Marshall Auerback: So Far, the Big Trade War Loser Is China, Not the U.S.

By Marshall Auerback, a market analyst and commentator. Originally produced by the Independent Media Institute

Trade wars are neither easy nor costless, in spite of the insouciant assertions of President Trump to the contrary. But it is also the case that those who predicted that the far-sighted mandarins who guide China’s economic policy would win this battle might be similarly guilty of misplaced confidence.

It’s early days, but so far the constellation of economic data that has come out of both countries suggests that it is China, not the U.S., which is bearing the brunt of this particular skirmish. And so long as the U.S. economy continues to grow, the corollary is that we should stop regarding these protectionist measures as temporary aberrations in America’s internationalist policies, especially on free trade. Rather, this is the new normal: an expression of a rabid 19th-century-style nationalism, reversing decades of globalization and shifting the worldwide economy into a series of competing regional blocs and alliances in the process. Maybe even a new Cold War (with China this time, not Russia).

Beijing has just reported its weakest quarterly official growth figure in a decade, and its currency has recently fallen to its lowest level since 2017. The 6.5 percent year-on-year growth reported for the third quarter is the official figure, and Chinese officials themselves have long conceded that many of their economic measuring sticks are doctored (which means that the unofficial, but real, number is probably much worse).

By contrast, the U.S. economy has remained relatively robust and shows little sign of a slowdown yet. The fact that the recently imposed tariffs in this growing trade war have not yet caused any significant economic dislocation domestically will likely embolden Trump and his trade team to up the ante as far as sustaining additional pressure on China, or to consider similarly aggressive action against other countries that conduct policy in a manner Trump considers deleterious to American trade interests. This will play well in swing states considered crucial to the president’s ongoing political success.

In the post-World War II period, the U.S. economy has remained the largest and most powerful in the world. Certainly it has long been the most developed consumer market, access to which has represented the crown jewel for any aspiring exporting nation. But until Trump, previous administrations have been somewhat more circumspect in resorting to aggressive protectionism to bludgeon better reciprocal terms for American businesses. Yes, the Reagan administration demanded export quotas from Japan’s automobile manufacturers, and George W. Bush and Barack Obama occasionally resorted to anti-dumping measures against China, notably after its entry into the World Trade Organization (WTO), which wrought devastation on the American manufacturing sector (particularly in the Rust Belt states). But these were all considered temporary measures; the underlying ideological assumptions of globalized free trade, and the so-called “Washington Consensus,” remained largely unchallenged as benign ends in and of themselves.

The focus of liberalization and deregulation of trade, however, began to change in the 1990s, reflecting Washington’s changing policy preferences, notably privileging finance over manufacturing via increased services liberalization, in exchange for continued access to the U.S. consumer goods market. Fighting for manufacturing interests basically went out the window after the Plaza Accord, under which then-Treasury Secretary James Baker managed to secure a devaluation of the dollar in order to improve America’s export position.

By the time Robert Rubin became Treasury Secretary, he regularly articulated a strong dollar policy, evincing little concern for U.S. manufacturing interests. Rubin espoused this belief on the grounds that a strong dollar attracted more portfolio flows to the U.S. capital markets, thereby sustaining the boom in American bond and equity markets, (a primary objective of the former Goldman Sachs co-chairman). Certainly the hardline stance adopted by “The Committee to Save the World” at the height of the 1997–98 Asian Financial Crisis, for example, was in part motivated to ensure that the emerging Asian markets crisis could be exploited in order to lever open their markets to the likes of Goldman Sachs, JPMorgan Chase, Citi, and a host of other financial interests. Nary a word for U.S. manufacturers. Indeed, America’s Asian Cold War allies were shocked at the manner in which the U.S. ruthlessly exploited the crisis for the benefit of Wall Street (failing to appreciate that the end of the Cold War had essentially eviscerated the basis of the bargain whereby American trade policy accommodated a huge increase of Southeast Asian exports to the U.S., to underwrite the latter’s ongoing prosperity and ensure that its bloc remained firmly within the U.S. sphere of interest as it fought to contain the spread of global communism).

