The Progressive Ensign

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Category: Protectionism (Page 1 of 2)

Saving Democracy: Economics – A Two Block Trade World – U.S. and China, Threatens World Peace

On Bloomberg TV, VMware CEO, Pat Gelsinger, observed that with escalation of the trade war he sees, “two separate trading blocks forming the United States and China, we want to be a player in both and will have to adjust,  our strategy, investments, supply chains and operations as a result.”  He sees both countries digging in for the foreseeable future.

The evolution of a two trading block global economy has a major impact on how businesses operate in the next five to ten years and integrated economies.  Those companies with major operations in China that ship products to the U.S. will continue to be adversely affected by U.S. tariffs on Chinese goods. Growing trade headwinds also face U.S. companies shipping goods to China. Besides tariffs, trade research shows Chinese importers will need to deal with U.S. non-tariff barriers that are the most stringent and time consuming. Recently, China has allowed the exchange rate for its currency to rise against the dollar effectively mitigating about 5 % of increasing tariff costs on U.S. imports.

Here is a list of industry sectors most impacted by the trade war with businesses exports and imports to China:

Sources: Census Bureau, Marketwatch – 6/27/19

Major software and electronics companies like Apple with $56b in sales making up 20% of total global revenue from China will continue to see declining sales. Apple, and other companies in the same shoes, will have to radically shift supply chain and sourcing for manufacturing.  CISCO, a global network systems manufacturer recently reported to shareholders a 25 % drop in sales of network products to both state owned and private corporations in China. Many American manufacturers’ source components and sub-assemblies from China and are shipped to the U.S. mainland for final manufacturing. These supply chains will have to change if they are to sustain profits. Caterpillar, in the transportation sector, recognizes 10 % of global revenue from China, and has experienced a significant drop in sales.  Tariffs have significantly reduced soybean exports to China by U.S. farmers to nearly zero. The Federal Reserve in Minneapolis reports farm bankruptcies have reached 2008 levels.  These are just a few examples. Each day the list of impacted industries and companies grows longer.

What does a two block trading world mean to our democracy?  The trade war seems to be here to stay. As such, we need to go to the strengths of our democratic government and our multilateral approach to global development to ensure peace.

  1. Tariff Alternatives – blanket tariffs as the present GOP Administration has implemented are driving up prices for consumers, created reduced sales for corporations and crated a world economic environment of confusion and uncertainty. Working with our alliance partners in the EU, Australia, Japan, South Korea and others to pressure China to change its laws related to intellectual property theft, state subsidized industries and unfair tariffs would be a far more effective approach than America trying to go at China alone. The U.S. needs to reach out to the free trade capitalist leaning economic entities that the government allows to operate – like entrepreneur owned and operated companies within China to build both economic and political links.
  • Trade Policy Consensus Development – Democrats and moderate GOP congressional members need to drive the national dialog instead of letting our POTUS use threatening, bullying and constantly flip-flopping tactics in trade discussions.  Reasonable well thought out policies built on consensus from both parties is crucial otherwise any agreement may not be ratified by Congress.
  • Federal Reserve Independence – our President has continued in a blitz of tweets to attack Chairman Jay Powell, and the Federal Reserve’s policies totally not respecting the independence of Fed to make decisions in what is in the best interests of the country.  POTUS wants the Fed to reduce interest rates to push the U.S. economy so he can continue his trade war with China. The political use of Federal Reserve powers never be implemented. Democrats and Republicans need to come to the defense of the Federal Reserve and push back on these attacks and ensure in every legislature way possible to ensure the Federal Reserve stays independent of politics.  Analysis by researchers shows that independent government central banks far better in both economy growth and recession cycles than politically motivated central banks. When central banks are focused on the long term health of the economy they may raise interest rates even when it may cause a reduction in GDP growth or recession to burst the bubble of low rates and speculation in risk assets.
  • Commit to a Just and Thriving World Economy – since the end of WWII, and the devastation it caused to people throughout the world, government leaders have been committed to ensuring that all countries are growing, have strong economies and support integrated economies.  It is a simple thesis: countries that are trading and growing together become more trusted partners, depend on each other for economic growth and thus are far less likely to see war as a mechanism for economic gain and power.  Certainly, countries like China have taken advantage of US trade policies, not ensuring worker protections, or protecting intellectual property rights.  We need trade policies that focus on these issues, using targeted trade tools not blanket massive tariffs applied at the whim of a tweet. The U.S. should support using the World Trade Organization which is a founding member, appoint staff left vacant right now, and adjudicate disputes in an hearing of a world agency to ensure trade justice. 
  • Integrate a One World Economy – by forcing a two block trading world, the U.S. and China will be forcing other major trading groups like the EU to choose sides. Other countries like Australia maybe become bridging countries between the two dueling economies for world economic power. This two block trend needs to be shifted into a one world view, where all economies are working together to solve economic problems.  To solve existential problems like global climate change will require all countries to cooperate, make joint sacrifices and innovate to ensure the existence of our planet 25 to 50 years from now.

