As we said in Part 1, the Donald’s Trade War is the anti-MAGA. The latter can only happen when free markets are unleashed and the obstacles to prosperity posed by the state’s bad money and regulatory and tax barriers are minimized.
Yet the Donald’s Trade War is mercantilist and statist to the core. From A-to-Z it puts Washington in the business of managing economic functions and outcomes which are properly the domain of the free market, not that of the trade nannies and business lobbies bivouacked in the Imperial City.
In truth, however, the Donald’s tariff-based blunderbuss is just an extreme form of the kind of “trade policy” which Washington has been practicing for decades. The fatal flaw of the latter—whether in mild multilateralist or radical Trumpian unilateralist form—is its assumption that the Federal government essentially owns the $4.3 trillion per year of merchandize trade transactions (imports plus exports) which US citizens and companies carry-on with the rest of the world.
Thus, a New York based wholesaler is free to buy cheap furniture made in rural Mississippi without tariffs and other Washington approvals, but when it comes to even cheaper stuff originating in China, not so much. If Washington claims to be pursuing some greater good, such as helping JPMorgan or Merck make more money in China, it can effectively put a lien on the procurement dollars of said wholesaler.
This arbitrary seizure of the wholesalers’ property, of course, is not a matter of improving the economics of our hypothetical furniture market. After all, the genius of market capitalism is that entrepreneurs never stop seeking the least-cost solution to consumer wants—even if such pursuit takes them to the four corners of the planet.
To the contrary, what is involved in this illustrative case specifically and “trade policy” generically is the statist political proposition that other countries and their vendors must “earn” the right to sell goods here by following domestic economic and trade rules specified by Washington. In effect, only when foreign vendors get the Washington seal of approval are American citizens and companies allowed to freely purchase their goods.
That’s not constitutional liberty and free markets, of course. 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.
Still, upon first blush the level playing field argument sounds “fair” and reasonable, even if it does abridge the commercial freedoms of Americans. In the old days, in fact, this form of protectionism was gussied up under the banner of “reciprocal trade” policy. It was based on the claim that reciprocal trade is a “win win” and therefore purportedly a step toward national economic betterment.
But here’s the thing. Even apart from the matter of economic liberty, Washington p0licymakers and negotiators do not have sufficient information and knowledge to improve upon trade outcomes on the free market.
Likewise, they are not economic eunuchs immune to pressures from the beltway influencers and racketeers who flood them with self-interested complaints, briefs, studies and talking points. In fact, 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.
The spurious claim that the Donald’s so-called Phase One trade deal will improve the American economy by forcing China to buy $50 billion per year of additional farm goods is an illuminating case in point.
On the one hand, it is evident that the White House has no intention of dropping the $71 billion per year of tariffs on Chinese imports that will remain after the minor abatement of the levy from 15% to 7.5% on one tier of Chinese goods. So US businesses which buy cheap components from China will continue to suffer the added tariff costs or the higher prices and transition costs which would result from re-sourcing to Vietnam, India, Mexico or some other lower cost foreign jurisdiction.
The usual protectionist theory, of course, is that the tariff on imports will cause production to be brought back to the USA—-a claim the Donald is constantly peddling—and that the increased production here will compensate for the higher costs to domestic users of previously imported materials and components.
That’s complete nonsense as a general matter—otherwise economic welfare would be advanced by 100% autarky (self-sufficiency) across the board. But when you begin to get pragmatic and pick and choose only some industries to tariff and thereby force sourcing and production back to the USA, you end up in a Washington influence peddling game.
In the current go round, for example, we got a 20% tariff on washing machines because Whirlpool’s lobbyists prevailed in their claim that South Korea’s LG and Samsung were “dumping” their products on the American market below cost.
By contrast, there has been no tariff imposed on iPhones, iPads and related products. That’s because Apple’s entire supply chain has been outsourced to Foxconn’s hundreds of factories and 1.2 million workers in China, and CEO Tim Cook has persuaded the Donald that in this case all the nefarious devices China purportedly employs to steal America blind—cheap credit, subsidized infrastructure, low worker benefit costs and protections—are not so objectionable after all.