The substantial falls of the Asian countries’ currencies relative to the greenback during 1997 considerably added to their dollar-based funding requirements (which exacerbated their economic distress). Blowback came later for U.S. manufacturers, as the greenback’s strength significantly eroded the position of U.S. exporters, resulting in a massive increase in the American current account deficit by the early 2000s. Furthermore, the hardline stance of the Treasury and Fed reinforced the Asian Tigers’ mercantilist instincts. Having seen Rubin, and then Larry Summers, hang them out to dry at the height of the 1997–98 crisis, these countries were determined never to be put in that position again and therefore deliberately kept their currencies weak well after their economies had recovered, building up huge trade surpluses and further obliterating what was left of U.S. manufacturing competitiveness (prompting yet another commissionto examine the after-effects, but without actually implementing a change in trade policy).

In spite of the shift in prioritizing services over manufacturing, and the discarding of the old Cold War quid pro quo, there remained throughout successive administrations a broader philosophic agreement about the virtues of free trade as a benign end in and of itself, rather than a means to end. Under Donald Trump, and his trade representative, Robert Lighthizer, that has all changed. Trump has always viewed trade as a zero-sum game in which there is one clear winner and one clear loser. He tends to focus on bilateral trade relationships, as a means of establishing which countries are playing the U.S. for patsies. Trump has even resorted to taking out full-page ads in his favorite media adversaries, the Washington Post and New York Times, to signal his new aggressive, unilateralist approach on trade.

Similarly, Lighthizer, who has immersed himself for decades in the fine details of U.S. trade policy, is not averse to using “executive orders, diplomatic pressure, and legal measures like… Section 232 [of the Trade Expansion Act, which empowers the U.S. president to impose tariffs on national security grounds, as]… legitimate tools for unsettling existing arrangements and pushing partners to the negotiating table. Lighthizerism is no roadmap for retrenchment but a blueprint for recapturing what is seen as a lost edge for U.S. manufacturing on the world stage.” He has also been very dismissive of the prevailing “conventional wisdom ”that implicitly assumes trade liberalization in and of itself would induce countries like China “to become more and more Western in… [their] behavior—almost as if… [they] were merely a more exotic version of Canada.”

When you start from the premise that free trade in and of itself is not an unalloyed good, but part of an “America First” strategy to make American manufacturing great again, or even allow free trade considerations to be superseded by national security considerations, it almost invariably follows that trade negotiations will be less benign and more aggressively unilateral, even with so-called allies (as both Justin Trudeau—“that punk little kid running Canada”—and Angela Merkel are now learning). Moreover, the lowest possible cost considerations (the usual endgame in a trade negotiation) might well not represent the primary objective in the overarching framework of a new agreement with Trump. Trade policy under Trump is designed to revive U.S. manufacturing, so as (in the words of Reihan Salam) “to steer U.S. firms to build resilient supply chains based in the Americas, not in China’s industrial heartland.”

Trump’s position vis-à-vis Beijing is not rocket science. The administration has simply taken the view that a large economy with a trade deficit has greater bargaining power than smaller economies with trade surpluses (in spite of its growth, China is still smaller in market exchange rate terms). By cutting the overall trade deficit, the big deficit country stimulates domestic growth and employment via import substitution. Meanwhile, the surplus nation loses a big chunk of its foreign market, leaving it with an overbuilt export sector. Moreover, it is politically easier to build new factories in the former deficit country than to have mass layoffs and idle factories in the former surplus country. That is what the president means when he says that “trade wars are good and easy to win.”

The dirty secret of globalization-driven cheap-labor offshoring is that it has boosted profits by much more than it has lowered consumer prices. The claim is that consumers will be hurt, but in the first instance, it is likely that the huge profit margins of the offshoring firms get whittled down first. They’ll still make profits, but not the same kinds of windfalls from cheap labor. That’s also one of the implicit quid pro quos embedded in the corporate tax reform.

Right now the Chinese leadership is trying to figure out whether they try to appease Trump or wait him out (and use all their Wall Street allies of convenience to make their case and help elect a Democrat in 2020). Much to Beijing’s consternation, the usual carrot/stick approach of making concessions/threats on financial services or farm goods haven’t worked. Wilbur Ross, Robert Lighthizer, and Peter Navarro are not Bob Rubin, Larry Summers, Hank Paulson, or Tim Geithner.

