Some Notes on Trump’s Trade War Threat

The threat of Trump going from a trade spat to a full blown trade war with China has produced what Lamber would call an overly dynamic situation, so I’ll offer only a few observations. For instance, after Trump warned China that he planned to hit another $200 billion of Chinese goods with tariffs if they responded in kind to the US assigning tariffs to $50 billion of Chinese products, Trump upped the ante and said he would slap tariffs on an additional $200 billion of Chinese exports if China didn’t back down.

The trade war-mongers are in the driver’s seat. From the Wall Street Journal:

The White House’s tough stance represents the ascendancy, for now, of trade hawks in the administration, particularly White House senior trade adviser Peter Navarro and U.S. trade representative Robert Lighthizer…

“It’s clear that China has much more to lose” than the U.S. from a trade fight, said Mr. Navarro.

Mr. Lighthizer said additional tariffs wouldn’t be imposed until the U.S. picked the products, and received industry comment, a process that will take months and leaves open the possibility of additional negotiations. But so far there is no indication that such talks are on the horizon, and the Trump administration is signaling that it is increasingly confident of achieving goals through a dramatically more confrontational approach to China…

Next up from the administration is a plan to halt Chinese investment in U.S. technology, due to be released by the Treasury Department by June 30….

Mr. Trump has backed away from threats before….In April, Mr. Trump threatened a dramatic increase in tariffs on Chinese goods, but didn’t follow through. Instead, he approved negotiations Mr. Mnuchin led to get China to buy more U.S. goods and make changes to its tariffs and other trade barriers. That led to a temporary reprieve in the tensions as the two sides sought to negotiate a truce.

The White House has since judged those efforts a failure, especially after Mr. Mnuchin and Mr. Trump were criticized by cable TV hosts and some lawmakers of being weak on China. During a June trade mission to China by Commerce Secretary Wilbur Ross, Beijing offered to buy nearly $70 billion in U.S. farm, manufacturing and energy products if the Trump administration abandoned tariff threats. Mr. Trump rejected that offer as another empty promise.

Trump’s negotiating strategy, if you can call it that, appears unlikely to work with China. If one were to try to ascribe logic to Trump picking and then escalating a fight with China, it is presumably in the end to bring them to the negotiating table. But China is not North Korea, where the US threatened the Hermit Kingdom with nuclear devastation and Kim Jong Un with being the next Gaddafi and then dialed the bluster way down as China pushed and South Korea pulled North Korea to the negotiating table. And the good luck of the Olympics being in South Korea facilitated the process.

One could argue that all of the theatrics was to enable Trump to talk with Kim Jong Un and not look like a wus.

With China, Trump’s escalation to threatening another $200 billion of Chinese goods after his initial $50 billion shot is a reaction to China going into tit for tat mode as opposed to negotiating. This should not be a surprise. The more detailed press reports were making clear that China was initially not engaging with the US (as in making clear that they weren’t receptive to US demands and accordingly weren’t deploying meaningful resources to talks).

Even if China incurs meaningful economic costs in hitting back at the US, politically it’s a no brainer. China’s sense of itself as the power that will displace the US means it’s unacceptable to be bullied. China has been bizarrely sensitive to slights, for instance, lashing out during the 2007 IPCC negotiations and getting testy when the US put countervailing duties on a mere $224 million of goods. Recall that when the US put sanctions on Russia, its strategists seemed to genuinely believe that Russians would rise up and turf Putin out. Instead, his popularity ratings rose and even the Moscow intelligentsia rallied to support him.

Oh, and while we are speaking about North Korea, Kim Jong Un is in Beijing . It’s not hard to get the message: there’s no reason for China to play nicely in the face of US trade brinksmanship.

Trump appears to be relying on the idea that since the US imports more than China exports, we can do more damage to them in a tariff game of chicken. On the one hand, as Marshall Auerback has pointed out, in trade wars, the creditor nation, which would be China, typically fares worse than the debtor nation. However, China can do a lot a damage to US companies in China. The US has long had a policy of promoting the interests of US multinationals based on the claim that deeper trade relations would reduce the odds of war and make countries more disposed towards democracy. And when “free trade” ideology got a life of its own, economists and pundits regularly treated the idea of trying to protect domestic jobs as retrograde, even when many of our trade partners negotiated their deals with that consideration in mind.

As Bloomberg points out:

American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump’s threat.

The total amount of U.S. goods exports to China only amounted to $130 billion last year, meaning Trump’s potential tariffs on $250 billion or more of Chinese imports can’t be matched, at least directly. But if you measure both exports and sales of U.S. companies inside China, the U.S. has a surplus of $20 billion with China, according to Deutsche Bank AG….

One advantage of this tactic for Xi is that this time the numbers are on his side, as U.S. investment in China is far larger than the reverse. American companies had $627 billion in assets and $482 billion in sales in China in 2015, compared to just $167 billion in U.S. assets and $26 billion in U.S. sales for Chinese companies….

A change in trade priorities to focus on domestic employment isn’t nuts. It’s hard to know what Trump is trying to achieve as he calls for China to reduce its trade deficit by $200 billion. Given that the Administration said it will focus on the sectors depicted as priorities in China’s “Made-in-China 2025” plans in next round to tariff targets, China has good reason to think Trump’s real aim is to check its rise as a superpower.

