TRADE WAR! A DEEPER TRADE WAR!

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May 13, 2019 (Washington) So we all woke up with the markets taking a deep dive. Why? We are in the midst of a deepening trade war with China. While presidents usually have very little effect on the economy, this little fact may very well send the country into a deep recession.

There are a few reasons for that. The first is that this expansion is quite long in the tooth. That is making a lot of economists nervous. At least the ones who have a clue and understand that business cycles are just that, cycles. This one is very long and that alone means that a recession is just a matter of time.

Let me say something that for most Americans is counter-intuitive. Presidents rarely have much of an effect on the macro-economics of the nation. Whether we go into recession, or we have an economic boom depends on the actions of the Federal Reserve. Central bankers are the ones with the keys to the palace, who through the use of monetary policy control the fate of the economy.

Presidents can have an effect, and usually, it is a short term calming effect when markets seem jittery. Or on the other side, they could help trigger a recession with an ill-advised economic policy that they think is good politically. This is precisely what a trade war with China does. It is making everybody nervous because it is an extremely wrongheaded policy in a globalized world.

Not only are consumers going to pay far more for socks, underwear, phones and other goods, but this may very well trigger an early start to a recession. This president also seems to believe that imposing tariffs is good for the government. And at one time he would have been correct. There was a time when we collected tariffs, which served as the taxes of the day. We also had industries, many of them young, that needed protection from foreign goods that were far cheaper and at times of better quality. And no, Americans did not pay annual taxes to Uncle Sam. And it was a world where each state set its own destiny, and nations had tariffs on industries they wanted to protect. It was also far more inefficient, and led to more expensive shoes, socks, leather goods, and clothing, for example.

If the goal of the administration was to bring manufacturing back to the United States, he is misreading the current global trade system, and I am very kind here. He is also not understanding how those tariffs do not transfer to the government and are more like taxes for the end consumer.

First off, if a company sees that producing anything in China gets too expensive, we live in a trading system where they can, and likely will, open factories in other South East Asian nations. Bringing production back to the United States is likely the last thing they will do, and that is not just due to the cost of labor. It is also due to externalities they would have to cover, that they do not want to. There are other reasons for this, and part of it is that it is far easier for these companies to move production around than bring it back to the United States.

Since the United States has de-industrialized, the supply chain needed to produce a car or a bike does not exist. We do not have the needed steel production, for example, needed to build a bike. So our small producers and big producers build them using Chinese parts. The supply chain is on the other side of the Pacific. Whether that is a good idea from a national security perspective or global warming is not even a question. It was not asked in the early 1970s when this global trade system started to take shape. It was not asked when the system started to move from one nation to another.

So we are in a situation where imposing tariffs on shoes will only raise the cost of shoes for Americans. We do not have shoe factories in the United States that could pick up the slack. They would have in 1950 for example. What about that great American Automobile? Well, given the steel for it comes from China and many of its parts from all over North America, it is made in America from all kinds of supply chains covering continents. Going back to the older system would likely take years, and investing in the necessary infrastructure that at present is crumbling.

These tariffs will translate to about $800 dollars extra that Americans will have to spend on shoes, phones, washing machines and underwear per year. This is less money they will have to spend at the local restaurant or movie theater. So yes, this policy could indeed help trigger the recession that many educated observers of the economy expect. It may even make it deeper than it should.

Oh and incidentally, the last time something this stupid was done as full no holds barred nationalist protectionist policy was 1929. We did not know better, now we do. And there have been other occasions when smaller in scope trade wars have triggered economic slowdowns. This trade war seems to be longer, deeper and more stupid. If we are to be kind, it is based on a policy that would have been right at home in 1800, not 2019.

The rise of autarky governments that are nationalists is not without precedence. The second age of globalization ended around 1910. We know what happened next. So yes, we may see deeper and longer conflicts, as nationalist governments decide to put multiple nations ahead of everybody else. One problem is that we are facing a crisis that requires a global response. Global warming cannot be solved by individual nations, and re-industrializing everybody will lead to higher carbon footprints globally.

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