Our democracy will thrive when we implement policies which our world allies and others see as just, providing equal opportunities for all businesses to thrive and ensure innovative solutions to world economic problems.

U.S. Has A Trade Surplus with Canada, What is the issue?

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Image: Feedstuffs.com

The U.S. actually runs a small trade surplus, of $8.4 billion with Canada when services are included.  The GOP Administrations seems to miss this point in the present trade discussions even though 75 % of the U.S. economy is services based.

Source: Washington Post, 6/11/18

Note the U.S. exports about two and one-half more services to Canada than we import.  The American surplus in agriculture products is $2 billion. It seems that just looking at the diary market taken out of the context of the whole trade relationship is a near sighted way to look a trade policy.

Looking at the specifics of dairy imports and exports reveals a trade surplus of $418 million here as well.  In 2017, U.S. exported a total of $637 million of milk, cheese and other dairy products to Canada. Canada to protect its much smaller dairy industry has established a supply management tariff system.

Source: The Wall Street Journal, The Daily Shot – 9/4/18

POTUS has been quite focused on the supply management trade of dairy products declaring a provision for 270 % diary tariffs are outrageous. We examined how the supply management system works in a previous post,

The reason there is a 270 % tariff on dairy powder is a system of supply management that was agreed upon by the US and Canada.  For most dairy products sold within the quota of US imports into Canada a tariff of 7.5 % is applied by the Canadian government.  When imports exceed the supply management quotas, super charges go into effect on products like dairy powder or over quota milk at 241 %.  Canada has established a supply management system with the US on dairy products, as most countries including the US subsidize their dairy industry.”

Next Steps:

The GOP Administration needs to understand the history of Canada – U.S. trade relationship and work with the Canadian government as partners not with ‘whack-mole” intimidation. By making a deal with Mexico first and leaving Canada out, the President is holding Canada hostage to get to a deal done while pushing on Canada to give the U.S. diary industry an ever bigger share of the Canadian dairy market.  Is this U.S. position fair?

We outlined our ideas on how to proceed in this way:

First, our President needs to treat our long-time ally to the north as an ally and friend to the American people with respect, dignity and cordial public discourse.  Privately, he may have disagreements, and negotiations should proceed to overcome trade imbalances where appropriate and to protect American jobs.

Second, the facts need to be used, not falsehoods as POTUS admitted in his first meeting with Trudeau, that he made up the idea there was an imbalance or equality or he didn’t know.  It is time to do the homework, research the facts in our relationship, preserve the on-going huge amount of commerce we already do, and figure out how to work more closely together as partners not adversaries.

Unfortunately, since June the trade rhetoric between the two countries has only grown more antagonistic mostly from the U.S. side.  Canadian trade negotiator, Chrystia Freeland in a press conference last week before flying back to Canada, kept very calm, did not try to negotiate in public, would not enter into a tit-for-tat battle with POTUS and showed a high level of professionalism and respect. We can only hope that our representatives will recognize how to treat our long time northern ally from her example.