Even though Trump is giving trade negotiations a bad name, there’s every reason to give domestic employment higher priority in trade negotiation. The reason Trump is so fond of tariffs is that they are a weapon he can deploy quickly and unilaterally, while negotiations and WTO cases take time. And even though the pundit class likes to decry manufacturing as oh-so-20th century, Ford’s Rouge plant employed more people than Apple does in the entire US. Restoring infrastructure would create a lot of employment, as would increasing domestic manufacturing.

But the US has eliminated the supervisor and middle managers that once ran operations like these. If we were to seek to build some areas of manufacturing, the US would have to engage in industrial policy, which is something we do now, but only by default, with the defense industry, financial services, health care, housing, and higher education among the favored sectors. So given our political constraints, it’s hard to see how we get there from here.

Mr. Market is anxious. Anxious is well short of panicked. Chinese stocks took the worst hit, but the latest round of threats took 4% off the Shanghai composite, taking it back to its level of 20 months ago. Chinese indexes were mixed today. By contrast, the Dow was down 1.15% and the S&P 500, 0.4%.

Having said that, the Fed is in a tightening cycle and stock valuations already looked pretty attenuated. Trade tensions and the uncertainty over how the threat to global supply chains will play out may lead investors to curb their enthusiasm, particularly if the Trump initiative starts looking less like another fit of pique and more like a change in the rules of the game that looks unlikely to work out well.

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  1. PlutoniumKun

    I think the Chinese response depends on the great unknown of the Chinese Communist Parties long term strategy. One line of thought is that the ‘Asian model’ of trade surpluses is for them just the means to an end for China to reach ‘high development’ status, from which point they would seek a much more balanced internal economy. The other, sees Chinas trade surplus – in particular the deliberate over production of strategic products such as microprocessors and pharmaceuticals as an end itself – warfare by means of trade. Both aspects are variations on the Japanese Yoshida Doctrine, something the Chinese have studied in detail.

    If the former, then its entirely possible that the Chinese see Trump’s threat not as a challenge, but an opportunity to carry out the necessary deep structural changes to balance their economy. A populist trade war would be the cover the government needs to dramatically cut over-production and focus instead on ensuring China has all the strategic products it needs (the most crucial of course is food). The CCP’s fear is always inflation in food prices – this is historically the trigger for urban unrest, as in the 1980’s. But if they have a foreign scapegoat for that, they may see it as a risk worth taking. Urban riots where people attack CCP buildings terrifies the leadership. Urban riots where people burn Trump effigies, less so.

    If the true strategy is the second, then Trumps attacks are an obvious threat. The Chinese are aware now of the growing awareness in the US of just how vulnerable the US has become to shortages of products which are now almost entirely Chinese made or controlled – many processed metals, pharmaceuticals, key electronic components, etc. If it is indeed Chinese strategy to use these for leverage at some future date, then they won’t want to risk undermining this in a tit for tat war. In this situation, they will tread much more carefully and won’t be worried about a minor loss of face if they stand down and give Trump the victory headlines he craves.

    In a broader sense, Trump believes that the biggest stick always wins a war like this, and he and his advisor clearly believe the US has the biggest stick. But in military terms, the winner in a war is not the country who has the biggest army, but the country that can bring the biggest army to the right field of battle. The Chinese (along perhaps with the Europeans and Mexicans) may believe that if they fight smart and focus on specific battles – such as US farm goods or key US aerospace and consumer electronics companies – they can make Trump and the Republicans really hurt. They know the electoral cycle in the US, which gives them a big advantage. It will be interesting to see if Trump forces all sorts of new and unlikely alliances in opposition.

    1. Loneprotester

      Interesting analysis. Do you think Trump’s aim could be to throw a spanner into their works, whatever the plan is, thereby buying more time to re-industrialize and wean US industries off of China? Also, it strikes me that Trump is consciously disciplining US-based businesses like Apple every bit as much as he is China.

      1. Quanka

        Hell no, that would require forethought and assumption that Trump cares about building anything that he can’t slap his name on. Trump’s policy has nothing to do with U.S. re-industrialization.

      2. Left in Wisconsin

        It would also require companies like Apple to show some interest in U.S. manufacturing, which is not the case at this time.

        I’m all for whatever barriers are necessary to re-invigorate and modernize U.S. manufacturing. But it will be impossible to make progress if U.S. multi-nationals refuse to go along. Trump doesn’t play the long game and there is really no evidence that he is willing to challenge/threaten U.S. firms in substantive ways. Remember the campaign threats against Ford? Since then, Ford has not upped its U.S. investment but instead chosen to get completely out of the small car business. And that is a company that still has an extensive U.S. manufacturing presence, unlike, say, Apple.

        I think this is what the Chinese understand (maybe Trump does too and this is all just theater for 2020). They can play hardball with Trump as long as US MNC’s are on the side of China against the U.S. In the last 6 months, have you heard a single large U.S. manufacturer voice support for Trump’s trade policies? I haven’t.

