Jim Rickards: The Trade War Will Get Worse

daily-reckoning

THE TRADE WAR WILL GET WORSE

By Jim Rickards from Daily Reckoning  | 16 September 2018

Burberry Black Tan Tan Black Classic Rainboats Boots/Booties a5a94d

Esquivel Blue "Dublin" Leather and Denim Boots/Booties,Christian Louboutin Black Classic Simple 85mm Patent Leather Round Toe Pumps,Burberry Tan & Nova Check Pumps,Chinese Laundry Gray 4615 Tall Leather Boots/Booties,Saint Laurent Grey Tribute Suede 'tribute 105' Tall Platform Boots/Booties,See by Chloé Tan Bowed Boots/BootiesLauren Ralph Lauren Black "Mcleod" Wide Calf Riding Leather 5b Boots/Booties,Vince Camuto Burgundy Chenai Suede Leather Wraparound Ankle Boots/BootiesSaks Fifth Avenue Black with Tan Tops Kensington Boots/Booties,Ras Beige New Linen Ankle Boots/Booties,Manolo Blahnik Black 37 Carolyne 70 Suede Classic Heels Slingbacks Point Toe New Pumps,Ann Taylor Light Tan New Without Tags Boots/Booties,Jimmy Choo Black Tarine Studded Cut Out Bootie Pumps,Rebecca Minkoff Taupe Oiled Suade Lizelle Winter Boots/BootiesAnthropologie Taupe Kaanas Leon Ankle Boots/Booties,John Fluevog Purple Knee High Leather Boots/Booties,Gianvito Rossi Black Suede Classic Camnero Pumps,Zara Cherry Red Kitten Heel Vegan 7141/201 Boots/BootiesDolce Vita Tan Camel Suede Ankle Zipper Boots/Booties,Marc Jacobs Metallic Grey with Blue Trim Collection Boots/Booties,Valentino Black Noir Patent Leather Ankle Strap Heels Rockstud Pumps,Teva Black Delavina Low Style 1003012 Boots/Booties,Roberto Cavalli White Silver Studded Fur Boots/Booties,Frye Sunrise Tan Leather Heeled Campus Mid Calf BootsSteve Madden Burgundy Goldie Block Heel Boots/Booties,Christian Louboutin Black Pigalle Follies 100 Glitter Plume Heel 35.5 Pumps,Chinese Laundry Gray Knee High W/Rabbit Fur Trim Boots/Booties,MIA Burgundy Dark Killer Sheridan Anthropologie Edgy Leather Flower Child Boots/BootiesChristian Louboutin Black Iriza 100 Gold Lame Hibiscus Patent Heel Pumps,GX by Gwen Stefani Black with Blue Accents Teardrop Ss1109 Boots/Booties,

It would simply be a replay of the sequence that prevailed from 1921–39 as the original currency war started by Weimar Germany morphed into trade wars started by the United States and finally shooting wars started by Japan in Asia and Germany in Europe.

The existing currency war started in 2010 with Obama’s National Export Initiative, which led directly to the cheapest dollar in history by August 2011.

The currency war evolved into a trade war by January 2018. Unfortunately, a shooting war cannot be ruled out given current developments in North Korea and the South China Sea.

The reasons the currency war and trade war today are repeating the 1921–39 sequence are not hard to discern. Countries resort to currency wars when they face a global situation of too much debt and not enough growth.

Description

Barely New

Everyone is worse off and no one wins.

Once leaders realize the currency wars are not working, they pivot to trade wars. The dynamic is the same. One country imposes tariffs on imports from another country. The idea is to reduce imports and the trade deficit, which improves growth. But the end result is the same as a currency war. Trade partners retaliate and everyone is worse off as global trade shrinks.

The currency wars and trade wars can exist side by side as they do today. Eventually, both financial tactics fail and the original problem of debt and growth persists. At that point, shooting wars emerge. Shooting wars do solve the problem because the winning side increases production and the losing side has infrastructure destroyed that needs to be rebuilt after the war.