Turkey Tariffs Hurt EM and U.S. Economies

Image: gsiexchange.com

Last Friday, President Trump’s tweet doubling tariffs on aluminum and steel from Turkey caused a major shock to the Turkey stock market and sent the lira spiraling down by 10 %.  However, the damage was not contained to just Turkey, emerging country currencies around the world took hits, the U.S. SPX took a .71 % dive.  Emerging countries with similar high debt levels like South Africa and Argentina took 2 % or more hits to their currency values.  The correlation of the lira with other emerging market currencies hit a new high today, according to Bloomberg.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

Our President chose to lob an economic bomb at a country already reeling from a 40 % drop in the lira year to date, high inflation at 15.85 %, ten year bond rate of 20 %, and a corporate $210 billion net currency account deficit owed to foreign investors.

Investors are concerned that EU banks holding loans or positions in Turkish banks could be vulnerable to losses. The European Central Bank is concerned with exposure of banks in Spain, Italy and France.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

U.S. banks do not hold many direct positions in Turkish banks or loans, but they do hold positions in EU banks in the three exposed countries.

The crisis was in the making, when President Erdogan took office in July after 15 years of rule declaring super powers to himself sending the lira into a flash crash.  Over the past month Erdogan insisted on keeping interest rates low, allowing inflation to get out of hand, and used foreign investment to build shopping malls and construction projects rather than invest in industry, productivity or critical infrastructure.  Today, the lira was falling quickly during the day, until its fall was steadied by Turkish central bank interventions, yet stock markets in U.S. were down with SPX losing .40 %, the Dow off by .50 %, and emerging markets down by 1.62 %.  All this financial uncertainty about loans, bank exposure, and foreign capital reserves has caused investors to hit the pause button to wait and see how officials around the world respond to the crisis.  The most critical question: can this financial crisis be contained to Turkey, Argentina and South Africa or will developed country markets be hit?

Next Steps:

We see economic bomb throwing via tariffs to gain supposed political advantage to secure the release of a pastor as a major mistake.  The added tariff on top of present tariffs on Turkey already in financial straits just exposed other emerging markets to investor and official scrutiny causing alarm and uncertainty.  Uncertainty is the big cloud growing stronger as world markets deviate from U.S. markets in the past several months.

Sources: The Daily Shot, The Wall Street Journal – 8/13/18

This divergence won’t continue, either the U.S. market will fall or the emerging markets will rise – with global economies slowing, currency weakness and tariffs it would seem that U.S. markets are likely to fall. Plus, the U.S. dollar strengthening versus emerging country currencies makes U.S. goods more expensive for global customers resulting in a reduction in U.S. sales.

Is this what the President wants; falling emerging markets eventually leading to the U.S. economy going into a recession? One crucial aspect of financial markets is that perception can become reality, just the perception that a country can’t pay its debts, or a bank may fall is enough to cause investors to run for the exitsThe President by making an impulsive tweet into a fragile financial system will only lead to more uncertainty, falling markets and economic disaster.  Economically damaging a NATO partner like Turkey only plays into the hands of Russia in establishing closer economic and strategic ties. America has a military partnership with Turkey at the Incirlik Air Base, where over 5,000 U.S. airmen are stationed used for monitoring Russian military exercises and staging for operations into Syria and Iraq.  Undermining the economy of our NATO partner may create enough civil unrest to force us to leave the base. We need to recognize that our military presence around the world keeps countries safe for us and all companies to conduct business, otherwise markets shrink.  The The White House needs to think in terms of what their tariff and protectionist policies are doing to the economies of countries our companies want to sell products to.  If offshore prospective customers are in falling economies they won’t have the money to buy U.S. products. So, how will the trade deficit be reduced? These poorly thought out short term trade policies need to be ended and sound long term, trade programs focused on building economies need to be implemented.  This Administration needs to follow the trade path of the past 50 years by both Democratic and Republican administrations.

Update: August 14, 2018 – President Erdogan declared the country is in an ‘economic war’ telling citizens to boycott American electronic products, sell dollars and euros to support the lira.  This tit for tat retaliation is exactly what we don’t want to see trade relationships spiral into uncontrollably.  What if China uses nationalism to drive boycotts of U.S. goods?  The deadline for the U.S. imposing new tariffs is August 23rd we will watch the action with great concern. Economic nationalism will cause worldwide recessions and setup conditions for civil unrest. Just in, Bloomberg reports that Turkey has slapped tariffs on U.S. goods including a 50 percent tax on rice, 140 percent tax on spirits, and 120 percent on cars. Tensions continue to escalate out of control.