    2. MyLessThanPrimeBeef

      If the Chinese focus on key areas that can ‘make Trump and the Republicans really hurt. They know the electoral cycle in the US…,’ wouldn’t that be outright election meddling?

  2. Clive

    There is the same logic, possibility, at work in Trump’s thinking (and thinking may be too generous a term for it but we do I suppose have to assign some sort of plan being pushed through here) to that of the U.K.’s Brexit Ultras.

    For the Ultras, reestablishing political and sovereignty independence is conflated and intertwined with economic independence which all — through a mechanism which is never adequately explained — will result in domestic economic revitalisation that doesn’t require government direct intervention.

    No, it doesn’t stack up or make a great deal of sense, but having been around many hard-core Brexit’eers in the Brexit heartland (and the Conservative party’s local association in a Brexit stronghold) the people who hold this worldview do make it work within the confines of their own minds. It goes something like: if you neutralise or at least weaken the power blocks which are winning out politically and you’ll reap a reward economically. The fallacy assumes that you can give Johnny Foreigner a good kicking at the sovereignty and international power-broker level and because you’re a geopolitical shaker and mover, that’ll pay off in trade terms. All without consequences.

    But of course there are always consequences. Other countries can decide to endure downsides (not least because the various ruling elites don’t end up on the receiving end of these, usually) — this was the same gamble the U.K. government made, unsuccessfully, with the EU (“we’re in the unassailable position because we import from them more than we export”). And so also with China. If Beijing is prepared to play a long game, it can tough it out with the US, potentially longer than the US is prepared to tolerate.

    This has always been the case with the US (and the U.K. too, for that matter) — they never expect anyone else to tolerate any downside which is imposed. They’re astonished when Cuba, the DPRK, Iran, Russia, China and even to a lesser extent the EU don’t simply fall into line when they click their fingers.

    1. John B

      There are different power centers operating in the Trump administration’s trade policy. Trump himself may be motivated by no more than a desire to appear tough — and as Yves notes, tariffs are one of the few ways a US president can act swiftly and unilaterally to do so.

      His advisers are another matter. They would like to pressure China to have more open and fair policies, but are OK with the consequences if China refuses — i.e., an extremely large decrease in US trade volumes with China, and, indeed, the entire world. They have probably performed a calculation similar to the one outlined by Paul Krugman in his June 17 column on trade wars. Basically, a global trade war would not have a giant impact on global GDP — perhaps 2-3 percent assuming tariffs on everything in the neighborhood of 30 percent. There would be displacement of jobs and workers while everyone readjusted, but that’s a price the Trump administration would probably be willing to pay. And, what Krugman does not mention, the United States as a very large economy would in fact do less badly in a trade war than most others countries. By losing less, it would “win” in the zero-sum universe Trump seems to inhabit.

      That’s a difference between Trumpers and Brexiters. Britain is an island that has always depended on trade. The US has two oceans around it, still the world’s largest economy (more or less), adequate natural resources, and a whole hemisphere to pick on.

      1. PlutoniumKun

        I think you are right in suggesting that the calculation is that even an all out trade war would not be catastrophic, and the US would come out best.

        I think the problem with this thinking is that it assumes symmetric actions by all the major parties, but in this sort of trade war it will be more targeted and asymmetric. By which I mean that the Chinese and Europeans in particular have immediately targetted more obvious, vulnerable US sectors. At first, these are just rather obvious ones, like Harley Davidson bikes or Levi Jeans, but its not hard to see that if it gets serious there might be co-operation to target what they see as Trumps heartlands. As I suggested above, a targeted attempt to hit key US food exports at the strategically right time could be devastating for US farmers, and domestically China and other countries may accept the ‘hit’ domestically as they have a convenient scapegoat.

        I should say though that whatever the outcome, the uncertainty created by Trumps action is likely to make all investors much more wary of businesses which depend on widespread global supply chain networks, which can only be a good thing for people trying to keep jobs local and to reduce emissions. Its unfortunate that when these come about through trade wars the impacts (as usual) will hit ordinary people first, at least in the initial stage.

        1. Clive

          I do agree that the zenith of long, complex and ultimately not especially resilient global supply chains has passed. For at least 20, possibly 30 years these have received and been able to rely on unstinting political aircover and hidden subsidies.

          Not any more. There’s some minor tremors already being felt with the distinct possibility of some bigger systemic shocks in store.

          1. el_tel

            I do agree that the zenith of long, complex and ultimately not especially resilient global supply chains has passed.

            Indeed – anecdotally and slightly tangentially – the days of outsourcing call-centres etc are numbered. Whilst many knowledgable people have shown that the cost savings have not turned out to be anything like as large as the corporations predicted, consumer hatred cannot be understated. I have gone through several weeks of arguing with Three over their service, being bounced around various call-centres offshore. Finally, an email to the CEO, pointing out (in a measured way) how my business calls and those of other businesses who use them will very quickly be affected, it was amazing how quickly things progressed, with my complaint being escalated to the CEO executive group. I phrased it in terms of the fact their business model now actively encouraged (and in many cases only supported) people to use phones known to be vulnerable to hackers and companies are really not going to like that, even if they’re cheap. Furthermore Three are immensely vulnerable come the next 5G spectrum auction (they are significantly in trouble spectrum-wise) and I was about to be escalated to the Ombudsman, and told the CEO I’d be highlighting their security vulnerabilities – something they really don’t want, even though they’d done it to save a bob or two in outsourcing.