In the interim, no doubt China’s leadership will continue to react to U.S. trade pressures by making life increasingly difficult for some U.S. firms with extensive Chinese operations. Its policymakers will also continue to offset the adverse consequences of the trade shock by retaining its existing policies of expanding credit and infrastructure spending to support economic growth, adding to their debt build-up in the process. Beijing may continue to allow the RMB to decline to offset the impact of rising tariffs, although here China’s economic mandarins have a fine line to tread, as too much devaluation could engender more capital flight from the country, turning a managed currency decline into a rout, which would be highly inflationary (and, hence, politically destabilizing). Treasury Secretary Mnuchin has also recently put their monetary authorities on notice not to pursue further this gambit (the Treasury Secretary can always declare China a “currency manipulator,” which would open the way for further retaliatory action on the trade front).

Longer term, Beijing will continue to try to build a larger domestic market and develop a Chinese system of international markets (less dependent on the U.S.). But that is a multi-decade project, ill-suited as a short-term buffer against a trade shock.

The real risk to Trump’s trade strategy, however, is that if taken too far or aggressively, it could ultimately turn into an “own-goal” for the U.S. Screwing hitherto friendly trade partners and weakening multilateral organizations, such as the WTO or NATO, deprives the U.S. of the goodwill and functional alliances they could use to confront China, contain North Korea, etc. When the European and Chinese leaders start teaming up to confront America, or the next crisis in the Middle East hits, it may be useful to have some friends, but the way things are going today, the U.S. might find that “America First” has become “America Alone.”

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53 comments

    1. St Jacques

      What! Globalisation was always about inflating corporate profits and executive remuneration by undermining the bargaining power of first world workers?

      Why, I never….oh wait !

      Reply
    1. Loneprotester

      Not necessarily. Those exports might have been redirected to the domestic market as replacement goods for the Chinese imports, at least in part. Granted, supply chains are global and some of that shortfall will be partially finished materials that US exporters can no longer get (at profitable cost) so cannot export to THEIR customers. Short term pain for some was always factored into the calculus. This is about long-term economic viability of entire empires, nothing less.

      Reply
    2. JW

      What academics keep forgetting is who wins and who loses. If overall GDP or exports go down but manufacturing goes up, that’s a win for any community that depends on manufacturing. If Wall Street, Hollywood and Silicon Valley feel the pain, we can all play the world’s smallest violins.

      Reply
    3. Marshall Auerback

      That is a function of the dollar’s cumulative strength over the past couple of years. It’s especially pronounced in countries such as Korea, Taiwan and Vietnam. Less so China per se, which I believe remains the object of Trump’s attention.

      Reply
      1. Benjamin Wolf

        Dollar strength is a direct result of Trump’s “trade war.” The dollar began its rally in late March/early April with a short squeeze from the tariff threat against China.

        Reply
  1. Terence Callachan

    Well well well what a surprise a few lackie USA journalists and accountants say USA is winning the trade war with China, do you believe them ? Are they likely to tell the truth or tie the line ?
    I don’t believe them because it’s possible early and too complicated to say but the 2008 crash might help you decide if they tell you the truth.

    Reply
    1. Yves Smith Post author

      Do you have a reading comprehension problem? Auerback is not a journalist, he’s been a fund manager for decades and long a specialist in East Asia.

      And name calling (ad hominem attacks) are against our written site Policies. You are accumulating troll points.

      Reply
  2. rd

    I remember in the 1980s that Japan Inc. was going to buy up the US and put it out of business. Then debt and demographics caught up with Japan and we have not heard that thesis since. I suspect the same thing is starting with China and they will not be the massive fearsome player on the world stage in 30 years that everybody is worried about today..

    The US has a pretty robust population and the Americas have been built on immigration, so we can import future labor and assimilate them into our society unlike many other countries, including Japan and China. So I haven’t had a serious issue with the trade war with China, although it appears to have been fairly incoherent in how it was put together. I have been baffled as to why we elected to start a trade war with our strongest allies.

    Unfortunately, Trump’s xenophobic rhetoric is undermining one of our biggest strength as a country, using multi-culturalism as a strong economic weapon. Similarly, he is overlooking the opportunity to use Americas-based clean energy production to disconnect North America from the overseas oil markets which would undermine Russia’s and Middle East oil and gas incomes, thereby making them less powerful. So undermining CAFE standards would just be shooting ourselves in the footr economically and militarily without even considering climate change arguments.

