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Trade Wars: A Phantom Menace?

Bloomberg is the only TV news channel I can stomach watching in the UK; it is the only one that is not instinctively leftist. I suppose if you are trying to provide a service that people will pay for to help them make financial decisions, a better standard of truth is required.

This morning they were very excited about Donald Trump’s threats to impose tariffs, especially now that (relative) voice-of-reason Gary Cohn has announced his resignation. They reported that the EU is threatening to respond to Trump by cutting off EU consumers’ noses to spite Donald Trump’s face.

Perhaps if we are lucky post-Brexit Britain will be a refuge of sanity, free-trade, and economic growth amongst all this madness.

Or perhaps, as one commenter on Bloomberg suggested, it is all bluster and this is just Trump negotiation tactics and it will come to nothing.

33 comments to Trade Wars: A Phantom Menace?

  • staghounds

    Levis, Harley Davidsons, and Bourbon. The very list says it all.

  • Paul Marks

    The United States has two great deficits – the budget deficit and the trade deficit, both HUNDREDS-of-BILLIONS-of-Dollars.

    President Trump is doing nothing about the budget deficit – tax rates had to be cut, otherwise companies and rich individuals would just have moved to Canada (which has much lower tax rates for companies and wealthy individuals), but he has utterly failed to reduce GOVERNMENT SPENDING. The list of unnecessary (indeed harmful) government departments and agencies produced by Senator Ted Cruz (who won his primary yesterday with 83% of the vote)in 2016, has been ignored by President Trump and by the Republican leadership of House and Senate. So America is doomed to bankruptcy – in fact if not in legal theory.

    The trade deficit is also hundreds of billions of Dollars of borrowing every year to finance CONSUMPTION. President Trump does have an answer to this – Protectionism, taxes on imports (the WRONG answer), and the establishment economists are even worse – with their mantra that borrowing hundreds of billions a year to finance consumption imports “does not matter”. The establishment economists have no answer to the crises – because they do not even understand that it is a crises. They go around quoting (out of context) the Classical Economists – as if Adam Smith and so on would have supported borrowing hundreds of billions every year to finance consumption.

    It is very difficult (indeed impossible) not to despair.

    Still perhaps there will be a crash in the exchange rate of the Dollar (which might finally break Americans from their addiction to imports), and would also lead to a de facto default on the national debt – as the United States can not afford such a vast debt (some 20 trillion Dollars) other than by printing money.

    “But Paul that would destroy the world economy and the international financial system”.

    Yes – of course it will.

  • Shirley Knott

    Addiction to imports? Absurd notion on its face. The purpose of the economy, insofar as it can be said to have one, is consumption.
    The fact that we ‘import’ items to consume is a trivial, and unhelpful, rephrasing of the benefits of the division of labor and comparative advantage.
    Someone is confusing an accounting artifact with an issue.
    May I suggest spending a few weeks with Don Boudreaux at Cafe Hayek? Or with Adam Smith, who understood quite clearly that this is toxic nonsense?
    Your position is incoherent and economically un-sane.

  • Or perhaps, as one commenter on Bloomberg suggested, it is all bluster and this is just Trump negotiation tactics and it will come to nothing.

    That depends to some degree on other countries’ response.

    – Trump wants NAFTA to close loopholes that let Chinese steel and aluminium into Mexico and Canada for re-export to the US. His tariffs may work to end reported foot-dragging by Trudeau in the negotiations.

    – If the EU were to offer ending or lowering of its tariffs in exchange for Trump’s doing the same, that path leads to one future. If they impose more, that path leads to another future.

    In the short-term, this, like the Italian election, may distract the eurocrats from fully focussing on their mission to punish us for Brexit. Condemning Trump’s tariff’s while simultaneously defending their imposition of far harsher ones on us will not embarrass any eurocrat but may help maintain their ‘cloth-eared’ reputation.

  • Alisa

    There are lots of explanations, both pro and con (and in-between) here.