Then again, the Donald was gung ho for the domestic steel and aluminum industries and imposed a 25% tariff, which drove up raw material prices for domestic fabricators and users including, ironically, Whirlpool. The latter then proceeded to raise prices further in order to retain the better margins that resulted from lessened competition from the South Korean manufacturers, thereby hitting US appliance consumers with a double-whammy.
Ordinarily, on it goes in a billiard table fashion as one domestic industry’s gain becomes another’s cost burden. In the end, economic resources are dislocated, reshuffled and re-allocated based on political clout and influence rather than marketplace efficiencies, causing overall economic wealth to decline.
But the Donald’s Trade War is sui generis because unlike most historic episodes of extreme protectionism—like the infamous Smoot-Hawley Act of 1930—it amounts to a giant tariff assault on one country.
And in the scheme of things, it’s truly big. As we showed in part 1, even after the so-called Phase One deal, Washington will be taxing $360 billion of Chinese imports at a 19.8% average rate.
This is a huge intrusion on commerce because prior to the Donald’s trade war the average US tariff was less than 2.0% of imported value, while the $360 billion of Chinese goods is more than the US receives from Japan, South Korea, Germany, the UK and France combined.
So here’s the thing. The Donald’s China tariffs are the greatest foreign aid program in recorded history. Over time, they will cause tens of billions of production to be moved out of China to the next lower costs countries on the global labor cost curve, such as Vietnam, Malaysia, India, Taiwan, Mexico and numerous others.
Stated differently, the production involved went to China in the first place owing to labor cost arbitrage more than any other factor including China’s alleged state subsidies and unfair practices. So when US importers look to circumvent the Donald’s massive China tariffs, they will be looking for next best deals in low labor costs countries, not the burned-out, high labor-cost industrial counties in Wisconsin, Michigan, Ohio and western Pennsylvania that elected the Donald in the first place.
In this context, it doesn’t take much insight to realize that Phase 2 is never going to happen, and that the next several years will give rise to the most massive sweeping, disorderly and costly re-location of manufacturing activities and supply chains in recorded history. That’s what the Donald’s permanent $71 billion tariff pile-driver will actually do, and with virtually no gain in US industrial production and jobs.
A mini-version of this grand (and pointless global shuffle) is already underway in the farm trade, where as we indicated in Part 1, the pending deal will be lucky to restore the status quo ante circa 2017, to say nothing of the high water mark of $28 billion of US farm exports to China in 2013.
As is evident from the chart covering the last 18 years, the overwhelming bulk of farm exports to China has been accounted for by bulk grains (red bars) of which soybeans accounted for more than 90%. But having put Brazil in the drivers seat during the past 18 months, clawing back the historical US market share won’t be easy—since Brazil has made major investments in production capacity including land, machinery and farm to market infrastructure.
So even if Beijing attempts to force feed its domestic market with US soybeans it really won’t amount to, well, a hill of beans in terms of overall benefits to the US farm economy.
We are referring to the fact that farm exports are totally fungible on the global market. The overwhelming share (85%) of the $59.3 billion of soybeans exported to world markets in 2018 were accounted for by Brazil at $33.2 billion and the US at $17.2 billion. The next two largest exporters were Canada and Paraguay with barely $4 billion between them.
So if China proceeds, ironically, to blatantly violate WTO rules and discriminate against Brazilian beans by state command, and thereby boost its US soybean buy from last year’s $4 billion to say $15 billion, it would only result in the swapping out of end markets between Brazil and the US.
That is, approximately $11 billion of Brazil’s $27 billion of soybean exports to China last year would end up in other Asian and European markets, while virtually all of America’s $17 billion of soybean exports would be shipped to China. Contrary to the Donald’s ignorant tweets about US farmers needing more acreage and more John Deere’s, they will simply be loading bulk grain carriers heading to different ports.
As we first demonstrated a few weeks back, the same reshuffling of end markets is true of the potential for beef and pork export increases (purple portion of the bars).
During 2018, the US exported $8.3 billion of beef to the world markets and $6.4 billion of pork. However, $9.0 billion (61%) of that $14.7 billion total went to Japan, South Korea and Mexico—the three leading US meat export markets. By contrast, only $1.8 billion went to Hong Kong/China.
Once again, the fungibility equation will come into play. Since the year 2000, combined US beef, pork and poultry production has risen by only 1.1% per annum, meaning that total supply is not likely to get up on its hind legs and suddenly leap higher.