    Reply
    1. cbu

      There is no comparison between China and Japan. When was the last time Japan had about four times the population of the U.S.? When was the last time Japanese economy 20% bigger than America’s in PPP term? The answer is never for both questions for Japan and yes for China. Do not forget the U.S. is aging too. China will always have the advantage in manpower in absolute numbers no matter how many immigrants the U.S. will let in.

      Reply
      1. Marshall Auerback

        The US is not aging. And even if it was, there is no shortage of people who want to immigrate to the US (even with Trump as president). Of course, it would be nice if we also had an immigration system that prioritized skills, but that’s a discussion for another blog post….:-)

        Reply
        1. cbu

          The white population, the main constituent of the U.S. population, is indeed aging relatively rapidly, along with the non-immigration populations of all OECD countries.

          Reply
          1. Yves Smith Post author

            Trump’s deportation rate has been lower than Obama’s and courts have blocked many of his initiatives. I spent about ten minutes looking but I can’t find any data showing the level of immigration in 2018 v. before Trump took office.

            And the world needs to figure out how to run an economy with a falling population level. At the current level of population, civilization will start coming apart over resource scarcity, specifically food and water shortages. We are already in the midst of the sixth great die off and even if we were to take aggressive measures to preserve diversity, it would take the planet 3-5 million years to recover. Potable water will become scarce by 2050 if not sooner.

            Reply
            1. John k

              Japan at leading edge, China following.
              Overpopulation elsewhere, India, Africa, ME etc. no end in sight.
              Water problems are here now in some places. Droughts already fueling migration…
              caravans and others here and in Europe rising rapidly as shortages cause wars worsened by outside meddling.
              Countries still resisting birth control.

              Reply
            2. Mattski

              Where does the observation about Trump v Obama deportation rates come from? Need it for something I am working on. Thanks in advance.

              Reply
              1. Yves Smith Post author

                I found it in searches ~ 6 months ago. Trump has been trying to ramp it up so he may finally have gotten to a rate higher than Obamas, but for the first year plus of his presidency, it was definitely lower.

                Reply
            3. johnonymous

              And as luck would have it, approximately 20% of the world’s fresh water supply is in North America, if memory serves. Even more important (if you are American) is the fact that we share rights to a huge portion of it with our bestest buddies in the whole entire universe: Canada!

              Reply
            4. charles 2

              You are totally right to point to the problem of running an economy consistent with a falling population as a requirement stemming from resource scarcity.
              A good question to ask if it is really should be treated as a “world” problem or a multitude of individual countries problems. The natural inclination of human groups in time of crisis is to secede into individual sub-groups which try to tackle to crisis on their own. Deglobalization though trade disputes is one way to achieve this, building real borders is another.

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      2. Workingclasshero

        I believe the longterm gambit with u.s. tarrifs on china is to bargain for opening up their still largely state owned banking and financial system to possible majority foreign(u.s. and it’s allies) ownership.which will eventually subvert any socialist system thats remains.the u.s. deep state will never play nice with any country that tries to maintain a sovereign financial system.

        Reply
  3. TG

    “The real risk to Trump’s trade strategy, however, is that if taken too far or aggressively, it could ultimately turn into an “own-goal” for the U.S. Screwing hitherto friendly trade partners and weakening multilateral organizations, such as the WTO or NATO, deprives the U.S. of the goodwill and functional alliances they could use to confront China, contain North Korea, etc. ”

    But that’s part of the point! These foreign entanglements are worthless. “Contain” North Korea? They are only a threat to us because we have been threatening their leadership with the same fate as Gaddafi etc. We should just bug out, and let the South Koreans and Chinese and Russians deal with the mess. Sacrificing our own economy in the pursuit of pointless alliances and wars of ‘honor’ is a large part of how we got in this mess…

    Reply
  4. Thuto

    It’s a tad too early to be striking such a celebratory tone, especially when all you have to go on are opening gambits in a “war” that no one knows the length of time it will last. Suffering sudden reversals of fortune for the “winning” side isn’t far fetched when one considers the fact that the author is perhaps no more privy to the trump cards China may or may not be lining up behind the scenes than the rest of us who are watching this with interest. It’s also interesting that the author mentions the cold war because the triumphalist spirit he’s invoking might as well be hoisted from the early days after the end of that war when the US declared itself “victorious”.

