Trump, Davos, And Free Trade

Authored by James Rickards via The Daily Reckoning,

After Trump announced the steep 30% U.S. tariffs on imports of solar panels and washing machines, the Chinese Commerce Ministry expressed “strong dissatisfaction” and said it “aggravates the global trade environment.”

Trump is not done with tariffs. In the days and weeks ahead, we can expect further announcements with regard to steel and aluminum imports to the U.S. Again, such imports come largely from China, but the tariffs will likely affect all exporters to the U.S.

Ironically these announcements came just as President Trump was preparing to go to Davos, Switzerland for the World Economic Forum.

The Davos elites vehemently oppose both trade and capital controls, preferring instead a globalist “one-world” approach. The only problem with the Davos elite theory is that it is empirically, historically and analytically wrong.

The theory of free trade is based on an idea called “comparative advantage.” This idea goes back to David Ricardo, an early 19th century British economist. Ricardo’s theory was that countries should not try to be self-sufficient in all manufacturing, mining and agriculture.

Instead countries should specialize in what they do best, and let others also specialize in what they do best. Then countries could simply trade the goods they make for the goods made by others. All sides would be better off because prices would be lower as a result of specialization in those goods where you have a natural advantage.

It’s a nice theory often summed up in the idea that Tom Brady should not mow his own lawn because it makes more sense to pay a landscaper while he practices football.

But, the theory is flawed. For one thing, comparative advantage is not static. It changes over time. Importantly comparative advantage can be created from thin air. Taiwan had no comparative advantage in semiconductors in the 1980s, but the government made a political decision to create the state-sponsored Taiwan Semiconductor Manufacturing Company.

Today Taiwan Semiconductor is the largest supplier of semiconductors in the world. The government nurtured Taiwan Semiconductor with tariffs and subsidies when it was most vulnerable to foreign competition. Today Taiwan Semiconductor is a publicly traded company that competes effectively around the world, but it would never have attained that status without government help in its early days.

If the theory of comparative advantage were true, Japan would still be exporting tuna fish instead of cars, computers, TVs, steel and much more.

The same can be said of the globalists’ view that capital should flow freely across borders. That might be advantageous in theory but market manipulation by central banks and rouge actors like Goldman Sachs and big hedge funds make it a treacherous proposition.

In the depths of the Asian financial crisis of 1997, Malaysian Prime Minister Mahathir closed Malaysia’s capital account to preserve hard currency and defend his exchange rate. Mahathir was excoriated at the time by the likes of George Soros. Soros went so far as to call Mahathir a “menace to his country.”

But scholars today agree that Mahathir made the right move. In recent years, even the IMF has said there are certain circumstances where capital controls are fully justified.

If open trade, and open capital flows are flawed ideas, why do the Davos elite support them?

The answer is that these theories, which have superficial appeal to everyday citizens, are the perfect smokescreen for the elites’ hidden agenda. That agenda is to diminish the power of the United States, and the U.S. dollar, in world affairs and to enhance the power of rising nations especially China.

If several hundred million Chinese can be pulled from poverty by leaving the U.S. market open while China subsidies its companies, imposes its own tariffs, steals intellectual property, and limits U.S. foreign direct investment, then that’s fine. If U.S. workers lose their jobs in the process, that’s fine too. The elites don’t care about the U.S.; they only care about their “one world” vision.

Trump is calling their bluff. When Trump says “America First” he means it. So does Trump’s top trade advisor Robert Lighthizer. Lighthizer is a veteran of the Reagan administration who forced the Japanese to move their auto plants to the U.S. in the 1980s by imposing steep tariffs on Japanese imported cars.

Thousands of high-paying U.S. manufacturing jobs were created as a result. Lighthizer plans to run the same playbook against the Chinese today.

Lighthizer is part of a hawkish “Trade Troika” consisting of himself, Secretary of Commerce Wilbur Ross, Jr. and White House trade advisor Peter Navarro. All three are urging President Trump to impose a set of tariffs on China involving not only washing machines and solar panels, but steel, aluminum, and theft of intellectual property.

