Market Hissy-Fits, Tariffs, and Chinese Trade

I am fascinated by business and the investment world. Those of you who know me personally know that. But two attributes of the investment world that are tiresome and troubling to me and many others are its excessive short-term focus and its selfishness.  It’s a “what’s in it for me attitude?” along with a “what’s in it for me today?” angle. Or, maybe even “this morning!” In the long run, the market gets things right; but in the short run, we have to put up with a spoiled child’s regular propensity to throw hissy-fits.

The tariff issues with China are a great case in point. China has had higher tariffs on US goods for years, stolen our technology, and made US companies agree to onerous terms to play in their markets. Average tariffs on Chinese goods, until recently, coming into our country were about 3%; ours going into China, about 10%.  Recently, the 10% has dropped to 7.5%. We’re making progress, in other words even without a final agreement.

But the stock market seems breathless over this matter. Yes, our consumers are paying more for a raft of goods coming into America, and our farmers are hurting over China’s retreat from buying our agriculture. We’re looking at a few hundred billion dollar problem set over against a $20 trillion national economy. At one point, it made perfect sense to look passed China’s trade abuses. After all, China was a new international economy, exiting, we thought the worse of communism, and going to change into a more democratic, open nation, as it succeeded. Now, it’s the second largest economy in the world. It’s still a communist nation, rough on its people and those with whom it trades. It’s time it grows up  in international trade and stop the bullying others trying to do business with it.

This has been a rough up and down market this month, supposedly, among other things, because of China and tariffs and a looming trade war.

“What if this goes on and on?”  “Who’s likely to win?” I believe the odds are in favor of the U.S. winning, especially since a trade deal with China to satisfy Trump is likely to end up being a win-win for both nations and their economies.

Clearly, the best trade policy is free trade, with no tariffs, barriers to entry, or subsidies. Free markets and global trade have proven to be the best way to promote global prosperity for nations and their people. Tariffs are best viewed as a tax on imports, with the cost being paid by the consumer, not by the producer. Taxes, or tariffs, serve only to reduce private consumption in order to fund government consumption, which in the end is less efficient. The country that taxes its imports least is, therefore, the country that will benefit most from trade. By the same logic, countries that subsidize their exports only hurt themselves while benefiting those who buy their subsidized goods and services.

Most economists would also agree that there are “second-order effects” that stem from tariffs. By making imported goods more expensive, countries that impose tariffs on imported goods give domestic producers a degree of “protection” to the extent domestic producers can charge higher prices and still compete with imports. But this only reinforces the argument that at least part of the cost of tariffs is born by consumers. Protectionists also argue that tariffs save jobs—and to some extent they do, in the “protected” industries—but only at the expense of consumers and international competitiveness. Tariffs, in short, benefit a relative few at the expense of the many.

Even though many feel Trump is an idiot and a liar, he understands all this – trust me – and said so, last year, at the G7 summit meeting: “That’s the way it should be, no tariffs, no barriers … and no subsidies. … that would be the ultimate thing.” His fellow national leaders at the G7 were not listening. The only way to understand Trump’s apparent love for tariffs today is that they are, as Larry Kudlow, his Director of the National Economic Council, noted a few months ago, “a negotiating tool. They are part of his quiver.” Nothing more, nothing less. And tariffs are a policy tool over which Trump has direct control. That makes tariffs irresistible to deal-maker Trump.

A war of escalating tariffs between the US and China would be damaging to both countries. If carried to an extreme, a tariff war with China would most likely endanger the global economy by weakening both the huge U.S. and Chinese economies. Bad stuff, indeed! And in that sense Trump is crazy to be engaging in a tariff war with China. Worse, he falsely argues that his tariffs are paid by the Chinese and that the money goes straight to the federal government’s coffers. To his credit, Trump’s economic advisor Larry Kudlow correctly admits that tariffs are in fact paid by U.S. consumers, not the Chinese. But he also correctly adds that higher U.S. tariffs will hurt the Chinese as well (because their exports will become more expensive when they arrive in the US, causing Americans to consider other product offerings). So the question then becomes, “Who will suffer the most?” “Who will likely back off from this game of chicken the first?”

Many believe, and I’m among them, that China is in the more fragile economic position in this cat fight, even though it is clear that Trump’s higher tariffs on Chinese imports impose burdens on U.S. producers and consumers.

Next time you hear that the costs of the trade war are simply being borne by Americans, be suspicious. In their zeal to make Trump look stupid or completely wrong on tariffs or other issues, too many commentators pick and choose their arguments. A more fair and complete economic analysis indicates that China is also a big loser in this trade skirmish. Trump’s threats are exerting real pressure on China.

Markets, in spite of their repeated hissy-fits in the short term, are usually efficient at discounting the future, if only because they reflect the consensus of millions of participants with skin in the game. Right now, those millions of economic actors, investors, and thinkers are saying that although both the U.S. and Chinese economies are hurting, the Chinese are hurting more.

Blessings to you all.

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