The G7 Summit Highlights Western Leaders' Hypocrisy

Authored by Daniel Lacalle via The Epoch Times,

Other countries pretend to be interested in free trade; in reality they only care about their own advantage...

The G7 failure to come to terms on trade highlights the problem of governments trying to macromanage trade. And no, the failure to even agree to disagree cannot be blamed on President Trump and his new-found economic nationalism.

The list of countries with the largest trade surplus with the United States is led by China, which exports $375 billion more than it imports. It is followed, very far away, by Mexico ($71 billion), Japan (69 billion), Germany (65 billion), Vietnam (38 billion), Ireland (38 billion) and Italy ($31 billion).

Not surprisingly, the markets with most protectionist measures against the United States are China, the European Union, Japan, Mexico, and India.

These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron, or any of the leaders gathered there.

During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess to the United States.

Especially China, Germany, and Japan have economies with high state interventionism and therefore very high excess capacity, in part due to a high personal savings rate.

Steel and aluminum, like the automobile industry, are examples of building unnecessary capacity and subsidizing it, country by country, hoping it will be somebody else who closes its inefficient factories to be able to export more to that country.

In Germany, the influence of the automobile industry over the government is legendary. What isn’t are the relatively high tariffs American manufacturers face when exporting to Europe and the low tariffs America itself imposes on automobile imports.

Have Your Cake and Eat It

What is also ironic is that modern-day protectionism didn’t start with Trump. Barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The only difference between Trump and Obama was that Obama didn’t publicize this much and the mainstream media didn’t complain.

The mainstream media also misrepresented the intention of the Trump administration to level the playing field by telling the story of Trump the protectionist.

But the requirement of the Trump administration in the G7 to eliminate all tariffs and barriers, rejected by the rest, has shown that the hat trick of accusing the United States of protectionism was simply a PR stunt. Every time the Trump administration has threatened its trading partners with tariffs, we learned of hidden barriers from the so-called “free trade leaders” in China and the European Union.

In six months we have seen an important list of tariffs and barriers against the United States that many of us simply thought did not exist. And this is on top of the already higher explicit tariffs that especially China levers on imported goods. Even the European Union recognized that the “Made In China 2025” plan, which the United States denounced, was a conscious objective of limiting foreign trade.

So the story the mainstream media tells is wrong. Trump does not favor protectionism, he just wants real free trade, which means no tariffs—but for everybody. He tries to dismantle the trick of imposing hidden barriers, smile, and then export more to the United States. Needless to say, he can only get some movement into the matter by threatening to impose tariffs as a retaliatory measure.

Because of the threat, the German car manufacturers themselves have asked the European Union to reduce tariffs on U.S. cars, the Chinese have agreed to reduce barriers to the imports of U.S. agricultural and industrial products, and so on.

But because other G7 leaders want to have their cake and eat it too, the G7 summit had to explode. If all countries subsidize their excess capacity and try to export to the United States while using peregrine excuses to limit imports from the world leader, a charitable agreement is not possible.

And the “free-market-disguised protectionism” strategy of some of the G7 leaders collapsed when Trump said “they have taken advantage of the United States for decades” and called for the elimination of all tariffs and tariffs completely. Interestingly, those who presented themselves as defenders of free trade refused.

Game Over

This game is now over. But we need to be wary of the consequences.

The United States may win and get the other countries to limit their protectionism. On the one hand, it exports very little, only 12 percent of GDP. On the other hand, everyone wants to sell there because of market size and growth opportunities. Additionally, without their huge trade surplus, the European Union and China cannot sustain their growth.

And the debt? China owns $1.3 trillion of United States debt. It does not reach 6.2% of the total. It is neither the largest holder of U.S. debt nor a threat. As shown throughout 2018, the demand for US bonds is much higher than the supply on all issuances and the U.S. based bond funds would absorb any sale by the Chinese in a few days.

Also, China cannot sell them. For China, these bonds are reserves of foreign currency. If sold, the Yuan would suffer enormous volatility, especially when its currency is used in less than 4% of global transactions and its value is more than questioned because of tight capital controls. In addition, China needs several trillion of dollar liquidity to run its trading machine.

It has been very easy for the European Union and China to support their GDP growth thanks to an external sector and a trade surplus that hid trade huge barriers under the rug of regulation and subsidies.

From bureaucratic barriers, hidden taxes, lack of intellectual property protection, disproportionate subsidies to obsolete sectors, or invented environmental excuses, it is over. If they want to sell to the United States, they have to adopt measures that increase free trade, not disguise protectionism under a mask of openness.

However, the United States should be careful either way. Tariffs are the worst way to combat protectionism. They give other governments the excuse to impose higher barriers to trade and blame the external enemy, without getting rid of the existing barriers.

Lose Lose

However, if Trump’s tactics don’t work and other countries liberalize their trade, we are looking at a world with much slower than anticipated GDP growth.

Europe is already slowing down and it looks like it will get worse not better. The data on industrial production, GDP, consumption and credit point to a much poorer growth than estimated. The European Union is exiting its monetary stimulus with a very important drop of the economic surprise indicators.

But protectionism protects governments. While all of us lose, politicians often prefer things to get worse than lose control, and that is a relevant risk with China and Europe. The United States is carrying out an aggressive negotiation tactic and it can backfire.
Trump knows that tariffs hurt inside as well.