  • Alisa

    They reported that the EU is threatening to respond to Trump by cutting off EU consumers’ noses to spite Donald Trump’s face.

    The EU has been doing it for quite a while as it is, which was one of the reason’s given to these latest measures by the US – although I think that China is the real elephant in the room for all involved (which is really everyone living on planet Earth and not in a cave).

  • Surellin

    So let me see if I understand this. The gnomes of Brussels are contemplating a trade war with Britain AND the US?

  • Addiction to imports? Absurd notion on its face. The purpose of the economy, insofar as it can be said to have one, is consumption.


  • Cesare

    This is a situation decades in the making, not unlike the gradual acceptance of NATO members not upholding the basic agreement. For the majority of those prior decades there has been great publicly voiced concern, furrowed brows and abundant tsk-tsking. It has become tacitly understood that any public talk of actual movement or action is, well, the kind of thing you have to tell those tiresome voters. Now some of those prior de facto arrangements are seeing sunlight and more of it than many participants would like. It would be good for everybody involved if there were to be a re-adjustment either back to in NATO’s case what they agreed to and in trade something actually approaching ‘Free Trade’. But if Brussels to mention one will not listen, we may have to go another way. After all, in Foggy Bottom it was a veritable pillar of existence that the Paks would continue getting their billions, and you can see how that worked out.

  • Thailover

    If all your trade is rational rather than political there’s no such thing as a trade deficit. Doesn’t matter if you trade goods for goods, money for money, goods for money. or money for goods, every rational trade is win win or profit/profit.

    Trying to punish other people for not buying your material goods or services is inherently stupid. To do so at your own cost is retarded.

  • CaptDMO

    Meanwhile, 500 steel mill workers hired back.
    How’s the nightlife in Sheffield these days?

  • Jacob

    The US exports to Europe goods of total value of 280 b$ and imports 470b$, so it buys from Europe almost twice as much as it sells. The EU needs to think twice before starting any wars, trade or otherwise… Seems some Eurocrats like to make silly noises before the whole EU structure collapses. (See elections in Italy, Germany… etc.).

  • Michael Jennings

    Trump says lots of things he doesn’t really mean, but the protectionism is something he really believes, alas.

  • I think that China is the real elephant in the room (Alisa, March 7, 2018 at 1:56 pm)

    As do I.

    for all involved

    For Trump and the US generally, I agree. If you mean China is consciously the real target or concern then I’m a lot less sure as regards the eurocrats.

  • bobby b

    ” . . . it is all bluster and this is just Trump negotiation tactics and it will come to nothing.”

    Or perhaps it will hasten the redesign and reratification of NAFTA, which is likely its purpose.

    Trump has already announced that the tariffs go away when NAFTA gets fixed.

    Even Bloomberg has announced that “President Donald Trump has turned his steel tariffs from a tool for protecting national security into a bargaining chip offered to Canada and Mexico to seal a quick deal on Nafta.”

    This is primarily a lever to get Nieto to move. He faces an election in July and needs NAFTA to win. The new tariffs make it clear what he needs to do in order to get NAFTA.

  • Spoons! Yes spoons I say!

    How’s the nightlife in Sheffield these days?

    Now that it’s not just an industrial town, not bad actually

  • Paul Marks

    Shirley Knott.

    I said several times that I was talking about the borrowing of hundreds of billions of Dollars per year.

    You totally leave that out of your reply – this shows that you are not an honest person who disagrees with me (and no harm in that – I am willing to be corrected by any honest person). Your failure to even address the obvious point, the unsustainable borrowing of hundreds of billions of Dollars a year to fund consumption, shows that you are dishonest person – so there is no need to think about you further.

  • Alisa

    Niall, see this for some perspective.

  • Paul Marks

    I have gone through all the comments (I do not often do that now – I do not have the time), and not one of the comments has suggested an alternative policy to deal with the problem. Therefore any logical voter would support DONALD TRUMP’S solution to the problem – which is a shame as his proposed solution is wrong.

