The stock market was rattled on Tuesday, after Donald Trump threatened to raise tariffs on Chinese goods.
The Chinese replied with silly threats of their own:
‘China deeply regrets that if the US tariff measures are carried out, China will have to take necessary countermeasures,’ said a Commerce Ministry statement.
Meanwhile, conflicting tweets and news items told us that China was either ‘ready to make a deal’ or ‘planning retaliation.’
Investors were left confused. Yesterday, stocks moved little, neither up nor down.
They will pay
The typical citizen, consumer, politician, or businessman doesn’t know what to make of it either. On the one hand, his president insists that he is forcing the Chinese to give us a better deal. The Donald says that ‘they will pay’ if they don’t buckle to his demands.
On the other hand, the householder wants a cheap TV. He doesn’t care where it comes from; he just wants the most value for his money. How could the Chinese give him ‘a better deal’? An even cheaper TV?
But cheaper goods from China would mean an even bigger trade deficit — the opposite of what Donald Trump says he wants.
Many readers will reply that US tariffs are just a negotiating tactic. But negotiating for what? For whom? A cheaper TV? Or a more expensive one? The whole trade war hype seems to make no sense, for a simple reason — it is senseless.
In the first place, there is no theory or experience to back up Trump’s claim that the Chinese will pay. The Chinese do not pay the tariffs; Americans pay them.
In the case of raw materials, such as steel and aluminium, the importing US company pays the tariff, raising the cost of its raw materials. Then, the cost is necessarily passed along to the retail purchaser in the form of higher prices.
In theory, free trade — without government meddling — will always provide the most goods and services at the lowest prices. Any meddling will raise prices and hurt the meddler at least as much as, if not more than, anyone else.
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Rotten fruit
And there’s more evidence. The idea of tariffs is to increase US exports while cutting back on imports, thus reducing the trade deficit.
But since the first guns of the trade war were fired, US exports to China have actually gone down by 7%, from $130 billion in 2017 to $120 billion in 2018… while imports from China have gone up from $506 billion in 2017 to $563 billion in 2018 — an increase of 11%.
In other words, it’s been a losing battle. But that only heightens the excitement as we reach further out on the limb for an answer: How come a policy that is so obviously and completely puerile and imbecilic is so popular?
No mistake
Many people now believe that the trade war is simply a ‘mistake’ made by a nincompoop president and his crackpot advisors. But it is no mistake. USA Today:
‘On Tuesday, the US Commerce Department announced the termination of the 2013 Suspension Agreement on Fresh Tomatoes from Mexico.
‘This means the US will impose a 17.5% tariff on imported Mexican tomatoes, a move that experts say may lead to shortages and price hikes.
‘According to estimates from Arizona State University, consumers could pay 40% to 85% more for vine-ripe and other fresh tomatoes.’
There you have it — a trade war over tomatoes. Lobbyists for growers in Florida, Texas, and California got together with politicians — notably Senator Ted Cruz — and cut a deal. ‘Hey… you block competition… and we’ll support your reelection campaign.’
Win-win, right? The growers benefit. The politicians benefit. Everyone comes out ahead.
Wrong.
A win-win deal is one where people get to decide for themselves whose tomatoes they will buy. They choose the best ones at the lowest prices.
But government always exploits the many for the benefit of the few. In this rotten tomato deal, a few growers make more money, some of which finds its way into the coffers of the lobbyists and politicians that made it possible.
But where does the money come from? Every penny must come from the millions of consumers who pay the higher prices forced on them by the feds.
Win-lose, in other words. The insiders, cronies, and fixers come out ahead; the public loses.
And next week, we take up the bigger and more provocative subject…
In trade wars, government spending, deficits, tax laws, economic theory, Fed policy, and foreign policy… everywhere you look, win-lose deals are gaining ground.
Why now? Accidents? Mistakes? Nope.
More to come…
Regards,
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.