US Steel and Nucor Use Tariffs To Monopolize Markets

 

Image: vice.com

Two major steel companies, US Steel and Nucor, last March lobbied the Trump Administration to post tariffs on imported steel at 25 %. They are now pressuring the Administration to deny any requests for waivers from the tariffs.  Over 1,600 applications have been filed for exclusion from the tariff provisions which blanketed the world including the European Union, Mexico, Canada, Japan and China.  The two steel giants are in fact creating a monopoly for their steel products in the U.S.

In order to protect about 33,000 steel worker jobs, several million jobs in steel using industries are jeopardized by the tariffs:

Sources: U.S. Bureau of Labor Statistics, Bloomberg – 3/2/18

Nucor paid for a film by presidential advisor Peter Navarro, when he was a professor at UC Irvine on the threat of China imported steel being dumped onto U.S. markets.  Certainly, there are issues related to China trade practices but is using 25 % tariffs on all imported steel even from allies going to force China to change their export practices?

Next Steps:

Companies that use steel in their products are reeling from soaring price increases in steel and sourcing issues because U.S. steel producers do not make the products they need.  Elite corporate CEOs are running their companies via the U.S. government to pick winners (themselves) and losers over 1,600 companies being denied exemptions to run their businesses successfully and keep jobs here in the U.S. Now, many firms are planning on moving operations to countries closer to their customers to avoid the tariffs all together – thus moving jobs out of the U.S. It seems already the tariff plan has backfired, moving jobs out of the U.S. and jeopardizing millions of jobs.  We should not be tolerating this state of oligarchy, where two major companies setup tariffs to their exclusive benefit in while damaging thousands of other companies businesses and threatening millions of U.S. jobs.  It is the job of our federal government to not pick winners and losers but to establish fair markets for innovation and entrepreneurship to triumph. The tariffs need to be lifted and an intelligent trade strategy in collaboriation with our allies to end China steel dumping practices be implemented.

Taxpayers Pick Up $12 billion Trump Trade War Cost

 

Image: 99getsmart.com

The Trump Trade War has cost corn, wheat, and soybean farmers over $13 billion in lost contracts and revenue already. As we have noted in previous posts, as China stocks up on crops from Russia, Brazil and other countries our farmers lose their incumbent status.   U.S. farmers have to go back to their customers now doing business with China and unhook that deal to write more contracts to replace the business they lost.   Our agriculture industry will be challenged by not being the incumbent supplier.

The Administration announced yesterday that the Department of Agriculture will begin offering direct cash subsidies to farmers impacted by the tariffs.  Farmers would be compensated based on the projected size of their harvests, they can begin signing up in September.  The direct payments by the government due to tariffs would be the first time ever by the Agriculture Department.  In addition to direct cash payments, the government will purchase surplus food products and distribute them to food banks, schools and other nutrition programs. The cash and surplus purchase program will cost taxpayers $12 billion.

We believe the cost to taxpayers is just the start. As China and other countries hunker down, as the Administration is buying time for its tariffs, more subsidies will be implemented.  Other industries in other sectors will ask for loss compensation in steel, aluminum industries and consumer products on the Administration’s tariff list.

Next Steps:

POTUS is now compounding a disastrous trade war strategy with no exit plan by subsidizing his errors.  No, ‘trade wars are not easy to win’ as last May 1100 economists sent the President a letter admonishing him not to enter into a trade war.   Sen. Charles E. Grassley, R – Iowa, noted in a statement yesterday, “What farmers in Iowa and throughout rural America need in the long term are markets and opportunity, not government handouts.”

There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term.  With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020.  Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.

Source Oxford Economics, The Wall Street Journal, The Daily Shot – 7/24/18

Stop the trade war now!  Reverse all the ill-advised, poorly throughout and threatening oriented tariffs.  Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works,  we are not holding our breath – just hoping for the best but preparing for the worst.

Protectionist Policies Are Damaging the Mexican Economy and US Businesses Today!