    In any serious, indeed crises, situation, if one person (in this case President Trump) is suggesting a solution – and his opponents are just saying “crises? what crises? we can just carry on borrowing hundreds of billion of Dollars a year and blowing the money on consumption imports” then the public will go with the only solution offered – EVEN IF THAT SOLUTION IS WRONG.

    Restoring the competitive edge of American industry would be hard – for example the steel industry was undermined by pro union laws, and the aluminium industry was undermined by “anti trust law”.

    “But we do not need to repeal pro union laws or anti trust laws – we do not need these industries, because we can just import everything and borrow the money to pay for the imports”.

    No one seriously believes that – which is why they (deliberately) leave out the borrowing of hundreds of billions of Dollars when they discuss the matter of consumption imports. The establishment line is not honest – it is dishonest. And it is nothing to do with what Adam Smith and the others meant by Free Trade – they meant buy some goods from abroad and (in return) sell other goods. They did not mean endless vast borrowing to finance consumption.

  • Rob Fisher (Surrey)

    bobby b: thanks, I added that link to the article.

  • Laird

    Paul, for someone who so well understands many aspects of banking and economics, your utter misunderstanding of the balance of trade issue surprises me. I agree with you that the budget deficit is a serious problem. But the concept of a trade “deficit” is a complete fallacy. Yes, there is an imbalance between our imports and our exports, but so what? That imbalance merely represents the aggregate of millions of separate transactions by individual consumers; it is not purchases and sales by “the government”. Some of those transactions may be financed by debt and some by other means. But it has absolutely nothing to do with the government’s financial position. There is no “billions of dollars” being “borrowed” to “pay” for it; it is wholly unrelated to the budget deficit or the national debt.

    The trade “deficit” is precisely and exactly offset by a capital account surplus. All of those dollars sitting in foreign banks and balance sheets must, sooner or later, return to the US. There is no other use for them (other than a relatively minuscule amount being kept for currency reserves). They may not come back directly from their current holders; they might be used in international trade to purchase, say, oil from Saudi Arabia. But eventually they will return, most likely in the form of capital investment in our economy, which only benefits us. I second Shirley Knott’s referral to the estimable Prof. Don Boudreaux at his “Cafe Hayek” blog. He’s one of the few academics (of whom I am aware) who actually understands this issue.

    A separate point: the so-called “trade deficit” is wholly unrelated to Trump’s desire to implement import duties. That is purely a device to protect politically-favored US industries, at the expense of consumers in this country who don’t have the first clue about economics (which is most of them).

  • bobby b

    Laird, excuse my ignorance of this entire aspect of money, but tell me if my broad impressions are correct:

    The danger inherent in leaving so much more of our money in their hands than we have of their money in our hands is the power that gives them over us to drive decreases in the value of our money. A well-timed presentment by them to us of our currency to purchase theirs would decrease the price of our currency relative to theirs.

    Countries which have a big hunk of our available money also tend to end up with a big hunk of our assets, unless we knock them back first with high inflation and money-expansion, or deflate the value of the assets they buy. (See CNOOC and Texas oil.) The tactics most effective for recapturing our money are also most effective in slowing our economy, so we eventually end up having to undergo a painful chemotherapy of sorts to get it back. (Although, Japan had the same opportunity at one point but mucked it up by buying the wrong assets.)

    Strategically, China is the country most likely to profitably use such a money imbalance to improve their position relative to ours, economically, politically, and militarily. The bulk of the money in the hands of the nominally “private” traders in China is available to the Chinese government on demand in ways not experienced in the West, so it is as if government actors are involved, albeit only on the Chinese side.

    So this is bad, right? Or does it make enough of a difference that the imbalance in trade flow ends up parked in US Treasuries mainly and thus there’s no risk of early maturity and demand? Or . . . what?

    ETA: (As Laird reads this, he’s banging himself on the head and crying “why do they try to talk about economics?!”)

