Now the Trade War’s Fake, Too

BALTIMORE, MARYLAND – The show went on! And, as we predicted, The Donald claimed victory… and stocks went up.

When we left you previously, Mr. Trump was on Air Force One. He was on his way to the G20 in Buenos Aires to decide the fate of the world.

At least, that is the way the showdown with China’s head man, Xi Jinping, was advertised.

The Chinese are “ripping us off,” claimed President T. They treat us “unfairly”… they are “taking advantage” of us.

Trump believes the U.S. loses jobs and wealth to China because his predecessors made bad deals. He, the titular author of The Art of the Deal, believed he could do better; getting a better deal with the Chinese is a cornerstone of his administration.

2 + 2 = 5

This never made any sense to us – except as entertainment. As George Orwell described a dystopian future, “If the leader says an event never happened, well, it never happened. If he says 2 +2 = 5… well, 2 and 2 are 5.”

The trade war never added up. Tariffs have been coming down for at least half a century, and are now only about 2% worldwide. That’s not enough to get excited about… and has approximately zero effect on U.S. jobs.

In America’s heartland, incomes have been stagnant for 40 years. Would salaries go up if the trade deficit were erased? Not likely.

The deficit results from the fact that the U.S. exports fake money, while China makes things better and cheaper (otherwise, Americans wouldn’t buy them, and there would be no trade imbalance).

Stifling China would mean raising prices to U.S. consumers. And that wouldn’t benefit U.S. producers; instead, Walmart would look to other low-wage countries, such as Vietnam and Mexico, to stock its shelves.

As for the non-tariff barriers (NTBs), the terms of the trade war “truce” say the Trump team will worry about them later. It might as well not bother. Every country has NTBs. In the U.S., for example, the Pentagon doesn’t buy the best trucks and guns on offer. By law, it is required to “buy American”… which effectively shuts out foreign products.

But these barriers – patent rules, licensing requirements, purchasing restrictions – hurt the countries that apply them more than they hurt their competitors.

Your editor has some personal knowledge of the matter. In Argentina, he was blocked from buying land… because he is a foreigner. In another country, he could not count on copyright protections. And in several countries, he needed to bring locals into publishing deals in order to avoid running afoul of bans on foreign ownership of the press.

Did your editor go whining to his congressman, asking the feds to “do something” against the offending country? Of course not. He took his foreign challenges as he found them… some good, some bad… some profitable, some not…

Most often, where foreign NTBs got in his way, he found ways around them… or simply walked away. He didn’t make a federal case out of it.

Full Smoot-Hawley

But there is nothing that is not a federal case to this president. And he, as leader of the federales, thinks he has the right to dictate not only to U.S. companies… but to foreign countries, too. And he threatened a trade war with China if it didn’t kowtow to his demands.

Thus, was the stage set for High Noon on Saturday night. There were three possible outcomes:

The first: The Chinese would blink… caving in to The Donald’s demands. It was very unlikely. They have their own Deep State to answer to… and their own agenda… and their own pride.

More important, the Chinese have a $40 trillion debt pile. And they can only service the debt by exporting. Take away China’s $396 billion trade surplus with the U.S., and the Chinese economy would collapse.

The second possible outcome: Mr. Trump would go full Smoot-Hawley, replaying the disastrous trade war of the 1930s. That was unlikely, too.

As we have pointed out, Mr. Trump has more to lose than anyone. A trade war would drive up U.S. consumer prices… and indirectly, U.S. interest rates.

Mr. Trump’s reputation, his economy, and his own fortune depend on low interest rates. Only very low rates – negative, in real terms – can possibly keep the bubble economy inflated.

That is why he is already trying to twist Fed chief Jerome Powell’s arm to get him to back off from his tightening program. Last week, for example, during an interview with The Washington Post, he stepped up his attacks on the Fed:

They’re making a mistake. Because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me. […]

So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing. […]

I disagree with the Fed. I’ve been open about that. I think the Fed is a much bigger problem than China.

 

Proclaim Victory

And the final possible outcome: The war would be called off; after all, it’s just showbiz.

If raising rates is such a problem, we guessed that the president would not want a real trade war. Higher import prices will quickly mean higher interest rates.

So, we predicted that President T. would proclaim victory even without any substantial concessions from the Chinese.

So what happened? This from Bloomberg:

U.S. President Donald Trump and Chinese President Xi Jinping agreed to keep their trade war from escalating with a promise to halt the imposition of new tariffs for 90 days as the world’s two largest economies negotiate a lasting agreement.

The truce between the U.S. and China emerged after a highly anticipated dinner Saturday between Trump and Xi on the sidelines of the Group of 20 summit in Argentina. The leaders agreed to pause the introduction of new tariffs and intensify their trade talks, Chinese Foreign Minister Wang Yi told reporters hours later in Buenos Aires.

 

Fake money. Fake interest rates. Fake employment. Fake boom.

A fake trade war.

Regards,

Bill Bonner's Signature

Bill

Category: Geopolitics

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