            Things were sorted ASAP; it was obvious that a UK programmer redid the whole Three app and web interface over a weekend (I used to program in Fortran in my PhD and diagnosed their problem straightaway). Three used to be innovative in carving out a niche segment regarding its roaming plans – but has not kept innovating, and EU laws on roaming now mean its advantage is largely gone…whilst Vodafone staff in stores gleefully tell customers that you’ll talk to a British call-centre – they have calculated that the price premium is worth it, if people don’t have to go through what I did, particularly high-value customers.

            The days of long supply chains are numbered, most definitely. Systemic breakdowns would simply kill a company that operated as they did. Now rapid changes seem to be in motion to make supply chains more robust and acceptable….

            1. PlutoniumKun

              I hope its true – the fascinating shipping stats that Lambert posts in WaterCooler most days shows that transport is still a huge and growing business, and seems to have recovered from the changes made 5 years ago when the oil price peak made a lot of companies think twice about long supply chains. But there do seem to be a converging set of factors which must surely make companies think twice. If you combine energy price risks, political risks, increasing tarrifs, consumer resistence, etc., there are more and more incentives for companies to tighten and simplify supply chains. But I think it will be quite a while before we see the impacts (and I’d never underestimate the power of inertia behind globilisation either).

              Its often forgotten of course – mostly by economists who never study history – that we’ve been here before, most notably in the late 19th Century when the trade was highly globilised, thanks to the major empires. That unravelled with startling speed.

              1. el_tel

                Indeed, I see his statistics and agree regarding interia. But, as you say, economists are rubbish at history – and coupled with their fascination with models that are ergodic (when the climate models suggest we are entering new territory with complete “breaks” in the relationships and possible sudden shifts to new equilibria with associated huge, fast, cyclical changes) I can’t help but wonder if the supply chain models simply must collapse if the climate scientists are right and the economists are wrong. But only time will tell….

          2. Jim Haygood

            Speaking of ‘bigger systemic shocks,’ Doug Kass puts a finer point on it [lifted from the Z site this morning]:

            [Trump’s] policy and negotiating tactics hold the risk that business confidence could be jeopardized and supply chains may be disrupted.

            I have long argued that the “Orange Swan” would ultimately be market unfriendly – that an untethered Trump would “Make Uncertainty and Volatility (in the markets) Great Again.” (#MUVGA)

            And, I have recently argued over the last few months that the president’s behavior is now beginning to impact the capital markets.

            Acting upon his impulses, growing more isolated and becoming more unhinged — the Supreme Tweeter is now an Orange Swan headwind.

            Rex, eat your salad …” – President Trump

            What numerical analyses such as Kurgman’s miss is confidence. Popular mood has propelled Bubble III to stratospheric heights, with equities and property dear worldwide.

            All it takes is for confidence to falter, and the whole house of cards comes tumbling down with a crash far out of proportion to the minor changes in economic stats that will be visible at the time. ‘No one could have foreseen …‘ etc

            Bubbles, and their aftermaths, are self-reinforcing both on the way up and the way down. A manly square jaw and a glorious orange helmet will take you only so far when you haven’t a clue what you’re doing. :-(

            1. MyLessThanPrimeBeef

              Since Kass mentioned ‘negotiating tactics,’ presumably many now also are aware that factor.

              Judging by how the bubble is holding up, can we say that, so far, the key market players are receiving that message and remain (again, so far…the Nasdaq dropped just a bit yesterday after the additional $200 billion tariffs news) confident on this front (but whose confidence can be shaken on other fronts… for example, perhaps by others who worry openly and warn that the sky is, at this moment, falling).

            2. False Solace

              Who needs confidence when the Fed has proved it will just step in and buy whatever’s necessary to prop up the market. Loot on the way up, loot on the way down. Fearing volatility is for smallfolk.

            3. Left in Wisconsin

              All it takes is for confidence to falter, and the whole house of cards comes tumbling down

              But U.S. MNCs have had no confidence in U.S. manufacturing for decades. Which is why we need to never anger the bubble-driven “confidence fairy.” On the fundamentals that affect most people, the house blew down long ago.

          3. liam

            What’s amazing, is that right at the time when being part of a large trading block would seem to be an imperative and not just an advantage, Britain decides to leave the EU. Even the very timing is wrong.

        2. Left in Wisconsin

          Much as I would like one, I am quite confident there will not be a global trade war. Trump has no long game and in any event no stomach for taking on the entire U.S. business class. There will negotiations, flip-flops, photo-ops, some marginal claimed “wins,” no real change, and on to 2020.

      2. Jim Haygood

        ‘Basically, a global trade war would not have a giant impact on global GDP — perhaps 2-3 percent assuming tariffs on everything in the neighborhood of 30 percent.’

        Kurgman seems to assume that the radical adjustment to supply chains is nearly frictionless. But it’s not. Vast capital investment will be needed, at a time when corporations are already highly leveraged by piling up debt to buy back shares.

