Trade Swords Sharpened, Belly Flop Reporting: Worst Response

Mish

China has threatened to retaliate on US tariffs. For now, Trump will hold off on the EU, but only if the EU cooperates.

The US, EU, and China are all sharpening trade swords. China's Retaliation List Includes Boeing and Soybeans.

For now, Trump has backing off on the EU. The EU gets a temporary reprieve on Steel.

Apparently Trump does not want simultaneous trade wars on two fronts.

Belly Flop Reporting

Meanwhile, Wall Street Journal writer Greg Ip takes a massive belly flop off the high dive with his analysis China Started the Trade War, Not Trump.

"Unlike with steel and aluminum tariffs, economists see merit in Trump’s trade case against China" writes IP.

“China is undermining or taking away some of our rents, so we are relatively worse off and they are better off,” says Dartmouth College economist Douglas Irwin, author of “Clashing over Commerce: A History of U.S. Trade Policy.”

Taking China to the WTO might be a less dangerous approach. But he [Irwin] adds: “No one is saying we shouldn’t do anything.”

Belly Flop

I expect better from Greg IP. He's normally a good writer. Today, it is unclear what IP's position even is.

This debate reminds me of a first-grader's ploy, "Susie started it", to which my mom would reply along the lines "If Susie jumped off a cliff would you follow?"

Did you catch the irony?

Irwin did not say the US was worse off. He said the US was "relatively worse off."

Apparently we are all better off from free trade, but China is "relatively" better off.

Mercy Me! How can we possibly stand that?

Fire the bazookas.

We Must Destroy Free Trade To Have Free Trade

IP's discussion reminds me of my post a couple days ago: We Must Destroy Free Trade To Have Free Trade.

Economist Daniel Lacalle inexplicably posted an article, Trump’s Tariffs are a Tool for Free Trade.

The concept is ludicrous, as explained.

But as I noted at the time, Lacalle did not write it. He took a guest post, without comment.

Worst Way to Combat Protectionism

Today, Lacalle pinged me an article that he wrote, that makes far more sense: Tariffs Are The Worst Way To Combat Protectionism.

Protectionism only protects the Government. It does not defend obsolete industries, does not create jobs and certainly does not support growth. It only protects the government that imposes it, because the governments present themselves as saviors of the effects of something that they have no power to change.

Year after year, countries met at the G-20 to discuss the problem of steel and aluminum. Overcapacity continued to build and be subsidized. Everyone put on a smile, signed an agreement on paper pledging to “be transparent” and sold everything they could to the United States, sinking prices by selling below real costs, in cases at prices that were between 50% and 106% lower than fair price.

That is the main problem. We have accepted globally that countries flood the market at prices below cost in the hope that “someday they will change” and with the excuse that they are the engine of growth in the world. But overcapacity remains, jobs do not improve and real salaries do not improve. And protectionist measures remain.

Today, overcapacity in China is over 60% in some industries – we have also seen the case of solar panels – and the country continues to increase debt to the point that state companies are the least profitable and the most indebted. According to Gavekal, Chinese state-owned companies have an average return on assets of 3% and a debt of 160% of their capital. A time bomb. We just have to wait. Because it explodes, it always explodes.

But resorting to tariffs is not a solution. It is negative for consumers and the economy.

China will not suffer from these measures. They simply give them an excuse to justify its interventionism. The most disadvantaged will be consumers and poor countries, which suffer the double effect of lower trade and barriers to grow.

Almost Correct

Those paragraphs are "almost" correct and overall a well-needed breath of fresh air.

Did you catch the mistake?

Take these two ideas and compare them.

  1. We have accepted globally that countries flood the market at prices below cost in the hope that “someday they will change” and with the excuse that they are the engine of growth in the world. That is the main problem. [sentence order switched for readability]
  2. Resorting to tariffs is not a solution. It is negative for consumers and the economy.

If tariffs are negative for the consumers and the economy, it stands to reason that foreign subsidies are in fact good for the US economy and long-term bad for them.

Mathematically, A=B, does not imply If Not A Then Not B. However, the slightest bit of common sense does suggest it is better to pay less and receive more than the other way around.

Perhaps there is some debate if national security is genuinely in play, but in this case, it is a farce for Trump to play the national security card as he did.

US Getting Bad Deals?

The notion is ridiculous. If US corporations believe they are getting a bad deal from China, they would not make deals with China!

Essence of the Matter

Looking for a perfect score?

Donald Boudreaux, professor of economics at George Mason University provide one.

Boudreaux wrote this Letter to the Editor of the Wall Street Journal just today.

