Two Days To Trade Wars: Can Stupidity Be Avoided?

Authored by Mike Shedlock via MishTalk,

US steel and aluminum tariffs start Friday. Germany's economy minister is in D.C. But Trump has stringent demands.

No one wins trade wars. The notion is ludicrous.

I have more on the "meaning of win" in a moment. But first let's consider the Eurointelligence view.

This is not a trade war the EU can ever win, as Wolfgang Munchau points out in his FT column. If the EU were to put up a big fight over this, with a long list of sanctions on Friday, the US would immediately respond with a tariff on car imports. It would be the equivalent of the Fool's Mate in chess, Munchau argues. Donald Trump is right in his assertion that trade wars are easy to win - if your opponent is sufficiently desperate and addicted to the export of manufactured goods, like Germany is. When we said that a current account surplus of 8% (or probably higher) is not sustainable, it was not meant as a statement of right or wrong. Unsustainable means that it will end at some point - through either adjustment or force.

Spiegel magazine had a story over the weekend that there is a glimmer of hope. It was one of those short Spiegel news stories, something they picked up from a single source, but not quite worthy of a full-length article. The story says the US will make three specific demands as a pre-condition for exempting the EU from the steel and aluminium tariffs. The first is that the EU caps steel output at 2017 levels. The story did not reveal the metric, whether in volume or value. The second is that the EU take anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy. And, to top it all, the Europeans will have to deliver proof that they are on the way to meeting their Nato commitments on defence spending. The latter is an impossible demand to meet since no such proof can exist. The German grand coalition, for example, is making no efforts to increase defence spending. The priority of the new finance minister, Olaf Scholz, is to maintain the fiscal surplus.

OK, Where's the Win?

Eurointelligence never explained how this magical "win" occurs.

Instead, Eurointelligence linked to a report by Brad Setser: Forming an Alliance With U.S. Allies Against Bad Chinese Trade Practices Won’t Be Enough to Bring the Trade Deficit Down.

There are growing calls for a global coalition of U.S. allies to pressure China to change some of its most egregious commercial practices.

That makes some sense [Mish - actually it makes zero sense - explained later], even if it is much easier said than done. It is relatively simply to get agreement that China should change many of its policies. But China doesn’t typically respond to peer pressure alone. It is relatively hard to get agreement on what to do if China doesn’t change voluntarily.

After a useless diversion into complaints about China, Setser admits this interesting tidbit:

China’s current account surplus is well below that of the Eurozone. Or that of Japan. [Mish - It's simply high with the US].

Even at 2.5 percent of China’s GDP, it is smaller, relative to China’s GDP than the current account surpluses of the United States’ security allies. ​

U.S. allies generally have much tighter fiscal policies than China. That’s a big reason why they run larger current account surpluses than China. [Mish - Not really - the reason is that Nixon closed the gold window and this is the logical result.]

Korea and Taiwan (and neutral Switzerland) also put their finger on the foreign exchange market when needed to keep their currencies weak (Korea rather egregiously in January).

As a result, the combined current account surplus of U.S. allies in Europe and Asia is close to $800 billion—well over China’s roughly $200 billion. That sum would be a bit bigger if you added in the surplus of democratic but formally non-aligned European countries like Sweden and Switzerland.

A China that behaved better commercially would no doubt help many companies. And if China lowered barriers to actual imports, overall trade with China might expand. But better commercial practices on their own aren’t enough to assure a smaller Chinese trade surplus. [Mish - On that I strongly agree with Setser]

So long as Asia and Europe’s aggregate surplus remains high, someone in the world will still need to run a large external deficit, and odds are that will still be the United States. [Mish - Once again this is a mathematical necessity!]

In Dollar Terms

See the Problem?

The US has its biggest trade deficit with China, but globally the imbalance is with Germany and Japan.

Placing tariffs in Chinese steel will so nothing but make the US more uncompetitive on exports.

