Trade War Begins

[damirUSBiH + 327]

If there were any lingering doubts, the trade war is now officially underway. At 12:01 in Washington, the U.S. began imposing tariff hikes on $34 billion of Chinese imports, alleging theft of American intellectual property. China says its retaliatory tariffs on U.S. goods are in effect after the U.S.’s "unfair" trade actions, according to Foreign Ministry spokesman Lu Kang at a press conference in Beijing. President Donald Trump told reporters earlier that the U.S. could target as much as $550 billion of Chinese products, a figure that exceeds all of U.S. goods imports from China in 2017. China’s Commerce Ministry said: "The United States has violated WTO rules and ignited the largest trade war in economic history." Happy Friday 😁

[Pavel + 384]

The Trade War Pacific edition begins. Like most  wars, avoidable, and seen in retrospect as pointless, perhaps cruel, bringing needless suffering..

[franco + 96]

Well here we go. Trade issues with China need to be addressed but this is the biggest risk method....

[Petar + 76]

From history: Would trade war become Cold War? Would Cold War become WWIII? The most scary thing is that nobody seems to be scared.

[rainman + 263]

Step back, of course. The world's two biggest economies have fired the opening shots in a trade war that could have wide-ranging consequences for consumers, workers, companies, investors, and political leaders....

[jpZelabal + 63]

These policies will most hurt the economically vulnerable. Probably the layoffs is coming and the inflation from tariffs....

[pinto + 293]

The implication will show result on ordinary people...as always in similar situations.

[pinto + 293]

Anything with the word "war" is never good for anyone..

[Jan van Eck + 7,558]

16 hours ago, franco said:

Well here we go. Trade issues with China need to be addressed but this is the biggest risk method....

It is precisely because it is so high-risk that it is the method selected by Trump.  The Donald is, and always has been, a high-risk player.  He has historically attempted to pawn that risk off onto other players, such as bankers who back his projects, and when the project goes south, the backers are the ones who take the hit.  You saw that play out with the Trump Shuttle, the airline between LaGuardia (NY) and Boston and Washington, and the Atlantic City casino ventures that ended up in the drink. 

And you see the same thinking at play here.  Is it accurate, bright thinking?  No.  Here's why:

When the Chinese sell us goods, for example a shipment of lawnmowers, we hand them pretty little pieces of paper with the pictures of dead Presidents on them.  We call that "money," but in reality it is "fiat currency," made valuable only because we say it is.  The paper has no intrinsic value.  It is not gold; it is not silver.  What can the Chinese do with that paper?   About all they can do is hand it over to the US Treasury for some bond that pays perhaps 2% or 3% interest. 

Is that a good deal for the Chinese?  Actually, no.  When a US firm does a successful project in China, the typical rate of return on US invested capital runs at 22%.  Some projects have busted 30% internal rate of return.  Why can the Chinese Government not convince their own people to do those deals?  They have the capital, it is being rented back to the Americans at only 3%.  And the reason is that the Chinese people have no confidence in their society.

And why is that?  Why do you see Chinese businessmen in the nascent entrepreneurial class spend fortunes in sending their children to US and Canadian and Australian schools, and spend say eight million on a house in Vancouver, BC, when anything inside China would be a fraction of the price?  The same reason Russians spend $20 million on a house in London - at some point, the landless peasants in China will become "the Mob" of French Revolution infamy, and will take over China in some cataclysm and seize their wealth, for redistribution to the mob. The business class of Chinese have no confidence in the stability of China, and seek to send their pregnant wives and daughters to the USA to give birth, to at least protect the family bloodline from the Beheadings to come. 

In that sense, the real beneficiaries of the US-China trade are US private secondary schools and universities, where the Chinese kids pay full tuition.  And the high-end real estate sellers benefit, with the Chinese buyers paying top dollar.  Those Chinese are frightened of China, and of the mob in China, and of the China to come.  Would you like to live like that?

For all of its vaunted police-state controls, China remains a lawless society, with disparate groups in conflict with the central authority.  The result is turmoil, a seething unrest.  Hardly an encouraging prospect, to be sure. 

What The Donald wants to do is balance the current account, with trade flows of equal measure.  What he does not recognize is that this shuts off the inflows into the capital account, which has been providing very cheap money for the US to build its super-carriers and $400-million-dollar airplanes.  Ironically, the trade deficit has financed the US budget deficit, and allowed the US to live on the cheap, with those capital inflows buying that paper providing the shortfall. Now if you go cut that off, then the US Treasury has to actually fund the Administration (and the military budget) with real dollars raised from its own citizens, and that is going to hurt.  Actually, I don't think it can even be done. 

Be careful what you wish for. 

Edited July 7, 2018 by Jan van Eck
typing error