    Reply
    1. Marshall Auerback

      I wouldn’t say my tone has been celebratory as such. More a response to all of the China-cheerleaders out there who consistently say that the US “can’t possibly” win a trade war against Beijing. China has been playing us for suckers for decades. They use the threat of their stockpile of US treasuries being sold (I’ve addressed that argument before), and the US basically plays along – esp from Rubin onwards. Lighthizer is a very different kettle of fish.

      Reply
      1. wilroncanada

        Marshall
        I too detected a tone of celebration in the piece, like Thuto above. It seems to me there isn’t even a war yet, mostly just an attack from the US, typical. I believe, like workingclasshero, above, that protecting the US-led financial pillage of the world (including dollarization of every transaction) is the main goal.

        Reply
    2. cbu

      Yes. So far the U.S. grew more than 4% in only one quarter. If you look at China’s it’s 6% a year every year. Also, if you look at China’s service PMI and growth in retail sales, China is indeed transitioning toward a more service based economy.

      Reply
  5. Peter

    I’m uncertain about the strength of the evidence here: a reduction in GDP growth in China vs an increase in the US. Is that it? Plus, is it really easier to relocate supply chains – building tons of factories in the US (or why not in Vietnam) – compared to increasing internal demand in China? Seems that the latter could be done simply by giving a billion people a wad of cash, either taking it from the rich or creating it without a tax offset. I don’t know if the Chinese government is ready for it, but seems like they’re better positioned to create internal demand (and if necessary revert to more state direction in the economy) than the US corporate sector is to rebuild industrial capacity at home.

    Reply
    1. a different chris

      >compared to increasing internal demand in China?

      No but the point of this post is the “trade war” itself. To your observation: I believe China always had such plans – to disengage from the “war” style footing if you want to call it that and turn back to its people. But like most get-rich-slowly schemes, the progress is not well distributed and the people who get the early money are never ready to move on to the next stage.

      And money is power.

      Reply
  6. Larry

    Yves,

    I know you have often made the point that off-shoring labor is not that cost effective a strategy when the total costs are considered, yet Marshall points to that off-shoring as the primary driver of corporate profit rates on manufacturing. There seems to be a conflict in the understanding of the contribution of labor to the overall costs of manufactured goods.

    I have always assumed that outsourcing had two drivers. One supposed cost benefits of a cheaper labor pool. But perhaps just as importantly, a more pliant labor market. Outsourcing has a long tradition of undermining trade labor unions, and most certainly one finds very weak labor standards in outsourced markets. Having control over the labor force must be just as important as any potential cost savings.

    Reply
    1. Marshall Auerback

      Why can’t offshoring be both? A driver of corporate profits AND a means of undermining trade unionism?
      I think labor is a significant cost as far as manufactured goods go, but my main point was to counter the view that protectionism in effect represents a “tax on consumers”. Yes, that’s true but I can guarantee that the labour savings were not all passed on to consumers. They were used to fatten margins as well. You can tell that simply by looking at the extent to which profits as a share of GDP have shifted in favour of capital vs labour in the past 35 years or so.

      Reply
      1. Yves Smith Post author

        Direct factory labor is not a significant cost of most manufactured goods. It’s only 11-13% of the wholesale price of cars, for instance. Materials, managerial overheads (which increase with offshoring, you have factory labor offset by more managerial costs), marketing etc add up to much more.

        Robert Cringley has written at length about what a disaster it has been in IT (he treats the use of consultants offshore and H-1B visa holders who are often hired via contractors as functionally similar):

        Now let’s look at what this has meant for the U.S. computer industry.

        First is the lemming effect where several businesses in an industry all follow the same bad management plan and collectively kill themselves…

        The IT services lemming effect has companies promising things that can not be done and still make a profit. It is more important to book business at any price than it is to deliver what they promise. In their rush to sign more business the industry is collectively jumping off a cliff.

        This mad rush to send more work offshore (to get costs better aligned) is an act of desperation. Everyone knows it isn’t working well. Everyone knows doing it is just going to make the service quality a lot worse. If you annoy your customer enough they will decide to leave.

        The second issue is you can’t fix a problem by throwing more bodies at it. USA IT workers make about 10 times the pay and benefits that their counterparts make in India. I won’t suggest USA workers are 10 times better than anyone, they aren’t. However they are generally much more experienced and can often do important work much better and faster (and in the same time zone). The most effective organizations have a diverse workforce with a mix of people, skills, experience, etc. By working side by side these people learn from each other. They develop team building skills. In time the less experienced workers become highly effective experienced workers. The more layoffs, the more jobs sent off shore, the more these companies erode the effectiveness of their service. An IT services business is worthless if it does not have the skills and experience to do the job.

