Apr 042018
 


Mayfair Building, Times Square NYC 1951

 

 

Dr. D is on a roll.

 

 

Dr. D: Since tariffs are in the news again, let’s run down the topic , first in micro, then in macro.

 

“Trump said this week he’ll slap 25% tariffs on $50 billion to $60 billion in Chinese exports to the U.S., including aerospace, information and communication technology, and machinery. The move is aimed at countering Chinese cyber and intellectual property theft of U.S. technology . It also tries to push back against China’s demands for technology transfers from U.S. companies in return for access to China’s market.

The Chinese government, in turn, said it would hit U.S. shipments to China with $3 billion in tariffs, affecting goods such as pork, aluminum pipes, steel and wine.

“A family of four will end up paying about $500 more to buy (clothing, shoes, fashion accessories and travel goods) every year” if those products are subject to 25% tariffs, the American Apparel and Footwear Association says…

Retaliatory tariffs from China, meanwhile, could especially hurt American farmers.  China is the world’s top soybean importer, with the U.S. providing close to 60% of the commodity. And the country is the second-largest purchaser of U.S. pork. Growing talk about a trade war has worried Iowa farmers. The state is the nation’s largest corn and pork producer and second-largest soybean grower.”

Historical background, when Clinton added China to the WTO, it opened the borders and U.S. markets to Chinese goods, but likewise, China promised to treat the exports of the U.S. fairly, which are driven by movies, patents, and intellectual property rights. In theory, that’s how the deal would be equitable. However for 20 years they have not been paying billions in patents or media royalties back to the U.S.. Stealing everything, patents, intellectual rights, ignoring international law, building a mile high tariff wall, and polluting their whole nation to boot, just like we did back in the 19th century when we were a wee country.

Guess what that shows? Tariffs work. It worked for us then and it works for China now. Go to a store and look for any item that isn’t made in China. That has devastated industry, and is arguably dumping, i.e. selling at a loss to ruin your competition. How? China isn’t a “capitalist” country, really. It’s an amalgam of communism and protectionism meant to rapidly modernize China in the footsteps of Stalin or Mao’s “Great Leap Forward,” and it works. As such, factories are built of debt money printed by the Central State then protected from bankruptcy with more printing and bailing out hand-picked winners by the state — just like we do.

Just like Abe buying up the entire Nikkei or the Swiss Bank buying a trillion in foreign stocks. So in a roundabout way, China is creating all these products at a loss, but doesn’t care about profit because people are employed and their industry rockets into the 21st century. Since profit is not a motive and bankruptcy is not a possibility, the strategy to modernize and compete with the U.S. is enhanced not only by moving China forward, but also by moving the U.S. backward into the last century. So the very concept of WTO, “Free Trade”, “Fair Trade” does not and cannot exist with a centrally-planned, centrally-protected, non-free market economy – theirs and ours. Only national strategy remains.

When that’s the case, you see Trump merely advocating for consequences to China breaking the original treaty, the original parity of hard goods for intellectual property. And why shouldn’t breaking a treaty have consequences? The problem of course is what those consequences mean.

Since from the Chinese perspective, they have reduced U.S. wealth, production, capacity for production, and even the U.S. military to 3rd world levels, and the U.S. no longer has the bargaining power to reverse what was supposed to be a free-market trade, but was executed by China as a mercantile/protectionist trade. And good on them, well played!

Here in the States, we hear people say –still!—“well if they give us cheap goods at a loss, who are we not to take them?” Regardless of the jobs lost since that giant sucking sound started. Or worse, “Since rebuilding industry will cost money, any move to help ourselves should be avoided because it will raise prices.” Yes people, we already missed the 21st century, let’s move back from the 20th century into an 19th century African colony because fighting it would cost something and be inconvenient. Worked for Argentina, right?

 

Trump said in his Asian tour:

“I don’t blame China – after all, who can blame a country for taking advantage of another country for the benefit of its citizens… I give China great credit,” said Mr. Trump while addressing a room of business leaders. Instead, the US leader said previous US administrations were responsible for what he called “a very unfair and one-sided” trade relationship with China.”

China seemed to understand this and take it pretty well: in the last 30 years 500 million were lifted out of poverty, they got everything they wanted, and are arguably already the largest, most modern economy, but the ride is over. Asia loves gold-plated show-boaters like Trump and their equanimity was unreported by the press.

It’s no surprise; I’m sure they knew it would end someday. Probably never dreamed it would go on this long. However, the way the game is played, China will still negotiate all they can as the inevitable ends. And with retaliatory tariffs, they negotiate their best deal, and as quoted, Trump understands that too. Nothing personal.

 

Daily news covered, let’s go Macro.

In the bigger sense, a lot of this is window dressing. We hear a lot about how “the world can’t feed itself if such and such,” but it’s feeding itself now: clearly it’s perfectly possible: if anything we may have too much! Same with trade and tariffs. So China refuses to buy American soybeans, but buys Brazilian, great: stick it to those farmers (mega corps actually) in the voting states! Show ‘em!

