manufacturing jobs have been and are going to continue to disappear not because of any trade agreements but because of automation advances. Humans are not as good workers as machines, especially when it comes to repetitive tasks. Even China is replacing its workers with automation and robots.
“Manufacturing jobs have been and are going to continue to disappear not because of any trade agreements but because of automation advances.”
Sure … recently … and in future.
But the past 30 years they have been offshored to low wage countries…. or did you sleep through the THOUSANDS of corporate announcements stating such?
“NAFTA did not cause a loss of manufacturing jobs, productivity and robots did.”
This is completely untrue. You’ve said this before.
Are / Were the factories in Mexico and China full of robots with one or two people in 1994-2016?
Without NAFTA do you really think things would be exactly the same for the midwest?
Automation happens first in the first world because that’s where wages are highest and where automation has the biggest ROI. This is partially why $15 / hr minimum wage will drive kiosks automats / self-serve checkouts / drone delivery everywhere.
I agree with Mish on much, but trade – far and away – is my #1 disagreement.
There are traders, they make their living by arbitration, they like to trade everything possible.
There are manufacturers and workers , they like to trade their products BUT NOT their business or livelihood. Tempt them into buying into foreign business for free and they collectively do themselves in.
Neither are right or wrong, but lets have a clear idea of what we are doing, a detailed and transparent roadmap, and a proper open debate.
You don’t step off one stone without knowing the next is as strong.
You are talking of your whole nation, your future, it is no small matter.
I didn’t care for Mish’s earlier anti-union posts and then the pro-automation posts, however I don’t think he’s wrong about the trends regarding each of them.
The value that Mish brings to the table, at least for me, is that he seems to pick up on trends very quickly and much of his predictions are data-driven.
Ross Perot was Spot – On in 1992 presidential debate when he said ‘that giant sucking sound’ would be jobs leaving US if NAFTA passed.
I wonder how many of the commentators about the US/China trade relationship have actually spent time in China.
I have been all over China for my company and have seen first hand the number of US industries that have moved operations there. The advantage to producing products there are mostly due to a difference environmental and regulation costs. Lower wage advantages are being reduced at a 15/20% clip a year and are more than offset by lower overall productivity. US Companies have shifted the negative burden of environmental/regulation to the Chinese people. Overall quality and innovation is lower across the board for anything made in China. There is huge turnover at these US Subsidiaries due to factors like the workforce leaving Company A for Company B for a miniscule raise and to mass migrations that occur around the Chinese New Year. There are many other factors related to doing business with the bureaucracy in China that increasingly are reducing the advantage to producing there.
Jobs are ripe to return to the US not just because of Trumps future policies ….. the underlying economics of producing product there are changing and I would argue are a more important factor.
Chinese, Koreans and Japanese are also highly nationalistic and use group strategies to defeat individualistic Americans. Free movement of peoples must accompany free trade, but when most countries are nationalistic and cheat foreigners. Free trade means the whole world can come to the USA and put Americans out of work, or drive up their real estate costs, shutter their businesses, but Americans can’t do the same overseas. It’s like fighting a war where you say any nation can send their armies and air force into the USA to attack, but the USA refuses to attack any other nation. It’s crazy. There are two paths forward: Trump can force open East Asian markets, or the US will retaliate and make it harder to access the U.S. market.
Everyone loses from a trade war, but when your domestic economy can grow 3% and their domestic economy can only grow 1%, or falls into recession without trade, then in terms of zero-sum power politics, you win. A lot of people don’t keep score solely by economics and they will push Trump to fight a trade war. Also, people don’t keep score by “potential GDP.” As long as GDP growth is positive, people will respond positively even if there is a trade war.
I’m an electrical engineer.
“Lower wage advantages are being reduced at a 15/20% clip a year and are more than offset by lower overall productivity”
Percentages obfuscate the actual differences….you know, in almost every case they are used…
Here is a real comparison from 7 years ago (2009):
Chinese electronics assembly worker in Dongguan: $0.45 hourly wage. That’s the wage, but a dormitory, food, etc. are provided as well, on-site at the factory.
US electronics assembly line worker: $11.75 hourly wage.
20% of $0.45 is how much? 9 cents?
How many years of 20% wage growth would it take to reach parity?
Hint: It’s not environmental regulations, –that affects things like mining, refining oil, etc.