Averting a Trade War

To stave off the trade war, assuming Trump sticks to his guns, the EU needs to do these three things.

  • EU caps steel output at 2017 levels.

  • EU takes anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy.

  • EU must deliver proof that they are on the way to meeting their Nato commitments on defence spending.

If not, we have a trade war.

Easy to Win

Wolfgang Munchau say In a Trade War Germany is the Weakest Link and "If your target is Germany, then yes, a trade war is easy to win."

Munchau bases his opinion on the idea that the EU, Germany in particular, is very dependent on exporting cars at a time when Germany's diesel technology is on the verge of being worthless.

Brexit poses an additional threat as Germany is a huge net exporter to the UK.

Here's Munchau' conclusion: "This trade war is indeed easy to win. It is going to be the equivalent of the fool’s mate in chess: the game could all be over in two moves."

Meaning of Win

What does it mean to "win" a trade war?

Donald Boudreaux at the Cafe Hayek explains in his post: An Oxymoron to Beat All Oxymorons.

No two human activities are as opposite one another as are trade and war. Trade is voluntary; war is coercive. Trade is peaceful; war is violent. Trade enriches; war impoverishes.

Trade is a mutually advantageous exchange of property rights; war is a bilateral destruction and confiscation of property rights – destruction and confiscation that never are mutually advantageous and that too often, in the end, are advantageous to no one.

When trading, each party improves his welfare only by attending to, and enhancing, the welfare of others; when warring, each party improves his welfare only by attacking, and diminishing, the welfare of others. Those who trade with each other have an interest in each other’s well-being; those who war against each other have an interest in each other’s annihilation. Trade enhances life; war ends life.

What are called “trade wars” are indeed wars, but they involve only war and no trade. Every so-called “trade war” is each government making war on its own citizens, coercing them not to trade as they would otherwise peacefully trade.

The term “trade war” makes no more sense than do the terms “good evil” or “peaceful violence.” We should stop using it. We must find a better term to describe governments’ waging war upon those of their own citizens who dare to trade with others.

Curious Way to Win

As Munchau, Trump, and Peter Navarro (Trump's trade guru) see things, it is remarkably easy for Trump to win.

In reality, the only way to win is to not play the game at all.

Please reflect on this: Shall we play a game?

Comments

Teja HopefulCynical Wed, 03/21/2018 - 11:49 Permalink

I would agree here - Free Trade as the Golden Calf of Unfettered Capitalism. Historically, it has made sense for many countries to limit free trade until their economy has reached a certain level. Japan, South Korea, China, all of them much better off today because of limits to free trade in the past.

But for a developed economy, economic walls against trade can become deadly by reducing competitive pressure. Just look at South American countries like Argentine or Brazil. Somehow I feel the U.S. are following their tracks rather than those of the Asian countries. Loud mouthed caudillos distracting from internal problems via trade wars, an economy more and more based on raw materials rather than manufactured goods.

Hmm I wonder if the U.S. will liberate some Caribbean islands from British rule, just to make a point similar to Argentine with the Islas Malvinas. That was what Argentine did when they were at the end of their trade wars... Greetings to BritBob!

In reply to by HopefulCynical

bshirley1968 Gaius Frakkin'… Wed, 03/21/2018 - 08:33 Permalink

I can see this subject really brings out the Trumptards.

China's guilt in this import/export fiasco is that they rent out their people as slaves.....just as Mexico and the rest of the Asian rim does. You cannot....cannot.....compete with slave labor.

We, the US, Corporate America created that slave labor market by allowing US corporations to move to slave labor countries and utilize that slave labor to compete with middle class American work force.....which has sense been destroyed.

You Trumptards want to fix this? Then the "tariffs" need to be put on iPhones, Levis, GM, Ford, etc. All these companies that make and use products made with slave labor need their asses taxed off. It should cost GE just as much to make something overseas and ship it here as it does to make it here.