But here’s the thing: there are X hectares of soybeans grown on planet earth, and Y people who eat them. If China buys “The Beans of Brazil”™, then whoever bought Brazil last year won’t get theirs and will buy American. Same with steel, same with oil. If China now buys Saudi oil or Russian oil, then that oil is simply removed from Europe, and Europe must buy Norwegian or Venezuelan oil. But it’s the same oil, from the same wells, going to the same people: that is, FROM planet earth, TO planet earth, BY the people of planet earth.

There are strategies and prices, advantages and minutia down there, but in the big picture, the effect becomes more subdued than may appear. So China places tariffs, even boycotts Iowa corn, then that corn is sold to Europe instead. What kind of political pressure are they really bringing, aside from making headlines?

The same is with Trump attempting to change the composition of U.S. industry. It’s a lot harder and takes a lot longer to rotate out of services and back into hard goods than it seems. What’s more, to start making your own chips or medical equipment requires a constellation of support industries: power lines, rails, screw machines, sheet metal stamping, servo motors, and behind them the dirty, heavy industries we erased: mining, steel and aluminum smelting, and so on. Yet this has to be done. We can’t run a country by asking China, “pretty please sell us some steel so we can make battleships to bomb you with.”

But like the soybeans, this shift of capacity doesn’t work in the macro view: if we’re not buying Chinese goods because we’re making our own, what is China going to do with all their factories? That capacity exists. It’s going somewhere or it will collapse, we BOTH have a lot to lose. A cutoff of most retail goods, their factories idled and people in the streets, Mutual Assured Destruction.

This goes back to 2005 and something Ben Bernanke said about the “Global Savings Glut.” That is, the problem wasn’t that the U.S. spent too much, but the real problem was the darn Chinese were too productive, too responsible, and spent too little. You might recognize this same argument from Germany and Greece. As much as this deserves raucous laughter, the larger macroeconomic imbalance is only this: the U.S. imports instead of producing, and China exports instead of consuming.

That’s how we come to a $700B yearly trade deficit, a deficit that is not ours alone, but China’s too. This goes back to righting the trade imbalance, the tariffs, in fact the overall inequality of the present (former) globalism: the U.S. prints fake digits and the Chinese send us real goods. If the imbalances are righted, there is only one path: China must spend more and the U.S. must spend less.

 

What will China do with their own factories if the U.S. reindustrializes and makes their own goods? They’ll buy those Chinese products themselves.

 

This is a long time coming, too. For decades, China has worked hard and developed their country, so why should they make cheap products and get nothing for their work? They deserve the products of their labor — arguably more than the Americans do. They need to spend more, and as we see with input costs rising back home, we need to spend less. So let them buy their “Make-happy ginsu mango-mango slicer.” No one deserves it more.

What do you think Chairman-for-life Xi thinks of this? Trump is going to make China stop saving and force their middle class to start spending, to start behaving like the modern nation they are. Xi and his predecessors have been unable to convince China to spend. But now Trump can blame his problems on China and Xi can blame his problems on Trump. So do you think Xi is angry? Or happy?

This had to happen. A nation cannot live at the expense of everyone else forever, amen. The only question is when and how it ends. So if China makes and buys Chinese products, and the U.S. makes and buys U.S. products, and we trade equally, where’s the harm?

It’s no fun to re-industrialize, to fall back to the level of real production your country is capable of minus extractive, extortive credit, but there are only two choices: the Neocon’s one world unipolar empire of murder and force, or nation states with borders and the independence and the internal capacity to produce for and defend themselves on all fronts, agricultural, manufacturing, intellectual, and military.

That’s what the “America First” plan was and in the Asian tour, China showed they understand this. So since nation states are going to persist for now, the best we can do is rebuild, re-normalize, and re-localize independently as best we can.

As the imbalances are reversed, it’s going to be a bumpy ride, but if we can do it, it will be worthwhile. At the very least, better than the alternative (They tried). We can – it is possible – recover our nation again, and with it, what it means to be “America”, and that may be worth the work.

 

 

Home Forums Trump Makes Xi Happy

This topic contains 8 replies, has 6 voices, and was last updated by  V. Arnold 8 months, 2 weeks ago.

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  • #39798

    Mayfair Building, Times Square NYC 1951     Dr. D is on a roll.     Dr. D: Since tariffs are in the news again, let’s run down the
    [See the full post at: Trump Makes Xi Happy]

    #39801

    vq12
    Participant

    The thought of rebuilding local economies sounds great. I think projects that people like Vinay Gupta speak about are inline with this concept. Vinay talks about how undeveloped nations can “skip” certain steps to advance due to 21st century technology- an example is skipping the construction of landlines straight to cell phones.

    My fear however is the monstrous growth of B2B. It seems that businesses have figured out, through financialization (alchemy) that they can just do business with themselves and each other and skip the consumer all together. After all building products for the consumer is annoying, you have to spend all the money and time developing something and marketing it, hoping that the consumer will like it over what your competitors create.

    “Globally, by 2020 the B2B ecommerce market will be twice as large as the B2C market — $6.7 trillion vs. $3.2 trillion — according to research provider Frost & Sullivan. The company predicts that China will emerge as the largest online B2B market with $2.1 trillion in sales by 2020.