Blue/Grey Women's Jag Steel Gray/Blue Wing Teal Boots/Booties,Christian Louboutin Black Very Prive 120 Calf/Kid Peep Toe Pumps,Manolo Blahnik Black Bb Pointy Toe 38.5 Pumps,Anniel Beige Scarpine Da Balletto Italiane Boots/Booties,Vince Camuto Ruby Jerrell Suede Ankle Boots/Booties,Rag & Bone Black and Blue Moto Boots/Booties,Marc Fisher Black Studded Suede Distressed Boots/Booties,Grey Zeus Boots/Booties,Christian Louboutin Black Pigalle Follies 100 Patent Pumps,Christian Louboutin White /Red Pattern Pigalle Follies 100 Calf Caviar Cerise Pumps,Anyi Lu Elephant Calf/ Taupe Sd Vanessa Boots/Booties,Etienne Aigner Burgundy "Katey" Leather Ankle with Kitten Heels Boots/BootiesBurberry Navy Birkback Rainboots Rubber Tall Nova Check Boots/Booties,J.Crew Black Templeton Tall Leather Flat Boots/BootiesGrey Oleesia Casual Ankle 851 Mushroom Boots/Booties,Christian Louboutin Black Bibaba 85mm Gold Mary Jane Heels A292 Pumps,Oscar de la Renta Black Satin Heels 36.5 (40480) Pumps,Aquatalia Red Tan Brown Florence Boots/Booties,Red Naomi Stitched Over The Knee Vamp Display Boots/BootiesBucco Blue Slate Silver Star Studs Cowboy Boots/BootiesHunter Black Rain Finish 6us Excellent Condition Boots/Booties,Hunter Navy/Dark Slate/White Short Backstrap Wedge Rubber Rain Boots/Booties,Tory Burch Black Mini Miller 85mm Heels Suede Pumps,Salvatore Ferragamo Black Mimi Suede Heels PumpsBanana Republic Gray Beige / Boots/BootiesOscar de la Renta Red Leather/Fabric Boots/Booties,Free People Olive/Green Iris Mid Calf Boots/Booties,Frye Black Shirley Calf Hair Leather with Leather Sole Boots/Booties,Moschino Gray Dark Suede Pleated Ankle Boots/Booties,Christian Louboutin Black Patinana 100 Mesh Strap Crystal Heel Pumps

What most surprised me about the new trade war was not that it started, but that the mainstream financial media denied it was happening. It’s possible to date the trade war from January 2018 when Trump announced tariffs on solar panels and appliances mostly from China.

A deeper analysis would look back to 2001 when China joined the World Trade Organization (WTO) and immediately began to break the rules, or 2008 when China cheapened its currency to prop up exports during the global financial crisis. But January 2018 is a more formal date because the Trump tariffs were explicit and not indirect as China’s tactics had been.

The media have consistently denied the impact of this trade war. Early headlines said that Trump was bluffing and would not follow through on the tariffs. He did. Later headlines said that China was just trying to save face and would not retaliate. They did.

Today the story line is that the trade war will not have a large impact on macroeconomic growth. It will. The mainstream media have been wrong in their analysis at every stage of this trade war. The trade war is here, it’s highly impactful and it will get worse. The sooner investors and policymakers internalize that reality, the better off they’ll be.

The easiest way to understand the trade war dynamics is to take Trump at his word. Trump is not posturing or bluffing. He will agree to trade deals, but only on terms that improve the outlook for jobs and growth in the U.S. Trump is not a globalist; he’s a nationalist. That may not be popular among the elites, but that’s how he sets policy. Keeping that in mind will help with trade war analysis and predictions.

Trump is entirely focused on the U.S. trade deficit. He does not care about global supply chains or least-cost production. He cares about U.S. growth, and one way to increase growth is to reduce the trade deficit. That makes Trump’s trade policy a simple numbers game rather than a complicated multilateral puzzle palace.