Opposing the Trade Troika are trade doves including National Economic Advisor Gary Cohn, Chief of Staff John F. Kelly, Secretary of State Rex Tillerson and the CEOs of major global corporations such as Boeing, Apple and General Motors that all derive large profits from Chinese operations.

The hawks and doves fought each other to a standstill in 2017 because of wishful thinking about Chinese help on North Korea and the importance of a united front to pass the tax bill. With hopes for China now dispelled and the tax bill passed into law, the trade agenda is front and center.

This is not a “kick-the-can-down-the-road” situation. Trump is confronting hard deadlines on key decisions.

America has always prospered with high tariffs to protect its industries. From Alexander Hamilton’s plan for infant manufacturing to Henry Clay’s American Plan, the U.S. has always known how to protect its industries and create American jobs. Trump is returning to that tradition.

The problem is that this will not be a smooth ride. It will take years for U.S. solar panel manufacturers to get back on their feet. (One of the largest U.S. firms filed for bankruptcy protection last year, but it continues to operate in reorganization under court supervision.)

A full-scale trade war will hurt world growth even as it helps U.S. growth. Given the trillions in dollar-denominated debt in emerging markets, a full-scale foreign sovereign debt crisis could be in the making if those emerging markets countries cannot earn dollars from exports to pay their debts.

Trump did not impose these tariffs in 2017 because he needed Chinese help with the North Korean situation. But, China did not do all it could in North Korea, and there is good evidence that China is helping North Korea cheat on existing sanctions.

As if to rub salt in the wound, China reported today that its 2017 trade surplus with the U.S. was $275 billion, the highest ever.

Once China’s lack of cooperation on North Korea became clear, Trump saw no harm in confronting China on trade, something he’s been talking about since the summer of 2015 during the early days of his campaign.

The Chinese may choose to retaliate not so much with their own tariffs, but with other forms of financial warfare including its threats to persify its reserves away from U.S. Treasuries.

As China buys fewer U.S. Treasuries, the most likely substitute asset class is gold. This is one more reason to expect that the recent weak dollar and strong gold trends to continue for the remainder of this year and beyond.

Comments

Déjà view Mon, 02/05/2018 - 22:32 Permalink

Remove reserve currency status & honest soveriegn debt ratings market works wonders...

American Library Association reclassified CAPITALISM: FICTION!

38BWD22 Mon, 02/05/2018 - 22:33 Permalink

 

Donald Trump did one thing that I would have thought near-impossible (well, among many other things):

He showed us that trade protection has its good uses, can be GOOD for an economy even an advanced one like ours.

I used to be strongly free trade, now not as much.

luckylongshot 38BWD22 Tue, 02/06/2018 - 01:38 Permalink

Free trade assumes free markets. However the first markets were set up by local warlords and princes trying to recoup some of the gold and silver they paid mercenaries to win wars for them. They were anything but free. Since then nothing fundamental has changed as all markets are rigged and Free Markets remain an idea that has much actual reality behind it as belief in fairies.

In reply to by 38BWD22

rex-lacrymarum SJ158 Wed, 02/07/2018 - 07:57 Permalink

Indeed, it is actually erroneous to assert that "countries" trade with each other - people do. A country  that simply dropped all trade restrictions unilaterally would experience a huge boom (it is no coincidence that free trade zone Hong Kong is one of the richest places on the planet). The notion that the US would benefit from trade restrictions while the rest of the world would suffer is completely absurd (raising prices for US consumers is good? How exactly?). It is based on another erroneous premise, namely that a trade deficit is somehow "bad" and a trade surplus is somehow "good".  I suspect the assumption rests mainly on the connotation of the term "deficit" - but one could well ask then, shouldn't all those trade surplus countries be worried about their "bad" capital account deficits?

Lastly, the law of comparative advantage isn't magically suspended or altered by economic progress. Economic laws are time- and place-invariantly valid. Apparently the Smooth-Hawley tariff lesson needs to be learned all over again. 

 

 

 

In reply to by SJ158

conraddobler Mon, 02/05/2018 - 22:36 Permalink

I don't think anyone has a plan.

I think it's not a cabal of elites doing, but something far more mundane.