        The third problem is how you treat people does matter. In high performing firms the work force is vested in the success of the business. They are prepared to put in the extra effort and extra hours needed to help the business — and they are compensated for the results. They produce value for the business. When you treat and pay people poorly you lose their ambition and desire to excel, you lose the performance of your work force. It can now be argued many workers in IT services are no longer providing any value to the business. This is not because they are bad workers. It is because they are being treated poorly. Firms like IBM and HP are treating both their customers and employees poorly. Their management decisions have consequences and are destroying their businesses.

        https://www.nakedcapitalism.com/2015/06/cringley-on-how-bogus-shareholder-value-theory-is-wrecking-the-computer-industry-and-america-generally.html

        Offshoring greatly increases business risk, as in your business system is more rigid, you are vastly more likely to get stuck with inventory (just in time processes does not mean you aren’t obligated for orders you put in…..)

        Offshoring is best thought of as a a transfer from lower-level workers to management, and only secondarily a cost saver. I know of many executives who say the case for doing it at their company was marginal at best, but they went ahead because the stock price got a pop.

        Reply
        1. Phichibe

          I totally agree. I’ve been reading Cringely since the early 90s in ComputerWorld, and we shopped at the same guitar store in Palo Alto, although the closest we came to meeting was taking lessons from the same instructor ;-) His book “Accidental Empires: How the Boys of Silicon Valley ….” is still the best single volume on the pre-dot-com era of the valley and hi-tech. I recently got a copy of his book on the fall of IBM, and it made sad reading, not least because I worked for them from 84-87. IBM and HP both made the fatal mistake of pursuing short-term growth in the 80s, and when demand proved to be highly cyclic, they abandoned the ethos that had made them great companies. They abused employees, used bogus employee evaluations driven by the need to lay off bodies rather than fairly assess contributions, and destroyed their corporate cultures.

          Dave Packard was famous for turning down government contracts if the work meant an unsustainable boost in short-term HP employment but would require layoffs at the end. I was (semi) shocked to read recently that IBM now has more employees in India than the US. I have nothing against India or Indian IT workers, but I want jobs in the US first and foremost; if that makes me a US chauvinist, so be it. In addition, as Yves writes, the performance of outsourced IT contractors has been mixed at best, and often disastrous. Language and time barriers, technological deficiencies, and a loose attitude toward intellectual property has confounded many clients who’ve hired even the most blue-chip Indian consulting firms like Tata, etc. I know this first hand from friends who work as directors in IT at some of the biggest IT customers, like Pfizer. IT and software are a crapshoot at the best of times, and the moves to outsource them to India, eastern Europe, China, etc have almost all been disappointments if not outright failures, and often the latter.

          When China targeted and succeeded in destroying the US photovoltaic industry in the 2000s, that was the last straw for me. We invented the technology, invested many billions in production capacity, only to have Chinese competitors come and sell below cost due to cheap land, cheap loans, and non-tariff barriers erected by Chinese authorities to shelter their home grown companies. I lived through the “Japan, Inc.” threat to high tech of the 1980s and the standard Republican attitude was literally “computer chips, potato chips – I don’t care what we sell as long as we make a profit..” (That’s almost verbatim what Carla Hill, George H.W. Bush’s Trade Rep said in the late 80s when Silicon Valley was on the ropes). Don’t get me wrong – I lament Trump in the White House. But even and ill-wind can blow some good, and Trump’s standing up to Chinese mercantilism is an example. I don’t know that it will benefit US workers as much as we might hope, but the laissez-faire status quo ante had to be stopped. And if it will hurt corporate bonuses for C-suite executives, all the better.

          Phichibe

          Reply
      2. Larry

        Regarding Yves comment sub to yours, that’s what I keep scratching my head over. Perhaps outsourcing is just a management jobs program (hire more MBAs!) and it undermines labor at the same time. Win-win for short term rent extraction!

        But, if the cost of labor is 11-13%, that’s certainly not insignificant. So if we presume that the average $35k auto price in the US has $3000 in labor, then shaving that labor cost in half or by 75% would certainly seem to help margins at the final sale. But that’s for a durable expensive good, so I suspect the mix is quite different for lower value chain consumer goods.