Instead, if China’s beef and pork imports were to quadruple, say from $1.8 billion to $8 billion, owing to orders from Beijing designed to keep the Donald off their back, most of that gain would come out of current U.S. exports to Japan, South Korea and Mexico. In turn, the latter would likely be supplied by other US meat export competitors who would be displaced from China (e.g. Argentina).
The US export of $920 million of cotton to China in 2018 provides still another case in point. Last year China’s cotton imports from all other global suppliers totaled $2.245 billion. So even if Beijing risked a flurry of WTO suits from Egypt, Pakistan and other cotton suppliers and ordered 100% sourcing from the US, the result would be another grand shuffle.
Last year total US cotton exports, in fact, were $6.5 billion. So if 50% of that went to China rather than 15% per last year’s trade, China’s other cotton suppliers would merely backfill the market the US would be vacating.
The same is true for virtually every item in the above color-coded chart of US farm exports to China. For instance, in 2018 US exports of frozen fish n.e.c. totaled $162 million to China and $932 million to all other worldwide customers, while China’s frozen fish imports in this trade code were $601 million.
Again, a state order from Beijing in behalf of Phase One compliance would simply cause most of US exports to other countries to end up in China, while $440 million of current frozen fish n.e.c supply to China from other vendors would backfill the markets vacated by the US.
For crying out loud, that would even happen in the case of “fresh or dried pistachios, in the shell”. During 2018 the US exported $1.44 billion of such pistachios, of which just $56 million went to China. So if China’s entire annual buy of $350 million got ordered into the “buy America” category by Beijing, the $294 million of non-US supply would quickly end up in other global end markets vacated by US suppliers.
Stated differently, the Donald’s writ that China’s shall henceforth buy $50 billion of farm goods from the US will not raise total global demand for these commodities–even if Beijing does decree that domestic purchasers must “buy American”. But if there is no increase in global demand, there will be no change in global prices for soybeans, cotton or anything else, meaning no additional US planting and production.
In short, the Donald’s $50 billion of farm export to China is a politically motivated chimera, not a step toward MAGA or even a stronger U.S. farm economy. In many instances, in fact, it would mainly involve a recouping of China markets the US has recently lost owing to the Donald’s Trade War and a politically driven reshuffling of supplies currently on the global farm export markets.
The visible heart of the $50 billion farm export charade, of course, is the soybean market. But what is certain to happen there is clearly not a case of “winning so much you can’t stand it”.
During the 2016-2017 market year which the Donald inherited, the US got the lion’s share of China’s soybean imports, taking nearly 60% of the total compared to Brazil’s 31%. And that was pretty much in line with the historical trend.
Needless to say, the green bar for the October 2018 to May 2019 period shown below is not a green shoot of progress. Brazil snagged 75% of China’s soybean buy because the stable genius and un-paralled deal-maker in the Oval Office decided to turn the US grain belt into trading bait in his attack on China’s $443 billion trade surplus with the USA.
And if as per above, the green and orange bars on the chart are reversed yet again by political orders from Washington and Beijing, it truly will not amount to a hill of beans for American farmers and the tens of millions of US consumers and business importers who will still be paying the Donald’s $71 billion tariff.
There is a reason why the free market is the only route to prosperity, and the Donald’s insane Trade War on China proves it in spades.
At the end of the day, the the only thing that Trump’s Trade War can do with the $4.3 trillion of US two-way trade and the $20 trillion of merchandise flowing through the global export markets is to throw some domestic producers and consumers under the bus–even as it invites the jackals of K-Street to extract concessions and benefits for special interests that have the money and political clout to effectively lobby the Washington Trade Nannies.
Of course, the ultimate case of Trade Nannyism is the perennial whining by the K-Street lobbies that nefarious trade abusers like China “subsidize” their exports.
Why, yes, they surely do…..send foreign aid to American consumers, that is!
To the contrary, if you want to level the playing field for American producers and manufacturers, instruct the Fed to stop targeting 2% inflation, and, in fact, to get out of the way entirely so that the domestic economy can deflate its high prices, wages and costs and thereby become more competitive on the global markets.
At the end of the day, the only “trade policy” America really needs is the natural workings of the free market operating under a regime of sound money.
Those particular ideas, of course, have never even remotely penetrated the considerable empty spaces under the Orange Combover.