People have completely lost any sense that's what it is.  We've boiled ourselves like frogs in a pot where nothing has made sense since the fucking 1980's but since the world did not end everyone just assumed that it must be something else holding up the world.

It's nothing more that exactly what happens when crime pays, not just a little either but trillions of dollars.

The sad part is that crime does not pay, people do, and this time the bill is so high it will likely wipe out the entire earth because people will never just let go and start over, the fight for the place holders will consume planet earth.

The odds this plays out without someone starting a war just out of spite is essentially zero.

Prepare accordingly.

conraddobler JibjeResearch Mon, 02/05/2018 - 23:05 Permalink

It's not inbreeding that's the problem is modern stupification.

Going soft since you don't have to scrap so hard to merely eat has done this to us.

People get removed from the basic math and ideas of simple survival and start to lose track on how things really work.

We can simply go back to the law of the jungle at any time but if we do that there will be a lot less people and no nobility to speak of just more and more return to brute force.

During the decent deciet doesn't work as shearing the sheeple only works when people are sheep, hard times breed only wolves and all the rabbits get eaten.

Then when there are only wolves, the wolves start eating each other and starve out and here come the rabbits again.

Only this time as we walk right into the same fucking trap as ever, this time we have a lot of nations armed with nuclear weapons and we are about to see what happens when the rule of law goes total tits up.

The law of the jungle says those things will get used.

In reply to by JibjeResearch

JibjeResearch conraddobler Mon, 02/05/2018 - 23:12 Permalink

You are wised... :)

The tricky PetroUSD works wonder...  The good time prevented hard work, dedication, and perseverance.  We forgot how to compete like "On the Origin of Species" by Sir Charles Darwin.

Now, it's getting close to pay back time.  It's going to be a baitch.... for most Americans.

Just like you said it...  : The law of the jungle says those things will get used. .

In reply to by conraddobler

NoDebt Mon, 02/05/2018 - 22:37 Permalink

"When Trump says “America First” he means it."

Well, OK, let's not get all religious about this shit.  Trump LEANS that way, but it's not like he's going to endanger his chances of reelection to a second term over it.  It's not like he's going after this in some RADICAL way or there would be bombs dropping on Beijing right now, not just vague threats of dropping them on Pyongyang.

Every time you think there is a shit-ton of stuff going on usually means there's less going on than meets the eye.

 

JibjeResearch Mon, 02/05/2018 - 22:51 Permalink

The root of people problem is capitalism. 

The article is semi correct; however, the solution presented in the article is misguided.

You average Americans are so fucked by Capitalism, and you are the one who asked for it

Hurrayyy Capitalism.

Get this in you (Neanderthal) head....

Capitalism is about making profit and enrich the owners of a team/firm/company/share holders; thus, a company will need to expand to make profit, similar to how a country mush have population expansion so that the economy can expand as well.

This question that is being asked and with the given condition, standard, solution, and possible outcome, is a question of which comes first, the chicken or the egg.

lolz ahahaha... good luck with that.

I know for a fact, because it's happening right now.  People who can understand the world economy will hedge accordingly and make profit no matter who's bitching....  And, the people who are bitching are the people who do the suffering. 

You wanted Capitalism?  You got Capitalism... baitchezzz...

 

Bwahahahahhaha

 

JibjeResearch conraddobler Mon, 02/05/2018 - 23:23 Permalink

Everything above...

You are a smart person....

I think you would agree with me that... our Americans Elites, also the EU's Elites, as it was taught to me, they think the term is political economy.  And sometime, I here/see them used Geo Politics or GeoPolitical Economy.

The term should be SocioGeo Political Economy.  This term covers all aspect of humanity.  There's no misunderstanding of this term.  The West's Elites don't fully understand the dynamic of different people; thus, failing to come up with the correct solution to dominate.... *peacefully, winning through mutual benefit.

 

The Art of War by Sun Tzu is practiced nicely by China.  Shit, they even understand Darwin's On the Origin of Species.  And, the principle of the Chinese Chess "Go" is winning globally. 

 

We are so fucked.... 

How can our Elites fucked up with the USD as the world reserved currency?

It's shameful....