        With regards to outsourcing and how short sighted it is, I’ve seen management at my own company reverse course on some lay off decisions. I work for a services and information company and we have front line customer support in North America and Europe. Two people in each market that have been in the job for so long, that some of hour highest value customers know them by name. They trust when they get them on the phone that they’ll get great support. Well, the powers that be decided to nix these roles and create a “center of excellence” in India. The quickly hired staff and poorly trained them, and no surprise, they failed to deliver on the high expectations our customers expect. Now credit to management, they quickly backed out of the plan. They realized that a single $1 million dollar/year account canceling because of customer service quality declining might hit our bottom line, and in fact pays in full and then some for the four highly qualified support people. But that’s not always how it works in organizations where spreadsheets and pivot charts are used as justification for all manner of idiotic decisions.

        Reply
    2. Left in Wisconsin

      Yes, yes, and no. Pliant labor is certainly a plus for US multinationals. Though most US manufacturing workforces are pretty pliant these days. But no because a huge amount of that outsourcing is to foreign companies in which direct control of the manufacturing process has been outsourced, driven by a reluctance of PE- and “shareholder”-driven capital to invest in anything, anywhere. Apple is one that seems to still have a pretty strong hold on its manufacturing process despite having outsourced it outside the company. But many US MNC’s now seem completely reliant on subcontractors over which they have little real control.

      Reply
  7. Don Cafferty

    Posted today as well is the article with Michael Hudson on Rescuing the Banks Instead of the Economy. He has a much different perspective on the trade war in saying that historically the US got rich by employing protectionist policy. He says that “… Trump is doing is the opposite of what traditional protectionism advised. Instead of lowering the cost to American manufacturers, he raised the price of steel, raised the price of aluminum, raised the price of raw materials and other inputs. This squeezes [other] American manufacturers. Suppose you’re a car maker or you’re making beer cans. Canadians, Europeans, Mexicans, producers all over the world who are making cars, refrigerators or beer cans can now buy aluminum and steel much cheaper than American companies can. So they can afford to make products at a lower price than American companies have to charge to break even. They can undersell American manufacturers.”

    If the intent is to bring back manufacturing jobs to the US, it remains unclear what is the enticement. I think business decision makers are being forced into a choice of where their best interest may lie and it is a struggle for them to decide. The US may currently have a large and enviable marketplace but decision makers may not perceive it to be the best market for the future. Since it takes at least 2 to make a war, decision makers may see a reason to be located elsewhere now in order to be in place for the future. As Michael Hudson points out, the US is killing the economy in order to save the banks. Moreover, Trumps plans/strategies embrace uncertainty and his reversal of tact undermines his credibility leaving decision makers bewildered. Making a business decision is not like making a bet at the casino.

    Reply
    1. a different chris

      You have to switch viewpoints, quite a lot, to make any sense out of politics. And the economy is politics is the economy is politics is…. Or at least the shape of the economy. I don’t think Trump got a lot of support from the car-makers, at least not to the level he likes. He got a h*ll of a lot of support – again my perception, might be wrong! – from steelmakers.

      Now he’s demonstrating that you need to back him. It’s a political, not an economic move. Trump being Trump, I wouldn’t be in the least surprised if for instance said car-makers swung clearly to his side, and promised (haha) to make cars in the US, he would weigh them against the steelmakers and screw the steelmakers if they seemed a bigger constituency. He’s turned on a dime many a time. His handshake is worthless, his word is nothing but the thought of a moment. He has some overarching themes, and that’s what you gotta figure out. The particular battlefields will always be a surprise, even to him.

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    2. John k

      Yes.
      Maybe the best policy is a blanket tariff against all exports from countries with which you have a trade deficit.
      Course, this results in shifting trade to other cost producers… so maybe the blanket should be universal based on percent trade deficit.
      Then, to the extent foreign savers wish to continue saving dollars, there would be a modest deficit with many.

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  8. Phichibe

    Thanks Marshall, Yves, for a superb article. What many never-Trumpers (and I’m one) can not admit is that sometimes a policy is the right one even if it comes from Trump. The Chinese have been practicing a predatory mercantilism for several decades at least, and unlike Japan or South kores, they are not even nominally on our “side”.