If the U.S. can gain jobs at the expense of Korea or Vietnam, then Trump will do it; too bad for Korea and Vietnam.

From there, the next step is to consider what’s causing the U.S. trade deficit. This chart tells the story. It shows the composite U.S. trade deficit broken down by specific trading partners:

The Gap in Trade

Dr. Martens Dark Blue Suede New with Tags Vintage 90s Boots/Booties,

The problem quickly becomes obvious. The U.S. trade deficit is due almost entirely to four trading partners: China, Mexico, Japan and Germany. Of those, China is 64% of the total. President Trump just concluded a new trade deal with Mexico that benefits both countries and will lead to a reduced trade deficit as Mexico buys more U.S. soybeans.

The U.S. has good relations with Japan and much U.S.-Japanese trade is already governed by agreements acceptable to both sides.

This means the U.S. trade deficit problem is confined to China and Germany (often referred to euphemistically as “Europe” or the “EU”). The atmosphere between the U.S. and the EU has been improving lately and Germany knows it needs to make concessions in order to avoid punitive tariffs on EU exports to the U.S.

Therefore, the global trade war is not global at all but really a slugfest between the U.S. and China, the world’s two largest economies. This reality and the gravity of the situation are beginning to sink in even to the most Pollyanna-ish rookie journalists. Seasoned market-maker and stock specialist Stephen “Sarge” Guilfoyle offered this insightful analysis in his blog for Aug. 31, 2018:

Part of the problem with market reaction to trade news is that keyword-reading algorithms react ahead of human response to any news item. Every time. Price discovery has become perverse. This is now part of the complex, changing environment. Just this week, we have already seen a tremendous effort to renegotiate a NAFTA deal that has the backing of both the United States and Mexico. A deadline for bringing Canada on board looms today…

Less than two weeks ago, the president threatened to pull the United States out of the WTO (World Trade Organization). The president has complained in the past that the WTO does not always side with the U.S. and sometimes infringes on rights of self-determination.

While President Trump rattles that cage, the comment period for U.S. plans to impose a 25% tariff on another $200 billion worth of annual Chinese imports is due to expire. This is an extension of the U.S./China trade war that the Chinese side will be unable to match dollar for dollar without getting creative…

The president also rejected a European Union offer to scrap automobile tariffs, citing European consumer habits that lead to a greater appetite across that continent for vehicles manufactured on the continent. “Almost as bad as China,” I believe is what President Trump said…

Guess what? In the realm of global trade, the United States is an extremely desirable customer. In fact, for most, we are their best customer.

Think the still export-based Chinese economy can afford to sell significantly less manufactured goods across borders? Think that same Chinese economy can allow for a significant devaluation of U.S. sovereign debt? That’s their book, gang.

Think EU manufacturers can afford to sell substantially fewer vehicles inside U.S. borders? Of course not. The winner, as always in tense negotiation, will be the one that the other side believes will walk.

Even China is slowly coming to the realization that the trade war is real and here to stay. Senior Chinese policymakers are beginning to refer to the trade war as part of a larger strategy of containment of Chinese ambitions that may lead to a new Cold War. They’re right.

Unlike in other policy arenas, Trump enjoys bipartisan support in Congress. The Republicans are backing Trump from a national security perspective and the Democrats are backing him from a pro-labor perspective. China sees the handwriting on the wall.

This trade war will not end soon, because it’s part of something bigger and much more difficult to resolve. This is a struggle for hegemony in the 21st century. The trade war will be good for U.S. jobs but bad for global output. The stock market is just waking up to this reality. The currency wars and trade wars are set to get worse.

Investors should prepare now.

Regards,

Jim Rickards
for The Daily Reckoning

This article by Jim Rickards was originally published at Daily Reckoning.

Banana Republic Black Rain Linsey Boots/Booties,
2018-09-15T10:46:17+00:00