That us wage has to pay for all the SSDI “retirements” and benefits paid to half of the population that is out of work.
Why are they out of work? Because just 45 days on a container ship away is a land where the same work gets done for $0.45 / hour.
See how that closed loop works?
Mish,
I don’t think you’ve been listening for the last 18 months, what could be called “the rise of Trump”. The people who put him in office want a trade war, in fact, they have wanted a trade war for 30+ years, since the shuddering of the “smokestack economy”.
What the trade warriors don’t understand is that the war may not be as quick and glorious as they think it will be. A little bit like the Iraq war.
NAFTA did indeed cost the USA jobs. My problem with all of these agreements is the ISDS clause. This is not free trade at all but a separate route for corporations and business to arbitrate their perception of loss of profits in a country for almost anything. If our government wants to protect it citizens with a drug deemed unsafe a foreign country can arbitrate, a good example was the TPP and making the EU take down GMO labels. Most here did not see it but serious riots broke out all over the EU. Why? well their food chains start at the individual level of responsibility. Certain chemicals chlorine being one of them is not allowed to be used to clean food. Chlorine is used to clean certain proteins in the USA, especially chicken.
GMOs are labeled in all of Europe. The TPP would allow our food giants to arbitrate. Arbitration is conducted outside the sovereign country’s legal system. If the arbitrators rule in favor of the company/corporation we taxpayers are on the hook for it as there is no appeal under this system. Of course the arbitrators are employed by the same legal firms as the firms on retainer for our large corporations. What a crock of shit!
Personally I pay more for USA made goods when it s reasonable. That is determined by you the consumer. But honestly not a lot is manufactured in the USA. Head to your bathrooms not one item is manufactured here anymore. Look at your clothing and you will nothing manufactured here. Even a company that does make clothing here imports the textiles from other countries. Look at your American made vehicle and you will find only 70% at most is manufactured here. Hit your kitchen next and you will find your appliances are no long made in the USA.
Construction products I use are made in the USA and I do pay more for them. Fine hand tools I buy USA only. You do pay more but I have some hand planes that are older then my 40 year old son. Electric hand tools are no longer made in the USA. Milwaukee tool moved to Mexico. EU made tools like Bosch are made in Taiwan, some are still made in Europe, most are not and it shows in the quality.
I hope many come home and start manufacturing in the good ole USA again as the quality is second to none. My automotive tools are USA made as well and they last some over 40 years. I bought a Chinese made wrench set once when I first got divorce and they were honestly crap. You do get what you pay for.
I do miss the quality of our goods. I have a set of Bose 901 speakers made in the USA and they sound as good as the day I bought them back in 1972.
I am all for free trade but free trade is not the problem, the problem is we want cheap stuff. I prefer quality of USA or European made items and do pay for them. The problem is more and more items are long gone.
Even western goods seem to have lost quality, probably to try to compete with low quality cheap, so have found you end up with slightly more expensive than cheap but acceptable, or relatively expensive high end. Much less standard good quality reasonable price.
Just opinion as it is almost impossible to extrapolate prices/manufacturing ability from before and compare.
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“I have been warning about the increasing likelihood of a serious global trade war for quite some time.
That warning is now my baseline scenario.”
It goes with that “you are here” chart of the housing bubble. “You are here” in an economic depression.
“You are here” is why Trump won the election.
We have a trade war going on now except we don’t take part in it. We will with Trump. America Is a patsy. The trade war is called subsidies by many and import duties by others. I say let join the trade wars. We might find that our tariffs will cause others to rethink theirs.
Questions to think about. What would trade with China, or anyone else, look like if the gold window that Nixon temporarily closed in 1971 were open? Would trade imbalances still be settled only in US treasuries? What would happen to the exchange rate if China bought gold from Fort Knox instead of treasuries? What if there was no US Government budget deficit and no newly issued treasuries for China to buy?
Second question fails to understand trade math. But the first and third are excellent questions
Mish
Good questions with pretty simple answers. The first, is reinstating Bretton Woods, which would eliminate the trade deficit through eliminating the current account deficit. Gold is a commodity which would exchanged for goods. Thus a settled trade. Of course this could not go on for long for the same reason that Nixon closed the gold window, the US was running a massive trade deficit and was therefore exporting massive amounts of gold to settle the trade. The US was running out of gold. The solution is simple. Just export more goods to settle the trade instead. This would likely require imposing tariffs on imports to force the trade into balance, but the result is what is needed.