We all will pay.... Pay back is a baitch... ahahah hahahahaha

In reply to by conraddobler

EndOfDayExit Mon, 02/05/2018 - 23:10 Permalink

To be 100% honest about it - Tariffs are a step towards socialism (and towards war) as they are subsiding inefficient businesses solely because the businesses are local to the country. I sure want to be paid $100/h doing the same work they can do for $10/h in some sh*thole. But why should I be paid that? Why is my ego somehow more important than the well-being of some poor sucker trying to improve his odds in life busting his ass for $10/h? I am not inherently better in the job to be paid 10x more. Tough shit.

conraddobler EndOfDayExit Mon, 02/05/2018 - 23:19 Permalink

You are 100 percent correct but ....... that's what America was built on.

We got rich because we were the low cost producer and then something different entered the equation, called a technological lead, something absent the work of traitors would of left our grandchildren set for life.

See these other shitholes didn't know HOW to produce anything close to what we could and would likely have never caught up but this is where we were sold out by people who arbiraged the wage differential which was I'd argue a high treason.

It's too late now it's been done, we've been usurped, the world has essentially caught up but what they have NOT caught up to is how essentially FAIR we were.

Not perfect by any means but fair.

That has been attacked and eroded until all the honor and sense of pride has been beaten out of our entire country and what's left is just feel good vestiges of it.

What made America great is only one thing, rule of law over rule of men.

Unless we get that back nothing else we do will matter and if we ever did get it back we'd surge back into the lead on almost everything because there is almost no rule of law anywhere close in the world that approximated what we had here.

The rule of law simply said if you build it you can keep it, it's yours, the rest of the world does not operate like that, they operate a lot like our government does right now, you scratch my back, I'll scratch yours and the law is for pussies.

 

In reply to by EndOfDayExit

ilovetexas Mon, 02/05/2018 - 23:19 Permalink

So Trump raises tariffs. Wait. Before the Chinese suffer the consequence, the American people will have to suffer inflation first. Any steel products, aluminum products will see a price hike about 50%. Producing those here in US? Then you will the price go up 3 or 4 times! Well, I think it is a good thing to suffer some after all these enjoyable days, what you think?

JibjeResearch Mon, 02/05/2018 - 23:33 Permalink

This is the first step of the full solution to solve American's economic issues.

1. Cut DoD by 50% and Social Benefit by 50%.

2. Cut taxes, or just completely eliminate the tax system and get rid of the IRS.... big saving here.

The result will be 1, small Government; thus, small spending, and 2, when people don't have to deal with the fucked up Gov, their health will be much happier.... could lead to high productivity.

 

MEFOBILLS Tue, 02/06/2018 - 00:00 Permalink

Ricardo’s theory was that countries should not try to be self-sufficient in all manufacturing, mining and agriculture

 

Ricardo was an agent of the bankers.  The "international" of that day wanted to take their cut on trade deals.  Ricardo went so far to say that Portugal should only make wine.

Here is the reality:  All nations should use autarky to the extent possible.  Only trade for those things you cannot make yourself due to your countries "earth" not having the minerals needed.  Labor makes goods as prices, to then make a living.  Prices fetch money from money supply.  

Example:  Russia was induced by the ((Harvard Boys)) to create an extraction economy.  Russia sells their earth by digging holes in the ground and selling their oil and minerals.  They sell oil and minerals for dollars, and allow Russian labor to go into dollar debts.  Meantime, an Oligarchy of land owners (Yukos) grabs Russian earth for themselves, and sells it for dollars.  Former nuclear scientists then walk around drunk because they never trained to be hewers of wood and drawers of water.  Russian society polaraizes as the former laboring middle class is eviscerated.  Platinum from Russia is fashioned into catalytic converters elsewhere, so value add does not accrue as Patrimony to Russian labor.

Malaysian Prime Minister Mahathir closed Malaysia’s capital account to preserve hard currency and defend his exchange rate

IMF had to finally agree that Mahathir was correct, but data on this period in Malaysia has been flushed down the memory hole. Google searches come up dry.  Malaysia is now a favorite target to have their "state" airlines knocked out of the sky for various reasons.