        A trade war is just the pin we need to pop Bubble III and send it crashing to earth like the Hindenburg — oh the humanity!

        It’s a heavy price to pay, just to turf out Herbert Hoover Trump after one term and highlight Peter Rabbit Navarro as the PhD Econ know nothing who wrecked the global economy. Even the benighted Kurgman sees that Navarro is a total charlatan.

        1. MyLessThanPrimeBeef

          Is it the trade war (this week) or raising rates (last week) that will actually be the pin we need to pop Bubble III?

          1. jsn

            It has been interesting for the last few years watching the pigs cotillion that passes for a “western elite” pull pin after pin after pin on what have been assumed to be grenades thus far without any detonation.

          2. Jim Haygood

            Though we’ll never know for sure, the Fed’s bond dumping is a financial pin, while trade wars are a confidence smasher.

            Once a stampede starts, it acquires a momentum of its own: you’re obliged to run, not because you were scared, but because a thundering herd is coming at you.

    2. PlutoniumKun

      I’d agree very much with this, Clive. I would add that this sort of delusion seems largely restricted to major powers who haven’t suffered a major loss (or at least not one that couldn’t be quietly forgotten) in a century or so. Those of us who live in smaller countries always know that true absolute ‘sovereignty’ in the real world is a chimera. What matters is what areas you maintain control, and which ones you let go – and its always better to let some go than have them ripped from your hands. And those countries who have suffered humiliations in the recent past (Germany, France, China, Japan) have fewer delusions about the dangers of arrogance and powerplay, although the French in particular are prone to forget.

  3. The Rev Kev

    An overly dynamic situation is one thing so long as it does not end up in a ‘kinetic’ situation. I am going to go out on a limb here and say that Trump’s threats against China are a gamble but will have to explain it a bit. For about two decades after the collapse of the USSR we lived in a unipolar world with the axis located in Washington DC. You had people like McCain, Rubio, Navarro, Lighthizer and Graham working through their careers in this ‘golden age’ but those times are now definitely over. The world is once more reverting to its normal state of a multipolar world and people like the aforementioned people cannot tolerate this.
    To push back against this reversion, they have been trying on a wide front to use American military and economic power to make countries bend to their will. Threatening allies if they purchase Russian weapons, blackmailing the EU to abandon Iran in preparation for a cruel embargo, threatening Turkey by withholding sales of the F35 fighter, etc. have all been tried. For several reasons, this approach is not working so well anymore. So at this point, after wrestling some time with countries like Russia and Iran, the US has decided that they need to attack the center of gravity in this new multipolar world and that means China.
    The US demanded that China reconfigure their entire economy to enable US corporations to have more power and say in China while demanding that China curtail their advancing their technological development program. China balked at this but did offer compromises to no effect. With the lunatic policy of pushing China and Russia together, a massive political and economic federation is slowly forming on the mass of lands from Vladivosok all the way through to Europe. If that happens, then the US definitely becomes a second rate power. The clock is ticking on this development hence the attempt to cower China which is the linchpin for this.
    Trump has been convinced that the US holds the upper hand and decided on a gamble, a doubling down if you will, so that a decisive victory will be achieved on the cusp of the 2018 US midterm elections. The trouble with all this is that the US is hemorrhaging both soft and hard power and is in a weaker position now. There is more and more countries seeking to bypass use of the US dollar as being too dangerous to use for some countries and working with an American company and buying America products is also being seen as risky. An example is when the US forbid Airbus selling its own aircraft to Iran due to the presence of US parts. I am willing to bet that a lot of other companies sat up and took notice of this. So now for Trump he is going all in to try to overturn these developments but as we say in Australia, he has two chances – his and Buckleys

    1. liam

      They do seem to be caught in something of a chinese finger puzzle alright. Everything they do seems to make their opponents stronger in some fashion or another. As per PK above, I wonder if Trump is not, unwittingly, doing the Chinese a favour?

    2. False Solace

      There’s a reason historical trade routes followed the Silk Road, a reason horsemen swept out of the Mongolian plains to conquer the world time and again. The axis of human trade runs through Europe/Asia. It has never run through North America and never will. The US can’t be the axis of the world because it quite simply isn’t located in the right place along the right population vectors. This is a fact the US military is well aware of. If the US tries to maintain its position in the long run it will fail. That’s just the way it is, and the sooner US stops propagandizing its own citizens to the contrary, the better.

  4. Louis Fyne

    to throw out an unconventional thought: if you’re an environmentalist/anti-climate change, you should want a trade war.

    I guess per the media and Democratic pundits it’s: Reduce, reuse, recycle–Unless your goals align with a Trump policy on a discrete issue.

    you should want to stop the government-subsidized 5/10,000-mile supply chain.

    Government-subsidized as in: favorable taxation for fuel oil, government subsidized port facilities/roads, lax emissions regulations, lax labor laws, etc.