  • Thanks for the link, Alisa (March 7, 2018 at 9:24 pm). I especially noticed

    “The main worry was China’s divide-and-rule policy,” Ms. Stanzel said. “The new worry is that because China is trying to make this format work, it will invest less effort and money into its relationship with Brussels.”

    The habit of weak-kneed response to any danger that is real is, I fear, well ingrained in Europe’s current ruling class. Something consciously perceived as a threat to their own authority might get a stronger response – but I will not hold my breath.

  • Alisa

    I agree Niall, but at least they finally seem to be recognizing the danger. The glass is quarter-full, or something.

  • bobby b

    As a follow-up to a dormant post, note that Trump signed the tariffs order today, with a major element:

    “The tariffs signed by Trump will take effect in 15 days and will exempt Canada and Mexico indefinitely. They also leave the door open for other countries to argue why they should also be exempt. The moves slap 10 percent and 25 percent charges on aluminum and steel imports, respectively.”

    Negotiating tactic. Says to Trudeau and Nieto “look what you just dodged. When your heart stops pounding and you get your breath back, let’s discuss NAFTA.” Says to the rest of the world, I mean what I say.

  • Laird

    bobby b, I like your last comment (10:35 pm). Seems right to me.

    As to the previous one (7:44 am), ummm, how to say this? Yes and no (but mostly no). “Leaving so much more of our money in their hands” does, in a certain sense, give other countries power (which, incidentally, isn’t necessarily a bad thing), but that’s mostly a function of who holds it. Most of that money is held by foreign companies (private actors), not their governments, and thus is dispersed. Unconcentrated, it’s no power at all. And yes, places like China could seize or otherwise control it, but mostly what governments do with those dollars is purchase US Treasury bonds. If they were to present a large amount of those for simultaneous redemption it could indeed create a problem (although in actuality the Treasury would just have the Fed “print” [metaphorically] more dollars to pay them off, but even that would adversely affect interest rates), but the reality is that most bonds have specified maturity dates and can’t be presented early. So such redemptions would be spread out over time, limiting their effect. And as a practical matter were the Chinese (for example) present a few $ trillion of our bonds for redemption they would be shooting themselves in the foot; they depend upon trade with the US more than we depend on trade with them. So I’m not overly concerned about that. It could change if, at some point, the Chinese yuan (or some other currency) had become strong enough to challenge the dollar as the world’s reserve currency, but that’s nowhere close to happening today.

    “Countries which have a big hunk of our available money also tend to end up with a big hunk of our assets.” By this I assume that you mean capital assets (manufacturing plants, real estate, equity shares in listed companies, etc.), not consumer goods (the reason they have all those dollars is that they buy fewer of our goods than we buy of theirs). Again, it depends upon who holds that money. If BMW (for instance) has a lot of dollars due to our purchase of their fine automobiles, and they turn around and invest those dollars in manufacturing facilities in the US (as they have in fact done), why does the bother you? It’s good for us (jobs, taxes, etc.). Why should we care if that plant is owned by BMW instead of GM? If those dollars are held by a foreign government it gets a little trickier, but for the most part foreign government don’t invest in those sorts of assets, just Treasurys. The obvious exception is sovereign wealth funds, but I view those more like private investors than government investments anyway; certainly their investing decisions are made in the same way.

    Does any of that make sense, or do I have to start over?

  • bobby b

    “Does any of that make sense, or do I have to start over?”

    Makes sense, thanks. Like I said, my education in this aspect of money is deficient.

    One question: When BMW buys that plant here, don’t we then lose the profits (not the labor dollars spent, or the materials purchased, just the profit) from that facility? Isn’t that a big deal, or does the increased flow of money to labor and materials and taxes make up for it?

  • Laird

    Yes, we “lose” those profits (if either “we” or “lose” makes any sense in this context). Those profits go to the shareholders of BMW. If you want a piece of them, buy some shares (it’s listed on the NASDAQ: BMWYY). Why does this concern you?

  • bobby b

    “Why does this concern you?”