Editor:

The title of your report today on the looming escalation of trade restraints imposed by Washington and Beijing is accurate: “U.S., China Sharpen Trade Swords.” But your description of these restraints - as U.S. “tariffs on steel and aluminum” and Chinese “duties … on soybeans, sorghum and hogs” - misses the essence of the matter. Tariffs and duties are not paid by the likes of steel or hogs; they’re paid by people. Furthermore, the people who pay these taxes in each country include that country’s own citizens, for these are the people whose actions these taxes are first and foremost meant to punish. U.S. tariffs penalize Americans who buy American imports; Chinese tariffs penalize Chinese citizens who buy Chinese imports. And the higher the tariffs, the harsher the penalties suffered by fellow citizens - people whose only offense is to stretch their budgets as far as possible.

So yes, Uncle Sam and Beijing are ‘sharpening’ their trade swords. These weapons, however, when swung, will be swung by each government against its own people. So-called “trade wars” are wars in which, to persuade foreign governments to stop attacking their own citizens, each government attacks its own citizens.

Sincerely,

Donald J. Boudreaux

Perfect Framework

Tariffs sharpen the axe against a country's own citizens. That is the perfect framework for understanding free trade.

Why do governments sponsor tariffs?

Governments like to buy votes. So they do. Politicians get loads of money from powerful corporations at the expense of the average consumer who is easy to manipulate with propaganda.

I discussed vote-buying and tariffs just yesterday in a radio interview with Lance Roberts.

You can play the radio interview here.

Fun Interview with Lance Roberts on Serious Topics: Trade, Inflation.

Words of Thanks

I appreciated being on the Lance Roberts show yesterday. I also appreciate Daniel Lacalle reaching out after I mocked a guest post on his forum.

Lacalle is one of few people it's easy to have exchanges with, even when you disagree.

I have exchanged emails with Lacalle on many occasions and he does not hold things against you, if you disagree with him.

I follow him on Twitter at @dlacalle_IA and Lance Roberts at @LanceRoberts.

Escape Now!

Lacalle has a book out called Escape from the Central Bank Trap, a title that certainly makes sense to me. I will review the book shortly.

Mike "Mish" Shedlock

Comments (42)
No. 1-42
Greggg
Greggg

The unaltered and now official CLOUD Act effectively gets rid of the need for search warrants and probable cause for grabbing a US citizen's data stored online.

US police only need to point the finger at some account, and tech companies must abide and provide all the needed details, regardless if the data is stored in the US or overseas.

Further, the bill recognizes foreign law enforcement and allows the US President to sign data-sharing agreements with other countries without congressional oversight. The CLOUD Act will then allow foreign law enforcement to require data on their own citizens stored in the US, also without obtaining a warrant or proving probable cause.

Rayner-Hilles
Rayner-Hilles

@Mish Intellectual property is the most ethically ambiguous form of property there is, save the ownership of human beings: but that's no longer widely acknowledged as legal.

Sanctioning China for not playing along with the US WTO consensus on intellectual property is like sanctioning your serfs for not paying you enough rent for working on your lands. It's just not something you do unless there's a good chance of it producing more money from your serfs.

Does the White House seriously expect China to start paying the US for intellectual property now a few tariffs are in place, or is this a legal excuse to close the trade deficit, or is this just some kind tantrum over some shallow ill-thought out perception of "money that's rightfully ours"?

You see this in hollywood movies where mafia dons get themselves killed for aggressively chasing down money they felt was rightfully theirs, without first rationally considering the risks involved and their own long term self-interest.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

The whole thing is ridiculous. If US corporations believe they are getting a bad deal from China, they would not make deals with China! I am adding that to the aricle

truthseeker
truthseeker

I haven’t read Ip’s article. However I think if I wanted to support him I might say that he meant what passes for free trade trade, must be destroyed for free trade to exist. Someplace in Florida I read many years ago they had this huge wildlife reserve that became so crowded the animals turned on one another, so they had to let hunters in to thin the heard~Mish my wife is fussing at me so I once again was going to talk about solutions not just criticisms having to do with our trade deficit with China.

whirlaway
whirlaway

"Tariffs sharpen the axe against a country's own citizens. "

Outsourcing and one-sided trade deals have already wielded the ax on America's citizens. You said what happened there was great for every American. You have no credibility left with any of those Americans for them to believe what you say.

whirlaway
whirlaway

So what is good for Walmart is good for the country?? Not many people believe in that crap now. But they did 20 or 30 years ago. You are living in the past.

pi314
pi314

Pharmaceutical companies make 'deals' with foreign countries all the time. They may not really have a choice. If India threatens to ignore your drug IP, are you not going to accept whatever payment they offer or receive nothing at all? Chinese uses similar tactics to steal IPs from American companies. They don't really have a choice. Or Google and Facebook will have a big presence in China.