Going after "countries" is bullshit. We need to focus on corporate America. That is where the power is and who is causing all the problems. It is a chickenshit move on Trump's part not to tax the shit out of corporate America. His tariffs are nothing but symbolism over substance.

In reply to by Gaius Frakkin'…

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In reply to by WTFUD

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In reply to by slopz38

keep the basta… wildbad Wed, 03/21/2018 - 06:28 Permalink

Sorry to hear that.

USA companies exporting jobs and production and USA   buying the product/ export back. Like your work.

not chinas fault. What can it do? Looking at the table in thar article Singapore is doing huge export compared with import and EU doing well too. But of course only the industrialised part of eu. China has bugger all at 1.4 percent of GDP and how much would be amercian firms exporting back to the USA? 

Maybe stop all exports to USA.

keep selling treasuries to finance other things.

 

In reply to by wildbad

all-priced-in Vendetta Wed, 03/21/2018 - 09:54 Permalink

When I graduated from business school in 1980 I believed this stuff about free trade.

 

When I went back and got my MBA in 1984 I believed it even more - fuck I could even PROVE it with a graph that showed the increase in profit made by BOTH countries as a result of free trade.

 

Then I  ran a manufacturing company for 15 years - in about year 10 a Chinese company started selling a  product - it was a copy of ours  - their selling price - delivered from China was less than it cost us for the material and direct labor.

 

So even if our indirect labor and overhead were zero - we would still lose a little on every sale.

 

Lucky for us their product quality sucked - but it was clear they were figuring out how to improve the quality.

 

We automated - and were able to cut our cost down to the point we were competitive - but we barely hung on for a couple years and almost went down the shitter. We had a parent company with deep pockets - they loaned us the millions of dollars we needed to develop and buy the specialized equipment to cut out 90% of the direct labor. Other wise we would have gone out of business.

 

 

 

 

 

 

 

 

In reply to by Vendetta

bshirley1968 Vendetta Wed, 03/21/2018 - 08:38 Permalink

Then go after the corporations that are doing the fucking. All you are is a slave to corporate America, hoping Trump can get you better slave wages. News flash: He doesn't give a shit about you....and why should he, corporate America pays him millions, what do you have to offer other than some bitching and whining?

In reply to by Vendetta

commoncourtesy HoPewGassed Wed, 03/21/2018 - 07:02 Permalink

Agree, US has took far too long to react to China's 'One Belt One Road' initiative. USA is reactive rather than proactive.

The stealth of China's march has been fast, swift and very quiet. 

https://thediplomat.com/2018/03/redefining-the-belt-and-road-initiative/

https://thediplomat.com/2018/03/despite-its-global-expansion-china-stresses-no-intention-to-displace-us/

WTFUD is also right. There may well be those pulling the strings of trump that have superior GLOBAL interests elsewhere, who knows?

As USA Inc. is a private corporation, can anyone define what US interests are? Legally, I think there are three corporations (Foreign, Municipal & Territorial) with very similar names all disguised to re-present America. That is where the real problem lies. It is called legalese.  

In reply to by HoPewGassed

Davidduke2000 Wed, 03/21/2018 - 05:40 Permalink

China should not play trump's game, the Chinese government should stop all exports to the us completely and buy all these exports itself while redirecting all sales to the rest of the world, it should not be that difficult to redirect the 16% of all its exports to different countries.

Then let's sit and watch how the us would deal without chinese exports, especially for the trump ties and ivanka's shoes.

RedBaron616 Wed, 03/21/2018 - 05:46 Permalink

These are diversionary moves so that Trump doesn't have to deal with the REAL US Trade Problems: China, Asia, and Mexico. Wages and benefit differentials practically beg for tariffs. Of course, tariffs should have never been pulled down as all that did was destroy one American industry after another.

pachanguero Wed, 03/21/2018 - 05:51 Permalink

Who the fuck writes this shit Tyler? 40 plus years of shipping our jobs overseas and spreading our ass cheeks for the Chineses is over.  Get the fuck over it.  We won and we are going to destroy you next.   