    1. el_tel

      to throw out an unconventional thought: if you’re an environmentalist/anti-climate change, you should want a trade war

      That thought occurred to me too. Of course this is one of those situations in which the supply conditions support this but the demands of the population…? Nasty situation…..People are going to have to learn (maybe the hard way via the oft-quoted “war-like BREXIT economy on here”) that lots of foodstuffs currently grown between the Tropics of Cancer and Capricorn are simply going to become unavailable. A 2-5 degree increase in average temperature in many of the countries there – particularly those with high humidity – means that unless they have a LOT of energy to aircondition people for large parts of the day, then human life will be impossible – the body can’t sweat enough to eliminate excess body heat if not cooled and death is inevitable. Nasty times ahead for lots of countries in the “middle” of the planet…..and besides the (obviously) huge human cost to them, the days of producing nice vegetables out of season for us at higher latitudes will soon be over.

  5. cnchal

    But the US has eliminated the supervisor and middle managers that once ran operations like these. If we were to seek to build some areas of manufacturing, the US would have to engage in industrial policy, which is something we do now, but only by default, with the defense industry, financial services, health care, housing, and higher education among the favored sectors. So given our political constraints, it’s hard to see how we get there from here.

    Perhaps, Trump is using the method of obliquity to get what is important to the powers that be, the fraudsters of Wall Street.

    For instance, three nano seconds after the billionaire’s tax cut was passed his top economic advisor, Gary Cohn resigned, and the reason given was his opposition to the direction trade policy was going, but really, who is dumb enough to believe that?

    Quoting Trump:

    “Gary has been my chief economic adviser and did a superb job in driving our agenda, helping to deliver historic tax cuts and reforms and unleashing the American economy once again,” Trump said in a statement to Times. “He is a rare talent, and I thank him for his dedicated service to the American people.”

    Substitute “billionaire class” for “American people” to get closer to the truth. Gary is a venal mercenary that went to Washington to get a jawb done.

    Two of the “demands” by the US when it comes to “trade” is that intellectual property be respected and that US “companies” operating in China be permitted to do so without the requirement to form partnerships with Chinese (CCP offshoots really) companies, and to get there, my cynical self suspects that all peasants are nothing more than cannon fodder in this trade war so that the fraudsters of Wall Street can go into China unfettered and loot the Chinese as much as they have looted Americans, and without sharing a cut with Chinese “partners”.

    1. a different chris

      Sadly, the Europeans are key to preventing this. Only they have the purchasing power to offload China’s current surplus, and eventually proceed to an even trade relationship as the other terminus of the Belt.

      I say sadly because they are the wimps of all time, and they will simply not let go of Mother America’s apron strings. So at least for my lifetime (another 20-30 years I’m expecting) things aren’t going to change — well, they will actually get worse for the 90% in the US as well as everywhere else, but the overall state-level power dynamics will remain.

      Funny also because the F35 sucks, you can barely tell where they detonated the MOAB, Elon Musk is building strange, badly-thought out tunnels, our military is just tired, tired tired…. yet still everybody cowers. What are they afraid of?

  6. EoH

    You make a good point in deriding Trump’s vacillating positions as not a policy. (For comparison, Kirstjen Nielsen’s consistent behavior in having her dept. separate would be immigrant adults from children – without tracking who belongs to whom – is a policy.)

    Trump’s focus on domestic jobs would be an excellent, indeed, a necessary policy. Successful economic competitors in Asia and Europe do exactly that. For Trump, however, it’s not a policy, it’s a talking point.

    As you say, American mythology is that it has no industrial policy. The reality is that it has one, but it’s written, implemented and policed by the private sector. It does not want government to make a priority of domestic employment because it has largely abandoned the idea as impossibly unprofitable.

    In that, Elon Musk’s reduction of at least 9% of his manufacturing workforce is the standard antediluvian response to management’s inability to meet its self-imposed objectives. He has decided, all evidence to the contrary, that his line workers and the processes they are implementing are adequate to meet his objectives. They just need someone to crack the whip a tad harder.

    But which jobs is Musk cutting? Largely middle management supervisors and technical staff. These are the people with manufacturing know-how, the very people most likely to fix Musk’s manufacturing-cum-quality process defects.

    Musk is throwing out the people who could most help him meet his objectives. Adopting policies to which Detroit has long been addicted will produce the consequences they always have before.

  7. bronco

    Krugman is not to be taken seriously on anything. He may actually know economic theory but he sold out so long ago that anything he writes I dismiss out of hand as propaganda . I don’t think he even has the potential to be stopped clock right about anything . Every column is econo-babble designed to support whatever message his handlers need put out there. I think of him as the Baghdad Bob of the economics bloggers.

    As far as trade wars go I say bring it on. We have gotten so soft here in the US that everyone seems to walk around wringing their hands and moaning all the time. My parents grew up during WW2 they had ration coupons and no passenger cars , no gasoline , full on recycling of everything. I’d like to see some belt tightening of that sort in the here and now. I grew up in the 70’s I remember the energy crisis clearly, and people under 45 or 40 maybe literally have no clue what it means to have limitations on basic necessities , not I can’t afford the new Iphone but that it just can’t be bought period.
    Where ever one is in the golbal warming spectrum or the environmental spectrum personally , we just can not go on the way we are . We need to put pressure on people to think about how they live and how they spend and what our government is doing in our name.

    1. Synoia

      and what our government is doing in our name.

      many, many thing of which I do not approve, and wish to have no part of. However, in some manner I feel responsible as this is a democracy, and I should have some influence (minuscule as it is).

