The Donald’s Fake Trade Deal, Part 1

Call this the era of Fake Everything and be done with it.

In addition to a Fake Recovery, Fake Stock Market and Fake RussiaGate/UkraineGate/Impeachment, we now have a Fake Trade Deal to go along with the Donald’s very real and infinitely destructive Trade War.

We will elaborate below on the content free “Fact Sheet” issued by the USTR last Friday, but you can reduce it to this: It’s simply a giant Trump campaign billboard aimed at the farm states.

Still, the Donald’s tweeted claim that American farmer’s will “very soon” be shipping $50 billion per year of agricultural exports to China and that they will need to rush out and buy bigger tractors is plainly out of this world crazy:

“I suggest farmers have to go and immediately buy more land and get bigger tractors,” Trump said at the time. “They will be available at John Deere and a lot of other great distributors.”

Even if the Chinese make a legitimate effort to comply (not happening), the US would be lucky to ship $28 billion per year to China by 2021—- a level reached way back in 2013 and which had imploded to just $13 billion last year thanks to the Donald’s so “easy to win” Trade Wars. As we explain below, in fact, just digging out of the very deep hole in farm exports that has been dug by the Donald reckless trade maneuvers will be a considerable feat in itself.

Meanwhile, it’s been 526 days since the Donald’s Trade War with the Red Ponzi incepted on July 26, 2018 with the imposition of tariffs on $34 billion of Chinese goods. It was designed to get Beijing’s attention and it did: China immediately retaliated with counter-tariffs on the meager $120 billion of goods–mainly agriculture, energy and materials—that the US sold to China last year and its been off to the races ever since.

Prior to the last Friday’s Fake Trade deal, the US had imposed 15-25% tariffs on $360 billion of Chinese goods (about two-thirds of total 2018 imports from China of $563 billion). Accordingly, the combined levies totaled $79 billion annualized—representing a 21.9% tax on American consumers and business importers.

Supposedly, one of the U.S. concessions in the ballyhooed Phase 1 deal is a roll-back of the 15% tariff to 7.5% on $110 billion of Chinese goods. If that were to happen, the levy on Chinese imports would drop to $71 billion or 19.8%

We can’t imagine this marginal concession is going to make Emperor Xi get all warm and fuzzy about what is alleged to be his end of the bargain, such as the aforementioned giant farm goods purchases or the USTR’s rubbery description of China’s commitments on intellectual property and technology transfer (see below).

That’s especially true because the USTR fact sheet is completely radio silent on the one thing Beijing insisted upon for a so-called Phase One deal and allegedly got according to leaked press reports. Namely, the above mentioned 7.5% rollback on $110 billion of existing tariff coverage, and even this Bob Lighthizer special was purportedly structured as a “snapback” mechanism. That means according to the USTR that if either side is dissatisfied with the other sides’ compliance, why they are free to just grab their football and go home:

It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.

Translation: There is really no written, contractually enforceable deal at all. What happened last Friday is that both sides issued separate aspirational press releases geared to domestic audiences that will only give rise to more “close to a trade deal” tweets right up to and through the 2020 election.

Needless to say, if any publicly traded company CEO engaged in the stunts documented in the chart below, he’d have swarms of SEC enforcers on his case and would be heading for a stint at Uncle Sam’s hospitality suites in short order.

To be sure, we’d just as soon see the SEC and its idiotic disclosure standards blown to bits. Presumably, if you’ve got thousands, or millions or especially billions to invest in the stock casino, you ought to pay for your own due diligence and assessment of company prospects and take your lumps when you get taken.

But the present stock market is so dominated by Fed-following liquidity-gulping speculators that it can’t be helped by either free market discipline or even the SEC’s stock market nannies.

To wit, the Fed-addicted robo-machines and day traders are buying the trade deal scam when the very negotiations process itself is a flashing red warning sign that statist politicians on both sides of the table are fixing to monkey-hammer global commerce and thereby send growth, profits and prosperity southward.