    Because I don’t know enough about the subject to form my own informed opinion. College econ never seemed to delve into topics like this, and I’ve seen arguments on both sides, but lack the background knowledge to pick between them. I hate that.

  • Paul Marks

    Another economic drain on the United States is the import of illegal drugs (I suspect that the money spent on this stuff is not fully reflected in the trade deficit figures) – at horribly inflated prices. Another case of being “addicted to consumption imports” – there is a massive difference between a factory owner importing machine tools (although these were once made in the United States – as were the “specialist steels” that people say they “have to” import now, and the “rare earths” that China now controls the world supply of, could be and used to be mined in the United States before the environmental regulations handed power to the People’s Republic of China) and someone importing cocaine to shove up their nose. If people can not see the difference between investment and consumption – then (non aggression principle or not) they really need a tap on the head.

    However, the economic answer (legalization and domestic production) to the economic drain, is rejected on social and political grounds. Even though it is quite clear that the degenerate part of the population can not be stopped from consuming narcotics (by the way it is NOT an “epidemic” – it is a not a “disease”, it is people making bad choices) – and I do not see any Constitutional authority for the Federal government in banning the degenerates buying the various poisons they wish to harm themselves with. The banning of booze was based on a Constitutional Amendment (the 18th – repealed 85 years ago). No Constitutional Amendment has been passed giving the Federal Government any authority to ban people buying narcotics to harm themselves with.

    As Prime Minister Gladstone put it – of one thing I am certain, it is NOT from the actions of the state that we will see moral improvement. The idea that banning the degenerates banning X,Y,Z will turn them into moral human beings is an experiment that has (contrary to Peter Hitchens – who denies the “war on drugs” has ever existed) been tried in the United States – and, as Prime Minister Gladstone would have predicted, it has failed (horribly failed). Moral improvement can only really come from voluntary cooperation and effort – both religious and secular. Civil Society must be rebuilt, if we are to see the “epidemic” of drug abuse roll back.

    Great nations are built by hard work, self denial and self discipline (not rolling around in the gutter full of “recreational drugs”), and REAL SAVINGS (not Credit Bubble finance – endless borrowing that is not from REAL SAVINGS, the actual sacrifice of consumption). Adam Smith understood this. A.L. Perry (the leading American Free Trade economist of the 19th century) understood this. Frank Fetter (the leading American economist of the early 20th century – for Frank Fetter was correct and Irving Fisher was WRONG) understood this. It is a pity that some modern “economists” do not understand this – and think that people (an “economy”) can be based on consumption (not work) financed by endless borrowing.

  • Paul Marks

    Laird – it is you (not me) who “utterly misunderstands” the situation.

    Just as you claimed that President Kennedy send troops to Vietnam to bail out the French armed forces (simply untrue – the French armed forces had largely gone years before) and that the Communist war against first the French and their allies and then the Communist war against the Republic of Vietnam and the United States and allies was essentially a “war of the flea” guerrilla war. Again simply untrue as the French were destroyed at Dien Bien Phu by massive amounts of heavy artillery, CHINESE artillery, and (later – the 1960s) the United States Air Force and United Stated Navy air arm were not even allowed to attack most enemy air bases because there were Chinese and Soviet “advisers” at these air bases (Washington seemed to be under the impression that the Soviet Union and the People’s Republic of China would be upset to have their citizens killed – a belief that clearly showed that the American government understood nothing about Marxists, who place no value on human life) and enemy supply lines for the Marxist forces in South Vietnam were not cut in Laos – a task that could only have been done by regular American Army divisions, not a handful of CIA advisers and hill tribes. The National Liberation Front or “Viet Cong” were not a major military force after the military failure of the Tet Offensive of 1968 – the NVA, North Vietnamese Army, was the real enemy during your own period of service and General Giap admitted losing about one million regulars over the course of the whole war (to the Marxist regime the losses were, of course, of no great importance – as Marxists do not value human life). A war in which tanks, aircraft, and artillery were of great importance. Anyway you are now using a lot of words about the “capital account” and other such.