If several hundred million Chinese can be pulled from poverty by leaving the U.S. market open while China subsidies its companies, imposes its own tariffs, steals intellectual property, and limits U.S. foreign direct investment, then that’s fine

Wall Street was in on the China gambit, even going so far as to greenmail american companies.  Generations of industrial knowledge, which is hard won, was given to China for wage arbitrage.  America's past patrimony was sold cheap for today's wage arbitrage.  And now, the future is here but the past was sold.  Many of those who "made" money in the gambit, have since fled America, or can go anywhere as they are "internationalists" and don't give a damn.  Elites should have some feeling for their countrymen.  Immigration for wage arbitrage is a disaster, and exporting jobs for wage arbitrage is a disaster.  Neo-liberal economics thinks only "prices" matter, and that money is a neutral veil.  And yes, our ((friends)) are the prime "intellects" behind neo-liberalism, the epicenter of which is University of Chicago economics department.

America has always prospered with high tariffs to protect its industries. From Alexander Hamilton’s plan for infant manufacturing to Henry Clay’s American Plan, the U.S. has always known how to protect its industries and create American jobs

Correct.  See Hudson's book.  America's Protectionist Takeoff.

ALL FOREIGN TRADE IS ONLY BARTER.  America's finance sector has learned how to export dollars and import foreign goods.  Returning dollars from overseas competitors channel into buying debt instruments rather than purchasing goods from american mainstreet.  This is in violation of economic prime directive, about goods trade only being barter.  Goods in exchange for debt is an abomination, but then America is caught in the grip of all kinds of false ideologies.

conraddobler Tue, 02/06/2018 - 00:25 Permalink

The problem is essentially simple.

People have lost all ancient hard won knowledge of what it means to be a human being.

That term is simplistic bliss.

Human beings simply are, they have no need to justify their existence, yes they do need to provide for themselves which is a trivial matter with today's technology, the problem arises in how we account for limiting what one human being can own.

I'm not a communist any more than Native American's were communists, they believed in hard work, honor, family, integrity etc.

They had wars too as they like all of us were imperfect but if you study them their solutions to some of our problems were born out of a connection with the earth that we have all mostly lost.

That connection is the only real guide we have, that and respect for facts and the truth and honor, love etc.

You can't build any kind of sustainable society when you forget your roots as an animal just like all others in nature.  We can't keep going on like this, there is no need for any of this.

Human beings are units of sovereignty and that is an INVOLATE rule of the universe as all our animal brothers are too.  Yes we may be smarter than them to a degree or another but we are NOT superior to them at all.

We are all God's creatures and if we don't respect that and align ourselves with the idea that we must first do no systemic harm we are doomed ulitmately and utterly.

We don't have to all live in huts and sit around fires although that would be superior to what we do now but we do have to search our souls for what we really are or we will all die.

There is nothing on earth that says anyone animal or person deserves X amount of anything and people who hoard stuff are as diseased as any alcholic just diseased for power or wealth none of which is ulitmately good for anyone.

Because we can do things does not mean we should do things.   

Colonizing the stars is an acceptable goal but hoarding earthly wealth just to become a feudal lord is not healthy for anyone, it's not going to make the world a better place for anyone either as you are sewing seeds that will ultimately destroy us all.

We simply have to grow up or die, looks bleak at the moment but then again it's looked bleak before.

PrometeyBezkrilov Tue, 02/06/2018 - 00:55 Permalink

"Trump did not impose these tariffs in 2017 because he needed Chinese help with the North Korean situation."

What, what? Needed help with NK situation? What situation? Situation made up by CIA and Pentagon?

JailBanksters Tue, 02/06/2018 - 02:22 Permalink

A Free Trade Agreement is easy to do, all you have to do is tear up the Agreement.

No Strings, No Ties, No I'll give you this if you give me that, that's what makes it Free.

 

Batman11 Tue, 02/06/2018 - 09:26 Permalink

Where would the US be today if had accepted the comparative advantage the UK had after the industrial revolution?

It was isolationist and protectionist until it had become a super power.

The idea is to make each nation interdependent and unable to go their own way.