Rayner-Hilles
Rayner-Hilles

@whirlaway Your entire argument completely falls to pieces in making this simplest of empirical observations: The average American has access to a more lucrative job market than the Chinese and every other Walmart-exporting country in Asia and South America.

Ask yourself, "why do I have access to better paying jobs as a citizen of the United States?"

Rayner-Hilles
Rayner-Hilles

@pi314 If you're a prostitute and a prospective client threatens to masturbate instead of pay you a reduced wage, are you forced to F#ck him?

The whole problem goes away if you just pretend China doesn't exist. It's not as if China exports stolen IP.

Unless you mean patents of course, but meeehh, they're not without some positive arguments but... as a historian and a libertarian, I feel compelled to argue against patents in the first place. They're only made possible by outrageous international government intervention and bureaucracy, and historically inventors got on just fine without a patents system; many would argue even better.

Rayner-Hilles
Rayner-Hilles

This is David Graeber on contemporary corporate-lead R&D practices:

"Most people who work in corporations or academia have witnessed something like the following: A number of engineers are sitting together in a room, bouncing ideas off each other. Out of the discussion emerges a new concept that seems promising. Then some laptop-wielding person in the corner, having performed a quick Google search, announces that this “new” idea is, in fact, an old one; it—or at least vaguely similar—has already been tried. Either it failed, or it succeeded:

->If it failed, then no manager who wants to keep his or her job will approve spending money trying to revive it.

->If it succeeded, then it’s patented and entry to the market is presumed to be unattainable, since the first people who thought of it will have “first-mover advantage” and will have created “barriers to entry.”

The number of seemingly promising ideas that have been crushed in this way must number in the millions."

"Common sense dictates that if you want to maximize scientific creativity, you find some bright people, give them the resources they need to pursue whatever idea comes into their heads, and then leave them alone for a while. Most will probably turn up nothing, but one or two may well discover something completely unexpected.

If you want to minimize the possibility of unexpected breakthroughs, tell those same people they will receive no resources at all unless they spend the bulk of their time competing against each other to convince you they already know what they are going to discover.

That’s pretty much the system we have now."

Sergei
Sergei

Haven't you, Mish advocated to vote for El Trumpo if "you want a change"?

Rayner-Hilles
Rayner-Hilles

@AWC Gosh that is something! And does China have a social safety net for the unemployed?

Rayner-Hilles
Rayner-Hilles

@AWC My goodness! Why is it that the US can afford to impose a social safety net but China's not quite able to?

Rayner-Hilles
Rayner-Hilles

It really is as if the Lord of the manor once fired all of his servants because he felt they were robbing him blind by the petty wages he was paying them. Tariffing China is tariffing the hidden US servant class.

Rayner-Hilles
Rayner-Hilles

Apparently Trump believes the US should make the steel and China should make the planes. Sure does look like it's going that way now.

JavaMe
JavaMe

"We Must Destroy Free Trade To Have Free Trade"... Well that's the point isn't it. We don't actually have free trade anymore. Not since crony oligarchs took over most industries in this county. It works like this.......Big business expands forcing local "ma & pa" businesses to close their doors and fire workers. Initially, they might re-hire some of the local workforce. But then they get even more greedy, move capital overseas to take advantage of cheap labor for manufacturing (China price) or services (India price). And it gets worse. Big Oligarch business protects its market share by purchasing votes in the Congress. Congress passes laws enforced by "regulators" effectively purging their industry of competition. Now comes the consumer squeeze...... Devoid of competition, the Oligarch cuts product quality to the point of being marginally defective. People still buy it because they have no alternative. Just experienced this trying to replace my bathroom overflow drain cap. You just can't find a decent chrome or aluminum product anymore, even online. Just this cheap made-in-china plastic crap with spray on metal finish. Lasts a couple years then have to replace again. I'm really sick of having to buy this garbage. I'd be happy paying 20% more for a good product.

Rayner-Hilles
Rayner-Hilles

And indeed those who would have benefited would include themselves and their children. It's really quite sad how many people out there have absolutely no faith in their ability to find another job of equal to better status in the labour market should they lose their current one.

Maybe it's cultural, maybe it's just that some percentage of people will always be of a faithless anxious temperament, maybe it's because there's some truth in it. One of the problems of over credentialing all US industries is that it collectively locks people into their professions. But that again is another instance of government intervention and bureaucracy creating problems in the name of supposed benefits that we historically got on just as well without.