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Image: hurd.us.gov

Last Friday, POTUS announced that he was considering just dropping the NAFTA agreement.  His announcement sent the Mexican Stock Market racing down with the fall continuing today:

Source: Patrick Hill, The Progressive Ensign – 6/5/2018

When President Trump was elected in November of 2016, the Mexican market tumbled, then regained when it seemed the Administration would negotiate in good faith.  Then, late 2017 threats and bullying started with the latest swoon when POTUS wanted to just pull out of the agreement.

The administration continues to use a ‘whack a mole’ policy approach, even with Vice President Pence suggesting last week that the NAFTA agreement should be renegotiated every 5 years.  Trade agreements are complex, legal documents which business leaders, consumers and government policy makers depend upon in making economic, infrastructure and industry plans for 10 to 20 years into the future.  Corporations when they plan for building a manufacturing plan, are looking at government trade policies and trends over the next 10 years to determine whether a plant will be profitable or not.  Policy makers can’t be changing the rules of the economic game constantly.

We are concerned that the anti-Mexico trade policies of the administration will continue to cause uncertainty, chaos and severe trade constraints driving the Mexican economy into a recession or worse.  Mexico is the second largest trading partner for the US.  States like California and Texas depend on exports to Mexico and will be hurt if the Mexican economy continues to slide:

Sources: US Census Bureau, Reuters, The Wall Street Journal, The Daily Shot – 5/4/18

Mexico just announced today their first shot across the economic bow of the US.  Slapping tariffs totaling $3 billion on whiskey, cheese, pork and other products. A spokesman for the trade group Farmers for Free Trade commented on ongoing trade war economic missiles being hurled at each other, declaring that the new tariffs would have disastrous consequences for farmers, “Hog, apple, potato and dairy farmers are among those suddenly facing a 10 or 20 percent tax hike on the exports they depend of for their livelihoods. Farmers need certainty and open markets to make ends meet. Right now they are getting chaos and protectionism.” Larry Kudlow, the President’s chief economic advisor shared the latest negotiating strategy for NAFTA on Fox and Friends, taking a strong protectionist stand against a three nation agreement, ‘preference now, and he asked me to convey this, is to actually negotiate with Mexico and Canada separately.”

Next Steps:

We know from research that when the Mexican economy does better, immigration from our south of the border neighbor goes down.

Sources: Five Thirty Eight, PEW Research, The World Bank – 2/28/17

The GOP administrations needs to start treating Mexico with dignity, respect and partnership – which they have earned as our southern neighbor and ally. When the Mexican people are prospering, they don’t seek jobs in the US.  So, instead of withdrawing support for NAFTA which our farmers and other businesses throughout the US are profiting by, focus on the main issue which is the imbalance in autos, trucks, automotive parts and manufacturing as the chart below describes:

Sources: US Census Bureau, The Wall Street Journal – 6/2018

Let’s start using evidence, facts and real insights in negotiating our agreements with our allies instead of bullying, prejudice and smear tactics. We recommended over a year ago, that the Administration, focus on the automative industry imbalance, and protect worker jobs and US businesses:

  1. Tax companies that move jobs to other countries. For example, a company moves a $1 billion plant with a 1000 workers offshore, they pay a 10 % plant offshore tax or $100M, and $20k per worker or $20M penalty to be used for training and apprenticeship programs in the US. (Tax the action we don’t want.)
  1. Establish worker councils in corporations to make decisions jointly, ensuring apprentice and new job training programs are in place.
  1. Offer incentives to keep plants here including fed, state, and local tax reductions, and training programs implemented in local universities and colleges.
  2. Train US workers on advanced assembly and use of robotics in manufacturing to build increased productivity capability and reduce costs.

POTUS Employs ‘Whack a Mole” Trade Tactics Launching the Trump Trade War (TTW)

 

Image: danbyink.bangordailynews.com

After declaring two weeks ago a trade truce with China, POTUS declared last week that 25 % tariffs would be imposed on $50 billion of Chinese of Chinese goods if they don’t commitment to purchases of US energy and agriculture products.  Commerce Secretary, Wilbur Ross left China on Sunday with no real progress except to make the Chinese angry, confused and upset.