      1. Isotope_C14

        The US is an oligarchy, even Princeton academics agree.

        Part of the way to end that problem, is seize control back from the tyrants.

        My suggestion is to join the poor people’s campaign, and do whatever you can do for them, whether it is protest, make signs, or send small donations.

        Don’t let the oligarchs make you believe that what they do is in your name. It is not, and the only way to stop them is to make them fear the population.

        Elections won’t do it – not as long as black-box voting machines and interstate cross-check ensure that the poor voice is as quiet as possible.

      2. bronco

        I have felt for a long time that our consumption based economy is a way to keep people so self absorbed that they don’t ask too many questions .

        WHEEE I got a new Iphone , instead of why are we bombing these people.

        Looking back I was a happier person when I had less possessions. I don’t know when the cut off point was though. I mean as a young man I did without and wanted things and then there was a period of fuzziness and now my house is full of shit that I don’t even care about.

        I can remember waiting in line at a gas pump with my dad so we could go to nantasket beach. I didn’t mind waiting in a hot car for an hour because I was excited to go. Now you see a family out in a car everyone has their device and do they even care where they are going?

        In a world of plenty everything seems cheap and tawdry . Bring on the trade war , lets see people start to do without and then realize the garbage they can’t get isn’t even important.

  8. False Solace

    > One advantage of this tactic for Xi is that this time the numbers are on his side, as U.S. investment in China is far larger than the reverse.

    That’s a really weird definition of the word “advantage”. The factories and plants US companies built in China employ Chinese workers and consist of infrastructure that exists in China. If China cracks down on those plants it’s basically punching itself in the face. Share prices for those US companies would fall, but as a working class American I honestly DGAF.

    1. MyLessThanPrimeBeef

      That’s a good point.

      Always examine the place from which the writer is coming or seeing the world.

    2. cbu

      The American companies get far more revenue from their Chinese operations than their Chinese workers can get from their salaries. So China’s retaliation will disproportionately affect the revenue of these companies instead of the income of their Chinese workers.

  9. David in Santa Cruz

    As tempting as it is to attribute this to personality failings, I don’t believe that Mr. Trump’s China tantrum is geopolitical one-upmanship. It is more likely a reaction to the annual Industrial Capabilities Report released on May 17 by the Pentagon’s Office of Manufacturing and Industrial Base Policy, in parallel to a similar review being conducted internally by the White House.

    The Pentagon has concluded that two decades of financially-engineered corporate concentration and out-sourcing of skilled work to China has stripped the U.S. Military-Industrial Complex of its “organic industrial base.” It appears evident that the White House has decided that tariff barriers on China are the only way to rebuild a population of of “qualified workers to meet current demands as well as needing to integrate a younger workforce with the ‘right skills, aptitude, experience, and interest to step into the jobs vacated by senior-level engineers and skilled technicians’ as they exit the workforce.”

    In short, the U.S. MIC is running out of bombs.

    1. MyLessThanPrimeBeef

      It’s good to have an ‘organic industrial base.’

      And Chins is well aware of the Japanese Judo, which advocates using someone’s energy to do the work for you.

      Here, workers in the US can take advantage of the energy of the MIC to achieve the goal of making American manufacturing and employment great again.

  10. Synoia

    Form the headline:

    Mr. Market is anxious. Anxious is well short of panicked.

    When was “the market” not anxious? It appears to me that fear, anxiety, is paramount.

    They, the market participants, are anxious where they are making money, they are anxious when not making money, they are anxious when they have money, and they are anxious when they don’t have money.

  11. Fiddler Hill

    I find myself confused and in a quandary. Is it not neliberalism and global trade that over the past 25 years or so has led to corporate mega-wealth and the beginning of the end of the US middle class, and the further impovisherment of the working class? If so, then as a good progressive, should I not welcome a trade war or whatever economic change will end this global economic tyranny? Is the skepticism or outright opposition to a trade war of so many progressives simply based on the fact taht t’s being initiated by the colossal idiot in the White House who may inadvertently be doing something beneficial?

  12. phichibe

    I’m not an international trade economist so take everything I say here with a large grain of sodium chloride.

    That said, I have been a keen student of the global economy since the mid 1970s, and in particular lived through nearly two decades in Silicon Valley, where in the 1980s we were all terrified of the Japanese “5th Generation” computer project and their announced intent of doing to our computer hardware and software companies what they had done so successfully since the 1950s where they started by targeting the steel industry, then the ship building industry, and finally auto manufacturing. We fully believed that we could be next. In fact, it is not at all clear why the Japanese effort failed, although some possible explanations is that they had poor market timing, that they sought initially to dominate DRAM production just as a huge glut of capacity became evident, that their focus was too-mainframe centric a la IBM, and/or that their computer companies were casualties of the financial crash that hit the Japanese economy starting in 1989 when the Nikkei was at 42,000. Since all the computer companies were parts of larger keiretsus, and these were built around the great Japanese banks that suddenly found themselves overexposed, it simply be that the Japanese computer initiatives of the 80s fell because they ran out of capital.