    Laird let me translate what you are saying into English. You are saying, translated into English, that it is fine to borrow hundreds of billions of Dollars every year to finance consumption imports – and you are wrong, as this borrowing to finance consumption imports is a disaster (both for the United Stated and Britain – where the population does it even more).

    Saying stuff such as “this is exactly offset by the capital account and ……” is just waffle. Enron speak. I repeat – I think that President Trump’s approach to the problem is mistaken, but at least he sees the problem (you do not).

    As for PRC buying of property in the United States – this is actually a bad thing (not a good thing). Things have not reached the stage they have in Australia, New Zealand and Canada (see the reports of the Australian Security and Intelligence Organisation (ASIO) Laird – and the reports of the intelligence arm if the Royal Canadian Mounted Police, RCMP) – things have clearly reached a crises point of PRC subversion (due to the buying of vital resources and other property by the PRC) in Canada, Australia and New Zealand (Australia and New Zealand are taking action – but Justin T. in Canada is utterly deluded and simply does not see the threat of the People’s Republic of China). However, such things as the control of the PRC over, for example, more than one third of American cinemas is clearly problematic. The relations between Hollywood generally and the PRC (the “invisible exports” you would point to – as if they matched the trade deficit, they do NOT) is also a bad thing (not a good thing) – it means, for example, that actors who are opponents of the PRC (such as Richard Gere) find it very hard to get work in Hollywood, and that the PRC has a de facto veto over script writing – as “this would not play well in China” is used as an excuse for “the spike”.

    It is now clear that the entire American approach to the PRC going right back to the Nixon Administration has been utterly wrong. Economic reform did indeed start in China. It started in 1978 – when President Carter was American President. President Nixon had no excuse for his demented trip to Mao, the largest scale mass murderer in the history of the world, as PRC support for killing Americans and other anti Marxists in Indochina did NOT stop, Mao never had any intention of stopping the extermination of non Marxists – and he might hate the Soviet heretic Marxists and their Vietnamese heretic Marxist allies, but he would always hate the non Marxist Americans more that he hated the heretics – heretic Marxists from his point of view. But economic reform has NOT led to political reform.

    We have been waiting for 40 years Laird (since 1978 when the economic reform started – two years after the death of Mao) when is the political reform going to start? It is NEVER going to start is it Laird. In fact the PRC is as committed to the extermination of the United States (and the rest of the West) as it was under Mao – but under Mao the PRC was an economic basket case, now the PRC is STRONG (strong due to all that trade with the West) and its military is modernising as I type these words. Not a great success for the policy of “engagement” with the PRC.

  • Paul Marks (March 11, 2018 at 11:42 am), while the economic power gained by China’s post-Mao political easing (and so economic growth) has not been politically counter-balanced, as it was in Russia, by the power-bloc fragmenting into separate opposable states, still less by true political freedom, it does strain the communist party’s power, so creating future possibilities. It is a swings and roundabouts thing – they get economically stronger, but less able than Mao to do just anything at a moment’s notice. What the Chinese people secretly think of Xi becoming president for life is unknown, but I suspect his ‘overthrowability’, though sadly far too low, is greater than Mao’s.

    Meanwhile, both Adam Smith and Milton Friedman grant there can be military/threat justifications for tariffs and suchlike trade restrictions. They merely note, from long experience, how often these are mere excuses, not the real reasons for tariffs. I’m no more convinced than before these threads started of the economic justification for tariffs, but if Trump ends up with them focussed on China then I may well be OK with that on political/security grounds.

    (And were Trump to combine pleasing his base – and keeping a campaign promise – with focussing the tariffs on China for enforcement and on bargaining chips for reciprocal trade agreements with others, I might yet think some of Scott Adams adjectives well-chosen, not just some of his analysis. We’ll see.)

    So in a sense I agree (as I did when critiquing Laird’s take on the Vietnam War in another thread) but I’m not sure you are really engaging Laird’s argument in this thread; Laird is offering a strictly economic analysis IIUC.