The bullying, intimidation, zero sum negotiating tactics may work in the rough and tumble of New York real estate but not international trade where over 70 years of careful negotiations by all the major trading partners have put into place a trading platform with rules and fairness wherever possible.  Now it is true that some nations take advantage of the slow, ponderous and confusing decision making of the World Trade Organization.  But blowing up the present trade agreements by saying things like Vice President Pence said last week to Canada and Mexico that the NAFTA agreement should be revisited every five years is insulting, duplicitous and lacking in good faith.  So last Friday, to heap more chaos on the NAFTA negotiations POTUS says he is thinking of just pulling out of NAFTA completely.  Welcome to a POTUS caused trade war, we call The Trump Trade War (TTW), as history books will likely record.

Prime Minister Trudeau of Canada has condemned the way the US administration has been treating a valued partner calling the actions “frankly insulting”, and in return he receives more trumped (pun intended) up national threats.  He continued in an NBC interview:

“The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat?” Trudeau declared. “Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.”  Maybe our POTUS doesn’t understand that dying for a common cause is a higher value than provoking, bullying and intimidation to make an extra short term buck.

EU ministers are confused and upset at being grouped in with China in steel and aluminum tariffs.  The United Kingdom, France, Germany, Mexico, Canada, Turkey and Japan have either announced or launched retaliatory tariffs on US goods and are reviving trading alliances that the US has abandoned like the TTP (Trans Pacific Partnership).

Sources: The Wall Street Journal, The Daily Shot – 6/4/18

The TPP non – US nations are in a dialog with China who is excited about filling the role the US once occupied. Experts note the long term effects and loss in business for the U.S., Adam Posen, president of the Peterson Institute for International Economics observed, “It will be hard to establish trust in the U.S. again, and all the uncertainty will drive down investment and productivity.”

US businesses are busy trying to minimize the damage to their export revenue streams,. Farmers in the midwest have already found that China has cancelled some sorghum shipments causing ships to be turned back, as the Chinese are making deals with Russia for agricultural goods.  American businesses are being cut out of customer contracts now, resulting in lost business that will be extremely difficult to get back once new suppliers are in place. Still incredibly, the White House trade team blows up the present world-wide trade framework replacing it with nothing, which results in uncontrolled reprisals and chaos. Seems like economic missiles have been launched and attacked nations are sending economic missiles back (sounds like a trade war to us, the TTW (Trump Trade War).

Next Steps:

To begin, our political leaders need to stop being invisible as the world trade fabric unravels. Next Congressional leaders need to bring all key trade factions, business and trade representatives and develop an alternative to the destructive protectionist policy now being implemented.  Sound trade policy based on win – win negotiations, fair agreements, protections for labor, working within the WTO, and legal order will win over allies and concessions from adversaries.  The GOP administration needs to stop going it alone, and work with our allies, build consensus, and make improvements in the present painstakingly developed agreements over the past 70 years. Over 1100 economists, the US Chamber of Commerce and world leaders have condemned the declared TTW which needs to end now.

1100 Economists Predict Trade War Disaster

 

Image: knowledge.wharton.upenn.edu

The economist group letter to President Trump quotes passages from a 1930 letter that was ignored by government leaders at the time leading to a trade war and the Great Depression, many economists believe.

“Much has changed since 1930 — for example, trade is now significantly more important to our economy — but the fundamental economic principles as explained at the time have not”, the economists declared including last year’s Nobel winner Richard Thaler and former George H.W. Bush economic advisor Gregory Mankiw.   Economists in 1930 advised against the Smoot – Hawley act at the time causing a trade war and a disastrous economic downturn for all Americans.

The trade war with China has already begun as we noted in our April 23rd blog the Chinese have not stood back waiting, they placed at 179 % tariff on sorghum shipped from the US causing China bound ships to reverse course.  Soybean orders have been cut way back by the Chinese as well:

Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 5/7/18

Corn contracts are in jeopardy as well in the Midwest as the Chinese threaten tariffs on those crops as well.  Corn farmers are already facing increased competition from Brazil and other countries undercutting their prices.