Indeed, the Donald has essentially declared war not just on the global trading system, but on capitalist prosperity itself. The foolishness announced Friday plus all the protectionist nonsense that undergirds the Donald’s Trade Wars amounts to a decisive GOP-led turn to statist economics.

And that baleful prospect is made all the worse by the fact that the only alternative to Trump is Elizabeth Warren’s blatant socialism when it comes to health care, energy, education, financial markets and almost everything else upon which America’s faltering prosperity still depends.

Needless to say, the Donald’s Trade War is the anti-MAGA because from A-Z it puts Washington in the business of managing economic functions and outcomes which are properly the domain of the free market, not trade nannies and business lobbies bivouacked in the Imperial City.

For instance, one of the air balls in the USTR press release comes under the bolded heading “Technology Transfer” and reads:

… China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as acondition for obtaining market access, administrative approvals, or receiving advantagesfrom the government. China also commits to provide transparency, fairness, and dueprocess in administrative proceedings and to have technology transfer and licensing takeplace on market terms.

Here’s the thing. What happens to American companies which freely choose to invest in the Red Ponzi in order to brag on bubblevision that they are part of the China “growth story” is none of Washington’s frickin’ business; and it has no bearing whatsoever on the economic well-being of the truck drivers, factory workers and insurance agents etc. who will still be paying the $71 billion Trump Tariff. The latter is remaining in place despite the purported deal and is intended, apparently, to help Emperor Xi get his head right and make good on the Donald’s farm state billboards.

Still, the Chinese has been playing rope-a-dope with the above vaguely-worded pledge on “technology transfer” for years and will not likely adhere to it this time, either. But even if they did, why is it Washington’s job to insure that ” technology transfer and licensing take place on market terms” in the case of U.S. based multinationals who operate in China among dozens of jurisdictions around the planet?

In the first place, there are no honest “markets” in the Red Ponzi—so what’s the point?

Moreover, if the “market” standard refers to practices commensurate with what occurs in the US, Europe, Japan, Singapore or India et. al., then U.S. companies are welcome to send their investments there rather than to a communist party-run economic hothouse which inherently operates by Red Rules.

Indeed, the whole “technology transfer” brouhaha is of zero interest or benefit to the broad electorate in America.

To the contrary, it was confected by corporate lawyers and K-Street lobbyists as a “give me”. That is, it can’t hurt to enlist the dumbkopf protectionist politicians like the Donald in the cause of pushing your own private commercial agenda if they are stupid enough to take the bait.

Self-evidently they are!

Indeed, insofar as we can read between the tweet-leafs, the Donald doesn’t even care about technology transfer. He’s actually maniacally obsessed with the current $443 billion bilateral trade deficit with China—something which we have demonstrated elsewhere is a function of bad money, not bad deals,  and which he wants even more of.

But in putting a lifetime Washington racketeer like Lighthizer in charge of trade negotiations, the Donald has made himself a handmaid of the Swamp Creatures. They are using his reckless tariff bludgeon to extract concessions from the Red Ponzi that will have virtually zero impact on the bilateral trade deficit.

That point is blatantly evident on another thin section of the USTR press release on “Financial Services”.

The Financial Services chapter addresses a number of longstandingtrade and investment barriers to U.S. providers of a wide range of financial services,including banking, insurance, securities, and credit rating services, among others. These barriers include foreign equity limitations and discriminatory regulatory requirements.  Removal of these barriers should allow U.S. financial service providers to compete on a more level playing field and expand their services export offerings in the Chinese market.

So what?

Who in their right mind thinks helping Goldman Sachs and JPMorgan get more business in the Red Ponzi is a valid reason for throwing the proverbial bus driver in Racine (Wisconsin) under, well, the $71 billion tariff bus that remains in place?

The fact is, last year JPMorgan booked $32.5 billion of net income, while Bank of America scored $28.1 billion, Well Fargo $22 billion, Citigroup $18 billion and Morgan Stanley and Goldman Sachs another $30 billion between them.

That is, the big six US banks had more than a half trillion of combined revenue and $120 billion of net income, yet the Donald has thrown bus drivers in Minneapolis (and throughout the US) under their own busses so that these predatory creatures of the state can more easily nose their way into the Red Ponzi.