Vendetta pachanguero Wed, 03/21/2018 - 08:22 Permalink

Excellent question pachaguero!  The globalist trolls here are so busy defending totally failed trade policies vigorously without the slightest hint of acknowledging the tent cities all across this fucked up country .. and millions upon millions of workers live paycheck to paycheck and these globalist fucking schmucks could give two shits about it ... fuck all of the globalists and their supporters .. they are the true deplorable in reality .. they LOVE worker exploitation globally 

In reply to by pachanguero

Vendetta pachanguero Wed, 03/21/2018 - 08:22 Permalink

Excellent question pachaguero!  The globalist trolls here are so busy defending totally failed trade policies vigorously without the slightest hint of acknowledging the tent cities all across this fucked up country .. and millions upon millions of workers live paycheck to paycheck and these globalist fucking schmucks could give two shits about it ... fuck all of the globalists and their supporters .. they are the true deplorable in reality .. they LOVE worker exploitation globally 

In reply to by pachanguero

overmedicatedu… Wed, 03/21/2018 - 06:55 Permalink

NWO has paid thousands of the like of mish..Tariff bad, NWO free trade good. obey..

well some are waking up to understanding it is good for every elite mega corp..but fuks everybody else.

FrankDrakman Wed, 03/21/2018 - 08:14 Permalink

How fucking stupid. "Trade is a mutually advantageous exchange of property rights;". How, exactly, is it "mutually advantageous" for the US to see an entire swath of its country left with empty factories, drug addicted workers, and ballooning government expenses for welfare, etc., so it can save a few cents on plastic crap from China?

When Adam Smith wrote the "Wealth of Nations", he envisioned free trade between competing industrial states that shared the same standards of living, the same basic laws, and the same basic technology, not first world countries competing with 3rd world states. He certainly didn't envision the type of "you let our stuff in free, and we'll let in your stuff if you just comply with all these rules, like hiring our people as partners and giving us all your IP for free" bullshit that passes in the MSM as "free trade". 

China, and just about everybody else, is following a MERCANTILIST policy, not "free trade". The sooner everyone realizes that, the clearer the picture will become. 

baldknobber Wed, 03/21/2018 - 08:47 Permalink

First off I am not an economist and probably don't know jack shit, but.  A lot of people here say China should just sell more to Europe and say fuck u to the US. Does China not know That Europe exists? Should someone run to Beijing and tell there is this new place with people that might buy their stuff. China is already selling what the market will bear in Europe. How would they increase their market share? They would dump product there at below cost, like they do to the US. How long would VW and others put up with a flood of cheap Chinese auto parts before they started to scream?

Oh and Russia should just stop selling gas and oil to the West until they treat them nicer

gdpetti Wed, 03/21/2018 - 10:06 Permalink

THe 'non' move is classic... not just 'Art of War', but throughout  nature... fight, flight or 'freeze' mode of reaction/response... if you can keep your wits under pressure, you want to always respond... which requires you make this move in real time with intent.. but it looks the same... fight, flight or freeze... the non or no move... which can sometimes be the best move, forcing your stressing agent/catalyst/opponent to choose their next move in accordance to your own.... usually it's predetermined by animal instincts and desires to conquer... thus the slanting techniques in most battle formations, same in business... give them enough rope to hang themselves... draw them into the quicksand and watch them disappear from history... as long as you are aware of your own changing situation.... as now... this time is different as we are on the end of not a  normal 'iron age', but the end of the Grand Cycle... thus the ice age aspect as/after the comets start swinging by... after the dark star etc.... the entire game is about to change... one in which the real 'move' is in the mind... instability can remain stable in times of chaos... which all depends upon the determining force that brings order to the chaos.... thus the real stress is in the OWO.