Rayner-Hilles
Rayner-Hilles

@JavaMe Surely you are not justifying government protectionist behaviour in the name of catastrophically bad governance of its internal free market principles?

Should North Koreans legitimize their nation's development of a nuclear bomb because they understand that their government is so oppressive that the US and the UN have good reason to invade and dissolve it?

Why doesn't congress and Trump set to work fixing the damn country instead of protecting it from just competition that calls the US out on its BS?

SweetKenny
SweetKenny

I constantly hear the sky is falling but it never does. The Canadian housing market never collapses, Bitcoin never goes to zero, Gold never goes to the moon, and the US dollar never becomes worthless. This latest VETO threat fake out has reminded me that a large amount of news is noise.

Rayner-Hilles
Rayner-Hilles

Sydney's is collapsing, London and Auckland follow behind. Cryptocurrency continues to plummet, though I don't believe it will hit zero. And Gold really only goes to the moon when the world comes to an end. The US dollar has lost 99% of its value over history and continues to do so at an exponential rate, especially in terms of assets.

Be patient.

Rayner-Hilles
Rayner-Hilles

@AWC Oh yeah I don't deny that point for a second.

MorrisWR
MorrisWR

I would say that neither China or the US have a free market. Free trade is about as likely as a utopia coming out of Marxist ideology. Perhaps more free trade is worth working on but all countries continue to protect their exports in some way. I have argued against Trump imposing further tariffs because I do believe, like Mish, that removing tariffs will benefit consumers and increase standard of living. I just do not by that we have anything close to free trade of goods. I am unsure if China abides by MFN tariff scheduling for the US as a WTO member but it would be interesting to get an actual tariff schedule on both sides for various goods.

whirlaway
whirlaway

Ah, the old "access" trick. Someone who held a manufacturing job that was exported may technically have "access" to becoming a neurosurgeon or a data scientist, but in reality, in the absence of a manufacturing job, the person is as good as marooned.

And it is not as if Americans have not tried to cope. They have taken up service sector jobs and 2,3,4,5 jobs per household in a desperate struggle to make ends meet. And still, 63% of Americans now cannot afford a $1000 emergency without going further into debt. That is the stark reality. They have to live with that. And you have to live with the consequences of making it happen and then pretending it is not happening.

Realist
Realist

SweetKenny is correct. The news is always sensational in order to grab your attention. The sky rarely falls, and the world doesn’t end, in spite of people’s fears. Even when we hit a speed bump (2008), things come back, and get better than before. In Canada, where SweetKenny lives, things are so good, people hardly notice when the US takes a tumble.
Rayner told Kenny to be patient; the collapse is coming. I would argue; be patient; if a collapse happens it will pass. If nine out of ten years are growth, and one in ten are declines, where should you focus your attention?
Additionally, as an individual, you can’t control the big picture. No matter how many blog posts you make, or people you scream at, you are not going to change the policies of Trump, Powell, Xi, et al. All you can control is yourself and your own personal situation. So don’t be like Whirlaway, screaming about things he doesn’t understand, and certainly cant change. Focus on your own well being. Keep working hard. Keep saving. For goodness sake, keep learning and acquiring more skills that will help you live a better life. And try to enjoy your life rather than being a curmudgeon.
Now, I’m not saying don’t prepare for bad times. Just remember they won’t be as bad as most predict. And remember that it’s up to you, as to how you prepare and handle the bad times. (Oh, and screaming, whining, and pleading for someone else to fix your problem doesn’t help much).
I have survived and prospered through many downturns; 1980, 1987, 1991, 2000, 2008 and others. I’m sure I will survive the next. I am certainly more cautious recently as a result of the possibility of a Trump trade war. But I won’t sell everything and “head for the hills”. Instead I will slightly retrench, and if Mish is correct this time about a crash, I will ride it through and come out the other side as always.

Mitchell Bupp
Mitchell Bupp

Even if a trade war does bring back factories, many of those jobs will be done by bots and droids limiting the short term employment gains but creating a industrial base to last for the long term.. just a thought ...

Ambrose_Bierce
Ambrose_Bierce

The era of government intervention has arrived. When China was accused to dumping steel their government pumped money into the futures market to move the price. The US is the same, don't like the number on the DOW, lets change it. Selling products below cost does have the desired effect of stimulating growth, and new technologies. Sometime soon we will have free, or nearly free, electricity, in order to facilitate the rise of cryptocurrency which will free us from the yoke of central bank policy.

whirlaway
whirlaway

Then your choices will be either Universal Basic Income, or getting another Trump-like candidate who campaigns against robots and automation.