    What’s clear is that the Chinese have been following the Japanese/Korean development model, namely by becoming an export-driven powerhouse. Something like 80% of Chinese production is for export. THe U.S. is, I believe, just the opposite. We are a much more autarkic (self-contained) economy. Even the vaunted “Belt and Road” project appears to my cynical eyes as a white elephant in the offing, and I think the Chinese launched it as a way of delaying the day of reckoning they are facing with respect to the *major* levels of overcapacity they have in cement, steel, and other heavy industry sectors. The statistics of Chinese over capacity in these are mindboggling – I can’t quote them here but I recall reading that it exceeds the total capacity in these industries in all the EU nations combined. Rather than reduce capacity and lay off millions of workers (as well as force the lenders to these entities to write down any loans to them made in the last decade), Xi opted to punt the ball down the road (and the belt ;-) Like Erdogan in Turkey, who the NY Times wrote in an article yesterday has been constructing giant building projects that have little prospect of generating revenue to pay for themselves, I think Xi and the communists are postponing a day of reckoning that when it comes may be brutal.

    I think, best case, the Chinese are facing a Japanese-level reckoning and that they will have decades of no-growth. The Japanese “miracle” that ran from the early 1950s to the late 1980s seemed unstoppable, and the Japanese absolutely believed they had invented a new form of Asian capitalism, one that by virtue of the keiretsu structure insulating its companies from too much market discipline these were able to avoid the “quarter-to-quarter” short term planning horizons that were deemed to be crippling American corporations, particularly in the wake of the Drexel-funded greenmailers like Boesky, Perleman, and Icahn who put great pressure on U.S. companies to keep their stock prices up. I recall reading a long interview in the Economist with Lee Kuan Yew a few years before the Asian crisis of 1997, where he went on at length about what he called “Confuscian Capitalism”, an autocratic model of both commerce and governance that was essentially one-party “democracy” with a veneer of limited civil rights, and a very mercantalist/dirigiste economic development model a la the Japanese Ministry of International Trade and Industry (MITI), the government planning entity that had for three decades led Japan’s industrial policy and guided its success in steel, ships, and autos.

    The echoes of Japan’s 5th Generation project (itself only one of more than a dozen similar initiatives aimed to gain for the Japanese the technological high ground of the 1990s and beyond) with China’s 2025 Initiative are startling. The Chinese may in fact succeed where the Japanese failed. I can’t say for sure, not least because it’s unclear to me or to any economic writer whom I respect why the Japanese efforts failed (see what I wrote above). The Chinese have huge cash reserves, and this may be guiding their strategy going forward, that they can keep their economy going even if exports slump due to Trump’s tariffs; what is ominous is that Japan had huge cash reserves by the late 80s, and while these may have prevented their economy from slumping into a true depression, they haven’t been enough to restart the Japanese economy in the nearly 30 years since. I have a suspicion (and only that, no firm belief) that China is in fact substantially more vulnerable to any economic decline than Japan was in the late 80s. My suspicion is based on two certainties: first, China has a massively unbalanced economy, unbalanced between domestic consumption levels and the levels of industrial production, meaning China *has* to export or its domestic industries will wither; and China is sitting on massive excess capacity already, setting the stage for enormous pain either in the form of Andrew Mellon-type liquidation (unlikely due to fear of domestic unrest) or a deflationary-death spiral among the producers. The second reason I think China may be a house of cards is that nobody, not even the Chinese government, has accurate statistics of production, consumption, debt, and lending. In short, China has for decades created a cauldron of potential disaster because the official statistics are “gamed” by the Communist Party bureaucrats all the up the line, from the village boss to the Ministers of Finance, Industry, etc. I recall when the Chinese government prosecuted a South China Morning Post reporter about 15 years ago for reporting economic statistics that he’d obtained from a minor bureaucrat in the city of Wuhan, IIRC. I think the government was sending a message to both its own bureaucrats and to reporters, foreign and domestic, that even the most mundane economic statistics were state secrets and no breach in the cloak of silence would be tolerated. As a result, no one in China, not even Xi, knows where the the bodies are buried, where the Chinese “Lehman Brothers” are lurking.

    All this brings me back to the incipient trade war. I think Navarro and Lighthausser (sp?) believe that China is the next Japan, that it has a “glass jaw” and that the U.S. can trigger China’s “Japan moment”. What I fear is that they may be right, but that they are ignoring a huge difference between Japan 1989 and China 2018, namely that Japan since the end of WWII has forsworn any military ambitions and geographic expansionism, while China has been doing exactly the opposite, especially in the last decade. The “Nine Dash” controversy makes clear that we are dealing with a China that is much more like Japan circa 1934 than Japan 1989. If China starts to stumble economically I fear that its leaders will resort to the time-worn option of autocrats from Mussolini onward, namely focus on the external enemy and military confrontation.

    It’s worth remembering that the triggering event of the Japanese attacks of December 1941 on Pearl Harbor, the Philippines, Singapore and Malaya, and the Dutch East Indies was the American embargo on exports to Japan, starting with scrap iron but expanding to include oil exports in July of 1941 after the Japanese invaded Southern Vietnam. Autocratic nations facing economic crisis seldom accept their decline meekly but rather lash out. Fasten your seat belts, it’s going to be a bumpy ride.

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