    In the U.S., where B2B ecommerce is already twice as large as B2C ecommerce, Forrester Research expects B2B ecommerce sales to reach $780 billion and represent 9.3 percent of all B2B sales by the end of 2015. The firm predicts that B2B ecommerce will exceed $1.1 trillion and comprise 12 percent of all B2B sales in the United States by 2020.”

    B2B Ecommerce Growing; Becoming More Like B2C

    #39803

    V. Arnold
    Participant

    Dr. D
    Re-industrialization of the U.S.?
    Not going to happen.
    The infrastructure for that is gone.
    Detroit, Seattle, and the other major industrial centers of U.S. industry have all been offshored.
    Not everything, but the guts are gone; and that includes the workers, who had the skills to make it all work.
    Die makers, the core of molding, stamping, and casting have all been replaced by Chinese programers encoding the programs for all of those skills to be done on modern CNC machines with operators; not skilled machinists.
    I worked for 7 OEM’s, from the floor to the CAD/CAM programs, and 3-D modeling for allmost 40 years; manufacturing/re-industrialization is not going to happen in the U.S..
    That’s a Trumpian pipe dream to bullshit the ignorant electorate to believe in fantasies.that will never happen.
    The future for the U.S. is 3-D printing of things like rocket engines and other complex parts; some of which cannot be machined.
    But, it will never replace the past; it will not employ the masses once again; those days are finished for the U.S. and the west in general.
    The future is something entirely different; and that is yet to be…

    #39804

    zerosum
    Participant

    Guess what … I still don’t know why our social/economic system are not changing.
    There are thousands of critical bloggers and 10,000 of critical commentators.
    Almost all of the bloggers are in the 10% and/or are in the well-to-do educated middle class.
    Almost all stand to be the biggest loser if their la-la-land were to change.

    A million student marched to influence the law makers to change the gun laws.

    Guess what … the students outnumber the bloggers.

    I think I got it …..
    Those that have the power and the wealth needed to make changes are called the elites.
    The only change that the non-elite will achieve will be the change that the elites find good for themselves.
    We are invisible and irrelevant.

    #39806

    Chris M
    Participant

    Dr. D,

    Well said. Great article.

    Here are other things to consider:

    When properly used, tariffs are NOT trade measures at all, but monetary adjustment measures. They can, and should be used to equalize differences in the purchasing power of our domestic money (U.S. dollars) with respect to any particular foreign money.

    And:

    “Free trade” cannot take place unless 1) by barter, where substance is exchanged for substance without force or inducement. This is what most people have in mind when they hear “free trade”: no party was coerced or induced to make an exchange.; or 2) between parties using the same money.

    And:

    You cannot cheapen your way to prosperity, as you cannot borrow your way.

    #39807

    VA,

    What I get when combining Dr. D and you is that the US will have to rebuild, re-industralize itself, but won’t. Contradictio in terminus. I think D. makes amply clear that it requires a return to the 19th century, and yet you talk about 3D printing. Contradictio in terminus again.

    What I think, and I’ve said that a few times, is that this whole reset of trade terms was long overdue and everybody knew it, except perhaps for Obama’s team. As D. says, China’s known this for forever and was mostly surprised it took so long.

    Therefore I think the outcome, after many more very very bold headlines, is a rearranging that both sides already knew, if not agreed to, was due long ago. For the US, it’s the intellectual property, Beijing not paying for Silicon Valley’s so-called great inventions. For China, it’s recognition as a serious global power. They’ll give up power to be recognized as a power. Because that comes with perks.

    #39808

    zerosum
    Participant

    We are invisible and irrelevant.
    The street people already know that.
    The street people will be among the survivors.

    #39810

    graffiti
    Participant

    Well reasoned Dr D! In my view China is fiercely capitalistic. The people I have met have homes full of everything and a new car in the car park of their apartment. They’ve embraced ecommerce in an unbelievably advanced manner….you can order anything from fresh apples to an iPad and it will get delivered for next to nothing the next day by a network of Uber style couriers. Remember China is bigger than Australia in size…..here it would cost $50 for that level of service. They are already buyers of their own production.

    #39817

    V. Arnold
    Participant

    Ilargi
    I think D. makes amply clear that it requires a return to the 19th century, and yet you talk about 3D printing. Contradictio in terminus again.

    No, not contradictory; it’s a matter of scale. Dr. D speaks to a return to the 19th century to re-industrialize.
    That won’t happen, obviously, and I do not advocate that.
    3-D printing, at this time, is nowhere near the scale of re-industrializing, not even close.
    It’s a brand new form of production and does nothing for labor, or industrializing, at anything but very small scale; boutique manufacturing, at the present time, however; the furure is wide open for this technology, having zero to do with the past.
    Trump? He’ll do as is his wont; China will forge its own future irrespective of the U.S..
    One forgets; the U.S. is one country, on its way down, there are more than 190 countries on this planet; the majority are not friendly towards the U.S. except as necessary…

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