The reality is the Trump Trade War is on!  Companies and nations are already acting on the threats and in some cases the implemented tariffs that the present Administration has in a misguided manner put in place.

We do not understand why the White House is ignoring the lessons of history, their own constituents in the Farm Belt and 1100 economists in implementing a catastrophic policy that will hurt every American’s pocketbook and many of our foreign allies.

Next Steps:

Our blog on April 2nd outlined two distinct factors that the Administration policy makers need to take into consideration:

First, we need to understand how corporations, suppliers and customers respond to political uncertainty.  Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price.  Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game.  Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers.  Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers.  Sales for US agriculture companies are likely to drop as a result.”

The solution is in working within the international frameworks of the WTO and our agreements with other nations to peacefully solve these economic issues. Sound economic policy is based on win-win agreements that put in place long term relationships that both sides can build their economic futures on. Plus, these are complex integrated trade issues and cannot be settled by blunt, prejudiced based ideas that history has proven are false.

Trade War Heats Up – China Slaps 179 % Tariff on US Sorghum

 

Image: asissentinel.com

Two grain ships filled with sorghum grain reversed course or headed to new destinations as China announced last week that they would require a 179 % deposit on the commodity.

Image: The Ship RB Eden Turning – Bloomberg – 4/20/18

US farmers shipped about $1 billion per year over the past two years of sorghum to China according to the Wall Street Journal. China is specifically targeting Trump states to make the point that a tit for tat trade war will end badly for US producers.

As other countries mount their own tariffs to US goods, and the US slaps tariffs on imported goods prices will go up.  When prices go up, inflation increases causing interest rates to rise, which means that interest rates rise on credit cards to mortgages.  Every consumer has some debt and the inflation wave will crash through the US financial system, ending the 2nd longest economic growth period since WWII – though the economy has helped the top 20 % the most versus the 80 % in the working class.

Next steps:

As we have noted previously, business leaders are already making decisions and calculations like turning ships around.  The Administration’s announcement and follow through on steel aluminum and lumber have distorted markets artificially causing increased prices and supply disruptions. Our leaders need to stop this bullying approach toward our trade partners, use international forums and work within our trade alliances to settle trade issues. Starting a trade war will cause everyone to lose money, jobs and trigger an economic downturn. The working class will be hurt the most, as they have the least amount of money saved and are usually the first to be fired in any falling economy.

China Retaliates in Trump Trade Battle

 

Image: asiafinancialpublishing.com

China announced yesterday they will be placing tariffs on 128 American goods for a total of $3 billion dollars in response to the Trump administration tariffs of 25 % on steel and 10 % on aluminum.  The situation is posed to escalate as the President is expected to announce $60 billion of new tariffs on Chinese imports this week.

The US agriculture industry is reeling from increased competition from overseas countries like Brazil and now the administration is throwing a trade war into the mix.  Farmers are perplexed as to how to navigate these new trade waters.

Source: US Department of Agriculture, The Wall Street Journal – 4/2/18

The US agriculture industry is one of the bright spots in US exports accounting for $140.5 billion in exports for 2017 according to the US Department of Agriculture.  China receives about $22 billion of US exports last year in pork, and meat products.  While the $3 billion in tariffs is not large it maybe just an opening round in the economic shots being fired by the US and China.

While some industry analysts look at just the dollar amounts involved we see a very disturbing trend in the tenor of the conduct of this trade conflict.  This administration has distinguished itself by being bullying, intimidating, impulsive, vengeful and unpredictable – not good traits for a positive trade negotiation outcome.

Next Steps:

First, we need to understand how corporations, suppliers and customers respond to political uncertainty.  Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price.  Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game.  Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers.  Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers.  Sales for US agriculture companies are likely to drop as a result.

We have said in our Insight Byte of March 6th that starting a trade war linking disconnected parts of the economy, not using international bodies like the World Trade Organization will just lead to lose – lose economics for global corporations and consumers.  Lost jobs will result, economic recession or depression will spiral downward and it will take years to recover.  Sound, research based trade policies based on win-win partnerships are the only way to turn this situation around.  This administration has opened an economic Pandora’s box that it will not be able to close.

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