The US was running out of gold. The solution is simple. Just export more goods to settle the trade instead. This would likely require imposing tariffs on imports to force the trade into balance, but the result is what is needed.
Pure idiocy.
The solution is a gold standard, not tariffs
Boeing and Airbus are pretty much the only games in town if you want to buy an airliner. And it behooves both of them to stay that way. The biggest issue for Boeing, and Airbus, isn’t the sales to China per se, as China needs the planes and will buy from one or the other. Rather, the issue is China’s insistence on performing some of the work of building the planes in China. This leads to an outsourcing of high paying jobs, but more importantly leads to a transfer of high technology to China. This transfer of technology only increases the capabilities of the Chinese to build their own airliners and will lead to fewer plane sales by both Boeing and Airbus in the future. These kinds of deals are tantamount to Boeing and Airbus slitting their own throats.
Instead of caving into demands from China, Boeing and Airbus should agree to not compete with each other on terms of production. That no production should move to China from either of these suppliers. No technology will be transferred to China from either of these companies. Indeed, it makes more sense for the two to share technology between themselves as they own the market, and doing so will increase the likelihood that they will continue to do so.
It would behoove you to think.
Sure, it’s in the best interest of Boeing and Airbus to “keep it that way”.
It’s always in the best interest of monopolies to “keep it that way”
It’s always in the best interests of consumers to NOT keep it that way.
Mish
Trump got it right when he said that the US was already in a trade war with China, and we’re loosing. This appears to be the issue that most people don’t get or don’t want to admit. Millions of jobs and thousands of factories have been lost to so called trade with China. In addition, large numbers of technologies have been transferred to China in the process. Technologies that were developed at great cost here in the US but are just given away to Chinese companies the their government. China is then using these technologies to grow its own economy and businesses. So much technology has been transferred that they hardly need to use this rubric anymore. They already have most of it.
China isn’t dumb. They know what they’re doing and that this plan is working. Just look at the massive growth in the Chinese economy with the shining new cities and infrastructure. Take just as close of a look at US cities that are crumbling along with the infrastructure. These are the real world facts and they are caused by trade policy, not by lacking competitiveness or poor business decisions.
Trade is just what the name implies, an exchange of goods and services in one country for a different set of goods and services in another country. But, what we do today isn’t trade by this definition. Instead, we have multi-currency purchase and sale agreements where cash, or its electronic equivalent, is transferred to a country in exchange for goods and services. This leads to imbalances that we now see are detrimental to the economy if the go on for too long. Decades of trade imbalances have devastated the US economy. Not only that, its unsustainable. How long will China be willing to accept US currency for real goods and services (mainly goods though)? At some point the trade must come into balance, and that reversal will likely be just a devastating as the build up of the trade debt in the first place.
How long will China be willing to accept US currency for real goods and services (mainly goods though)?
That question displays trade ignorance
Stop promoting your blog at the end of very comment
I removed them
Yet another reason US citizens should not cry for government sponsored entities like Boeing…. while veterans can’t access VA hospitals, obamacare costs are obscene and userous for civilians, the Fed can’t shovel enough 0% free money at bank CEOs — Boeing is using the taxpayer funded Export Import bank to give cheap credit to Iran…
http://www.reuters.com/article/us-iran-boeing-deal-finance-idUSKBN14213W
Dear Mish, I enjoy reading your daily your blogs. Thank you forbringing a common sense view to the complexities of finance, trade, economicsand all these related issues that ultimately distill to money and jobs. I am not an economist nor financial guy. But afterover 50 years’ experience out there, I am a former long-term intelligenceofficer, worked in the defense industry, entrepreneur start-ups, lived inforeign countries for over ten years, traveled to over 40 countries, and taughtover a decade at the university level – I have developed a few thoughts – most matchthe points you push in your blogs – inflation is bad, economists do not understandthe scientific method, most data from the government is ‘spun’, the idea of theEU is stupid in its implementation. However I do take issue with you on “free trade”. Youseem to have a blind spot on free trade. I googled the definition of “freetrade’ and it is about as controversial as the definition of terrorism and manyother definitions. My question to you – Shouldyou not be using the term “free-for-all trade”? How do you account for dumping,subsidies, and the real world practices that nations will use to gain economicadvantages in trade and to push domestic political agendas? Keep up the good work Gary Bowser