In 2001, Bush Jr. introduced tariffs on aluminum that destroyed thousands of jobs, and Obama’s constant protectionist measures led the country to the worst external sector growth data in decades. Putting the fist on the table and demanding that everyone remove their barriers can motivate everyone to blame their barriers to trade on the outside enemy. On the “protectionist” United States, and vice versa.

If the purported “free trade nations” don’t start some real free trade soon and the bickering escalates into a full-fledged trade war, those who will suffer the most will be the consumers all over the world.

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Daniel Lacalle is chief economist at hedge fund Tressis and author of “Escape From the Central Bank Trap,” published by BEP. 

Comments

Heros Adolfsteinbergovitch Wed, 06/13/2018 - 11:58 Permalink

The claim that it is unseen trade barriers that are preventing US products from getting larger sales is laughable.

There is very little that the US produces that the rest of the world wants any more.  US cars are pathetic even in the US, and US trucks are too big for the rest of the planet out side of North America.

Electronics has all been out sourced, white goods have all been sold off or shut down with sears and kmart.  IBM, HP and Dell have turned themselves into services businesses. US furnishings and hardware, made to US standards in inches and feet cannot be exported.  Construction equipment like Caterpillar might be one exception, but like Deere these are international companies with components sourced from around the world.

The only thing left to do is to get international conglomerates like Samsung or Toyota to open more plants in the US.  This is what Trump is doing, but it won't help small US manufacturers and might hurt them.

In reply to by Adolfsteinbergovitch

hooligan2009 Heros Wed, 06/13/2018 - 14:26 Permalink

here's a list of the 2 trillion of exports for 2017, that the rest of the world doesn't want.

https://tradingeconomics.com/united-states/exports-by-category

top 10 just for you.

the US has fantastic people and products, so does germany, france, japan, china, the UK and even Canada.

the point is, these people and products are comstrained by governments that are transitory and add nothing to the well being of hte people they represent.

Machinery, nuclear reactors, boilers              $201.65B 2017

Electrical, electronic equipment                    $174.25B 2017

Mineral fuels, oils, distillation products          $138.01B 2017

Aircraft, spacecraft                                      $131.17B 2017

Vehicles other than railway, tramway              $130.10B 2017

Optical, photo, technical, medical apparatus     $83.56B 2017

Plastics                                                         $61.50B 2017

Pearls, precious stones, metals, coins               $59.75B 2017

Pharmaceutical products                                 $45.05B 2017

Commodities not specified according to kind      $44.65B 2017

In reply to by Heros

Catullus Wed, 06/13/2018 - 11:44 Permalink

A trade deficit doesn’t matter in a fiat money system. It’s old world concept when you had to pay for things internationally in gold. 

What happens now? Some idiot local thug helps someone build capacity to export stuff to the US. What does it cost the US? Digital 1s and 0s. The US gets stuff. Gives up 1s and 0s. Who’s the loser in this deal? 

The thing the US exports is inflation. And there’s plenty more of that to go around. 

A trade barrier with the US just prevents people from ever cashing in their 1s and 0s with stuff. So they dump it into US capital and real estate markets. Again. The US wins. 

FreeEarCandy Catullus Wed, 06/13/2018 - 12:14 Permalink

 The US gets stuff. Gives up 1s and 0s. Who’s the loser in this deal? 

Ah? All those 1s and 0s a country receives for their tangible goods and services are then also used to buy tangible goods, such as USA real estate from the bankrupted factories that were destroyed by unfair trade practices.  Ill tell you what. We could go back and forth with this. I have seen 40 years of unfair trade practices and the resulting devastation. Logic would suggest a reverse course will have the opposite effect. From the USA stand point what do we have to lose, as this so called free trade is doing exactly what everyone is suggesting will happen - if we pull out of all these dumb deals.

In reply to by Catullus

caconhma Catullus Wed, 06/13/2018 - 12:40 Permalink

The best analysis of today's digital economies.

The summary: "A trade barrier with the US just prevents people from ever cashing in their 1s and 0s with stuff. So they dump it into US capital and real estate markets. Again. The US wins."

The USA has three problems:

  • China wants to cash their US$ holding for the US high-tech buying most technology-advanced companies. By achieving this, China will have no incentives to sent their cheap, slave-made goods to America
  • China also has started a process of dethroning US$
  • The USA cannot anymore stop these processes

The article is POS. It is based on US financial markets mentality.

Finally about N. Korea.

Any dictator to stay in power needs to have external and internal enemies. If such enemies disappear then there is no need for dictators. This is exactly what happened to the Soviet Union. There is no way Kim will accept such scenario.

One more comment: N. Korea nuclear and missile expertise could be traded for lots of money. Even Japan has no such missile expertise/capabilities as Kim has.

In reply to by Catullus

FreeEarCandy Wed, 06/13/2018 - 12:01 Permalink

Any country that preaches free trade, while charging tariffs, is a closet protectionist. Free trade = Zero tariffs world wide.  Free trade will never happen - ever! The second leg is fair competition. Government subsidies would also have to be stopped. The bottomline here is that none of the G7 members are interested in free and fair trade.