Beyond the complete inequity and inappropriateness of it, the end game of providing US banks with a “more level playing field” in the Red Ponzi is that when the latter crashes under its own mountain of debt, speculation and malinvestment, the US banks which got deeper in owing to the Donald’s Trade War will end up losing their shirts to an even greater aspect than they already foolishly have at risk.

The same point is true with respect to the” intellectual property” section, which again consists of vague pie in the sky pursuit of objectives being peddled by the corporate bar and Washington racketeers that has nothing to do with the well-being of the main street citizenry. Still, the USTR boasts that in return for continuing to pay the Donald $71 billion per year Tariff Tribute, main street households and businesses will have the satisfaction of knowing that justice is being done with respect to the following:

The Intellectual Property (IP) chapter addresses numerouslongstanding concerns in the areas of trade secrets, pharmaceutical-related intellectualproperty, geographical indications, trademarks, and enforcement against pirated andcounterfeit goods.

Needless to say, Ralph Lauren, Nike, Louis Vuitton and Rayban,  among countless others, are grateful for Washington’s helping hand in the enforcement of their copyrights, patents and trademarks in global commerce.

But again, how does that help the proverbial US bus driver, as opposed to hedge fund speculators in Nike stock who undoubtedly got a bump from Friday’s announcement?

Indeed, your editor bought a pair of Nike’s at a negligible price three years ago at a stall like this one in Shanghai. Mirabile dictu, we are still wearing them as we type and they are not any worse for the wear!

What we are saying is that our cheap knock-offs embodied the very same materials and craftsmanship that were in authentic Nike shoes made in the same factories in China. It is Nike’s business model to price them massively above costs in order to fund its huge marketing campaigns and sports celebrity endorsements and make a goodly profit on its investment in branding and product differentiation.

Good for them. But that branding model inherently embodies risk of knock-offs sold under its high-price umbrella and the expense of worldwide efforts to protect brand integrity.

And the latter is their job, and is to be done on their dime, not by Uncle Sam’s trade nanny payrollers, who are basically funding their “negotiations” with tariff extractions from the citizens of Flyover America. The latter, needless to say, have better things to do with their limited resources than t0 help Nike get a higher stock price.

Counterfeiters in China
[Source: PETER PARKS/AFP/Getty Images “Handbag stalls in Beijing’s famous Silk Alley market”]

Likewise, the “theft” purportedly carried on by Chinese companies and government agencies when it comes to patents and knowhow is another K-street special. For crying out loud, “reverse engineering” is not a crime or an economic sin; it’s what every aggressively competitive company does to the products of its competition.

That’s why in the scheme of things business firms pay good money for competent legal counsel—so that in replicating and besting products already on the market they stay outside the four walls of any relevant patents which may be at issue.

Indeed, the entire intellectual property theft meme is just a racket under which the business lobbies have enlisted the FBI and other law enforcement branches to function as taxpayer-financed patent attorneys and litigants.

But that’s not the state’s job at all: Enforcement of intellectual property rights is a cost of doing business that should be born by patent owners; and not, again, by the proverbial bus driver shopping at Walmart’s and finding the cost of his tariffed necessities rising because some company in China is allegedly stealing trade secrets.

The truth is, there are substantial opaque grey areas around the four corners of every patent, which explains why more than 6,000 patent infringement suits are filed in the US each year. And if you check the filing papers you will find that infringement allegations are what keep the patent bar in business, and that the accused consist of virtually every Fortune 500 company that’s involved in the production of patentable products.

Stated differently, patent infringement is not some nefarious activity carried on exclusively by the Chicoms in the dark recesses of commerce, and in pursuit of world conquest or whatever similarly ludicrous objective that may be attributed to them by protectionists and neocons alike.

To the extent that Chinese companies are in the patent infringement fray along with most other South Korean, Japanese and European companies, among others, the remedy for American companies is to file cases in the US and elsewhere to enforce their patents and to absorb the cost of doing so. And if the patent enforcement laws are deemed too weak in China or other jurisdictions and cannot be adequately enforced that’s the cost of operating in world commerce.

