Interesting Times Arrive

“Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.

 

Ancient Chinese curse alert… [PT]

 

“One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come on.  China’s outplayed the U.S. at this game for over a quarter century.  They have the upper hand.

“Besides, what’s the point?  If we no longer buy stuff from China, then how will China buy Uncle Sam’s debt?  And the timing for all this couldn’t be worse.  Deficits are spiraling out of control.  We’re talking $1 trillion or more a year for the next decade.  I don’t see any way out of this quagmire, do you?

“Printing money to buy government debt is no solution at all.  And a trade war will just hasten America’s insolvency.  What is it that Trump thinks he’ll accomplish, anyway?

“I’ve also heard that China’s tickled the debt poodle way more than we have.  So they may be worse off at absorbing an economic shock than us.  But I wouldn’t bet my life on it.

“Obviously, like I said, this won’t end well.  Yet there’s no turning back now. The trade war genie’s already out of the bottle.  That’s easy enough to see.  And maybe President Trump is right, and a trade war with China is warranted.

 

A joint hanging venture… [PT]

 

“But in the end, something big – like a massive fighting war or worldwide depression – will need to happen before this genie can be put safely back inside the bottle.  How do I know this?

“I know this because this is how these peacocks on the walk contests always play out.  The invisible line has been crossed.  Trump and Xi Jinping have both gone all in. There’s no backing up.  There’s no walking away.  They’ll keep chest bumping each other until something serious happens.  Then it will really be game on.”

 

It cries out for funding… the federal debtberg in all its glory. [PT]

 

Integration and Disintegration

Certainly, our colleague brings up some good points.  Is a trade war upon us?  If so, where will it lead?  Here we take a deep breath, and a sip of coffee, and endeavor to offer some perspective.

Expansions and contractions in global trade have rotated back and forth over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC.  This trade route provided continuous conduit for the exchange of goods, culture, and knowledge, between east and west for nearly 1,600 years.

Trade along the Silk Road came to an abrupt end when the Byzantine Empire fell to the Turks in 1453 AD.  For whatever reason, maybe a madman was President, geopolitical trends turned inward towards isolation. The Ottoman Empire closed the Silk Road and cut all ties with the west.

 

Sultan Mehmet II, the conqueror: not a friend of free trade [PT]

 

Global trade these days is conducted by shipping cargo across the international waters of the high seas.  Trade cycles over the last 200 years have often expanded for such a lengthy duration that several generations will come and go while only knowing the expansionary half of the trend. These extended expansionary episodes compel people to believe that increased global trade is a linear phenomenon.

 

A little row-boat with trinkets from China. [PT]

 

You have to go back to pre-1960 in the United States, Japan, and Western Europe to find someone with living memory of a global trade contraction.  China’s latest trade expansion began in the 1970s.  Eastern Europe’s began in the early 1990s.

Just because global trade has expanded for the last 50 years doesn’t mean it will continue to expand without interruption.  In fact, geopolitical shocks have periodically disrupted or reversed overall long-term trends in expanding global trade.  According to the World Trade Report 2013:

 

“Politics [at times] has intervened – sometimes consciously, sometimes accidentally – to slow down or even roll back the integrationist pressures of technology and markets.  It is this complex interplay of structural and political forces that explains the successive waves of economic integration and disintegration over the past 200 years; and in particular how the seemingly inexorable rise of the ‘first age of globalization’ in the 19th century was abruptly cut short between 1914 and 1945 – by the related catastrophes of the First World War, the Great Depression and the Second World War – only to be followed by the rise of a ‘second age of globalization’ during the latter half of the 20th century.”

 

Trade War Game On!

Presently, it’s unclear if we’re in the early stages of a global trade contraction. The trend in expanding global trade appears to have slowed over the last decade, following the 2008 financial crisis.  The budding trade war between the United States and China just might be the geopolitical shock that closes out the ‘second age of globalization.’

 

It wasn’t all that long ago, when they were still the best of friends… [PT]

 

This week Trump and Xi likely pushed the trade war past the point of no return. They called each other’s bluffs and raised the stakes as the week progressed.  By Thursday things had hit a fever pitch.

Our friends at Zero Hedge have been closely monitoring the situation.  Here are several choice quotes they alerted us to from an editorial published in the Global Times, China’s state-owned party mouthpiece:

 

“Many believe that the Trump administration’s $50 billion tariff on Chinese products is meant to pressure China to submit to the U.S. demands.  If that is the case, the U.S. will undoubtedly lose.  This is because the Chinese government has rallied its citizens and is prepared to go toe-to-toe in its fight with Washington.  In fact, more and more Chinese citizens think that an ‘epic trade war’ is inevitable, and could knock some common sense into the U.S. government, so that it will change its way of dealing with China.

“If the trade war happens, China will show that it has just as many reserve plans as the U.S., if not more.  Chinese experts suggest that China could even take actions to weaken the strength of its currency.  Since China is the world’s largest trading economy and the largest buyer of commodities like oil products, China could use its influence to push its own currency, RMB, in global markets to reduce the dominance of the U.S. dollar.  That would be a heavy blow to Washington.

“If this trade war comes to pass, it will be an evenly matched total war between China and the U.S. economies, and not some small scuffle.  It would be delusional for the U.S. to think it will be victorious at the end of this trade war.  China comes up with the conclusion in confidence, and will not shy away from letting Washington know in this situation.”

 

Alas, not good friends anymore. [PT]

 

By Thursday evening Trump had ordered US Trade Representatives to consider raising Chinese import tariffs an additional $100 billion, from $50 billion to $150 billion.  Several hours later, “Beijing vowed to defend China’s national interest against U.S. trade actions and protectionism.”

Now we’re talking.  Trade war game on!

Definitely not friends anymore!