    This article was particularly good in pointing out the disparate impact of the Neoliberal trade policies pursued since Reagan or even Carter on manufacturing versus Big Finance. This goes a way toward explaining a mystery that has bothered me since before the GFC, when in 2007 John Bogle was on Bill Moyers’ PBS show promoting his then new book, and he pointed out that Wall Street that year was going to take 17% of US corporate profits, versus its historical average from 1900 of 7-8%. BTW, Bogle was against this development, and said Wall Street had distorted the economy to its advantage (rentiers will be rentiers, n’est-ce pas?). Now with this article I can see how since James Baker at least that Treasury has been captured by Wall Street, and used to promote a laissez-fairist trade policy that sold manufacturing down the river while advancing Big Finance. I’m just chagrined I didn’t put this together on my own. Thanks again, Marshall, great piece.

    Phichibe

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    1. Left in Wisconsin

      Sad to say, Reagan was the last president before Trump to actually care about domestic manufacturing. On the other hand, he really, really hated unions.

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  9. a different chris

    I am probably showing my age with this old saying – but here it is: “If you owe the bank 1000 dollars, the bank owns you, if you owe the bank 1000000 dollars, you own the bank!”

    Fix up the appropriate orders of magnitude, but it does seem to hold. And if you owe the bank 1000000 quatloos, where you get to produce quatloos for virtually free, then the whole “owe them” thing is a total joke.

    The Chinese aren’t stupid, they were well aware of this they were just hoping the US top 10% would hold power long enough for the Chinese to grow to the point of not caring about the debt. Like borrowing money from your parents to get thru school… once you get that degree you can (or at least once could) pay them back easily, except for the underhanded scam part. But Trump came along, and he can smell that kind of crap even in his dotage. As a master of it, obviously.

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  10. Left in Wisconsin

    Since I got on Auerback’s case the other day, I should praise him for a nice piece. Still a few quibbles:

    1. It is important to distinguish between US MNC’s and domestic manufacturing. “US manufacturing interests” are global corporations who mostly are not at all wedded to US manufacturing. The big weakness in the Trump strategy is that the US MNC’s are not on board. Some steel capacity has been fired up apparently but I am not aware of significant domestic manufacturing investment otherwise. The fact is, US MNCs are still not convinced that Trump is serious or, worst case, that they can’t outlast him.

    2. MA tends to see give too much credence to US exports as opposed to simply desperate attempts to preserve domestic capacity for domestic consumption (i.e. comment on Plaza Accord). US manufacturing exports are still disproportionately not finished goods but intermediate goods and machinery designed to facilitate outsourced manufacturing for shipment of finished goods back to the US (and elsewhere). (This is what all that diversionary talk of “complicated supply chains” is about. No one is shipping intermediate goods back and forth between North America and East Asia.) A reason not to be concerned (as MA is not) for the decline in US exports.

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  11. Tomonthebeach

    “it is China, not the U.S., which is bearing the brunt of this particular skirmish.”

    Only at the macro level. My piddly, but very diverse, portfolio is not doing a happydance. This month has felt like those Universal Studio roller coasters when you are free-falling from the top, then at the bottom, you get jerked right and left to the point of dizzy. You are not sure if you are about to get off the ride or slowly climb back up for the next drop.

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    1. ewmayer

      “My portfolio” — that assumes that stawk prices are reasonably correlated to macroeconomic and corporate fundamentals, a dubious assumption in the best of times, and especially so when valuations are as out-of-whack as they have been of late.

      And even assuming valuations are in some way fair, the selloff may simply be reflecting that the punters foresee lower profits and dividends going forward, both metrics which benefitted from offshoring at the expense of labor and the consumer, as Auerback and others have often pointed out. E.g. MA: “The dirty secret of globalization-driven cheap-labor offshoring is that it has boosted profits by much more than it has lowered consumer prices.”

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    1. ewmayer

      A return of some of the millions of well-paying/good-benefits domestic manufacturing and attendant service jobs which were lost due to offshoring, for one. Not that I have high hopes of getting more than a modest fraction back. But given the relentless “Washington consensus” offshoring tide of the lat 40 years, even the much-more-modest accomplishment that it is no longer considered crazypants to question said ‘consensus’ can be considered a win.

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    2. Old Jake

      More important, suppose China sees it is losing and decides to fight harder or rethink it’s tactics. What might they do differently than they do now? This may be the opening shots of a long campaign. Building a plan assuming the competition is going to play into your hand is never smart.

      Reply

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