Recall, if a Chinese infringer attempts to sell infringed-upon products in the US or other jurisdictions with applicable patent laws, the US patent holder has every prospect of getting a court order estopping such sales and of collecting damages for the infringement.

What that means, of course, is that Lighthizer and his K-Steet confederates are attempting to impose U.S. patent law extraterritoriality on the Red Ponzi. Apparently, it is not enough to stop infringement in domestic US commerce; the Donald’s crew wants to insure that the monopoly privileges of U.S. patent law are fully enforced in the Red Ponzi, too.

At the end of the day, the right answer is for U.S companies not to run to Washington, but to run their investments and production facilities toward nations which treat them better.

After all, the consumption dollars and the work hours and production talents that American citizens bring to the US economy belong to them, not the politicians and policy-makers on the Potomac. They are not pawns or economic bargaining chips to be thrown on the table by Washington negotiators—whether they be incompetents like the Donald or otherwise.

Moreover, the odds that policy-makers subject to the hideous money politics of present day Washington could possibly add net value to the US economy from global trade beyond what the free market would produce on its own are somewhere between slim and none.

We would be of a mind to say, good luck with that and move on. But these demented folks are conducting a trade war over that very principle. And sooner or later that campaign for sweeping managed trade by Washington will only fill the swamp deeper, even as it triggers ever greater barriers to the wealth-creating expansion of global commerce.

That gets us to the larger issue. The heart of the Donald’s economic policy is the Trade War and the latter is predicated on politicizing virtually every aspect of America’s $4.3 trillion of two-way trade, and, for that matter, virtually the entirety of the worlds  $19.3 trillion in global trade.

As a matter of principle, that is sure to lead to the impossibility of socialist calculation, as Hayek demonstrated a century ago. But as a practical matter, sheer mayhem which is certain to follow from the $200 billion increases in goods and services exports to China that the USTR claims has been agreed to and the $50 billion farm exports component touted by the Donald

As we indicated above, $28 billion of US farm exports to China was the high water mark back in 2013. But as shown by the chart below, that came after a 13-year ramp from just $2 billion per year in 2000; and it also materialized as a result of China’s need for the products shown in the red, blue, purple and white sections of the chart, and the ability of US farmers to meet these needs in competition with suppliers in South America, Russia, Europe and elsewhere.

The important point is that China’s alleged trade barriers and unfair practices did not prevent a 13X gain in US shipments in the span of just 13 years. After that, total volumes fell slightly between 2013 and 2017 to an average of $24 billion per year, but again it wasn’t owing to the sudden emergence of nefarious Chinese trade practices.

Virtually the entire $5 billion per year lost of volume was due to reduced US soybean and feed grain exports to China as a result of Brazil expanding its production and offerings at compelling prices. Nevertheless, the USTR press release would have you believe that US farm exports are going to come soaring back by virtue of Beijing’s bending to the Donald’s will and removing trade barriers and unfair practices:

The Agriculture Chapter addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports,increasing American farm and fishery income, generating more rural economic activity,and promoting job growth. A multitude of non-tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infantformula, horticultural products, animal feed and feed additives, pet food, and products ofagriculture biotechnology.

That’s unadulterated bull hunky. Yes, China has innumerable, foolish, self-defeating obstacles to trade. But they are the same ones that were in place when US exports hit $28 billion during 2012-2014. The reason the bar for 2018 plunged is no mystery whatsoever.

To wit, the Donald did it!

He invited the Chinese to retaliate and as we will show in Part 2, that’s exactly what they did by massively switching their purchases of soybeans and other products to Brazil and Argentina.

More importantly, any Chinese attempt to come even close to the Donald’s ballyhooed target will likely only cause a gargantuan reshuffling of world farm products trade, with disrupting costs to all parties and very little net gain for American farmers.

Stated differently, they won’t be buying many more John Deere’s. They will just be selling their products to former customers of China who would be displaced by the writ of Beijing.

If that doesn’t sound like freer world trade or a stepping stone to MAGA, it’s not.

Reuters Graphic