 

In closing, lettuce spare a thought for the victims…  [PT

 

Chart by: St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

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6 Responses to “Trade War Game On!”

  • Hans:

    Would it be fair to say, that those whom argue that
    trade imbalance do not matter are the same folks
    whom believe that Federale debt does not matter either?

  • Hans:

    Now, this is a very interesting hypothesis, as to why America has suffered
    a long and lengthy red balance of trade.

    “Some economists attribute the enduring U.S. trade deficit to a new form of mercantilism by America’s trading partners, dubbed “monetary mercantilism” by Joshua Aizenman & Jaewoo Lee (2005), who defined it as “hoarding international reserves in order to improve competitiveness.” Under the classical form of mercantilism, countries encouraged their exports and discouraged their imports in order to build up their gold hoards. Under the new form, countries build up their foreign currency reserves as part of currency manipulations designed to encourage their exports and discourage their imports.

    Japan had gradually invented monetary mercantilism in the years following World War II. Then Taiwan, the Asian Tigers and China copied the policy that had converted Japan from a weak and backward economy to a world powerhouse. In recent years, more and more countries have been joining the bandwagon, with the United States as their primary target. They have accumulated dollar assets in order to manipulate currency values and preserve the conditions that produce trade surpluses for them and trade deficits for the United States. China’s foreign exchange reserve buildups outstripped all of the others put together. Navarro and Autry (2011) summarized the disastrous effect of Chinese mercantilism upon the U.S. economy:”

    http://ww2.odu.edu/~jrichman/workingpapers/MechanismstoBalanceTrade.shtml

    The nations whom have enacted this action, have all reached economic prominence – with
    of course their primary mechanism being trade surpluses. Does this suggest, that currency
    manipulate is more important than investments?

  • Hans:

    JKS, thank you for your reply.

    https://www.investopedia.com/terms/c/current-account-surplus.asp

    https://www.investopedia.com/terms/b/bot.asp

    “if a foreign trader chooses to save and invest in US govt. debt, US business debt, or equity; its still trade even though it shows up in that much maligned “trade deficit” stat.”

    Again, investments appear in current accounts. Foreign investments in the USA, are still debt or asset sales, which can not continue indefinitely.

    I will ask this question until I receive an adequate answer: Present a nation which has had a trade deficits over an extended period (30 years with 2/3 deficit) that has risen to economic prominence, America notwithstanding.

    Here is a more extensive article from Mr Griswold.

    https://www.cato.org/publications/congressional-testimony/americas-misunderstood-trade-deficit

    “There is no connection between trade deficits and industrial decline. From 1992 and 1997, the U.S. trade deficit almost tripled, while at the same time U.S. industrial production increased by 24 percent and manufacturing output by 27 percent. Trade deficits do not cost jobs.”

    Not true, if one examines the FRED chart. In fact, since 2000 industrial growth has stalled. Moreover, as of 1970
    industrial percent growth has been on a steep decline, based on the 1950 to 1970 period. Moreover, net
    manufacturing investment in the United States all but collapsed after 1980. The result is reflected in the
    second link below.

    https://fred.stlouisfed.org/series/INDPRO/

    “Americans have run an annual trade deficit in goods and services with the rest of world in every year since 1976. That unbroken string of deficits has colored much of the trade debate in the United States in the last two decades.”

    Has not Mr Griswold seen these effects upon the ever shrinking middle class! But he like the Fed said, trade deficit do not matter, because of foreign investments.

    “A nation’s trade deficit is determined by the flow of investment funds into or out of the country.”

    What becomes of nations which do not have the economic appeal for investments?

    “An understanding of the trade deficit begins with the balance of payments, the broadest accounting of a nation’s international transactions. By definition, the balance of payments always equals zero—that is, what a country buys or gives away in the global market must equal what it sells or receives—because of the exchange nature of trade.”

    So what, does this accounting method mean that the nation is healthy? A business balance statement always zeros out, does this mean the firm has a net worth?

    The thrust of the Mr Griswold prose is this – “Exports Are Good, Imports Are Better” rather than the effects on wealth.

    If what he says is correct, then we should have numerous examples of countries which imported
    themselves to economic prominence. Who are they and how many or should I say few are there?

    Here is chart comparing economies over a five year period: those with a surplus and
    those with a deficit and their annual growth rate.

    http://ww2.odu.edu/~jrichman/workingpapers/MechanismstoBalanceTrade.shtml

    Most if not all nations that prospered, did so because they had trade surpluses, which
    created wealth and a higher standard of living. Red China is the latest example and
    India and others will surely follow.

    Exports Are Good, Imports Are Better

  • Thank you very much for these analyses !

  • Hans:

    For every Red China import of $5.05, America exports $1.30. They say the balance
    of trade does not matter – if so, then why even bother to keep the stats?

    https://www.census.gov/foreign-trade/balance/c5700.html#2017

    Granted, it is not a game of winners or losers, however, clearly in the long run, one
    of two becomes more wealthier. One becomes a debtor, another a creditor.

    No nation has risen to economic prominence by running a continuous trade deficient.

    • jks:

      Hans, when you get paid do you spend the entire amount? If you save and invest a portion of your pay, that’s a trade deficit. Is that a bad thing? No. It’s a good thing. Capitalist economies need capital to start and/or expand business.

      Why even bother to keep the stats? Why indeed. Because if a foreign trader chooses to save and invest in US govt. debt, US business debt, or equity; its still trade even though it shows up in that much maligned “trade deficit” stat.

      This short article explains the benefits of a trade deficit well:

      https://www.cato.org/publications/commentary/are-trade-deficits-really-bad-news

      Any trade intervention that discourages foreigners from trading with the US cuts them off from earning the dollars they need to buy American. Trade makes everyone wealthier. That’s why a trade war can’t be won–only lost.

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