Tuesday, August 6, 2019

Trade Protectionism = Recession?

Popular Economics Weekly


BEIJING (AP) — China’s government has threatened unspecified “necessary countermeasures” if Trump’s planned tariff hike goes ahead said the AP. And it followed up the threat by devaluing their Yuan by more than 7 percent against the dollar, say news reports.

President Trump Thursday had suddenly tweeted that he would levy a 10 percent tariff on $300 million of Chinese imports last week, after what he perceived to be Chinese backtracking on their good faith efforts to negotiate. It completely unsettled financial markets, causing the DOW to plunge more than 600 points Friday and almost 1,000 points today from a rally spurred by the Federal Reserve rate cut on Wednesday, and today’s counterpunch by the Chinese—though some commentators remarked that investors should have seen it coming.

The beefed-up tariffs on Chinese imports add to an existing 25 percent tax Trump has already placed on Chinese goods. As the New York Times notes, the United States is now “taxing nearly everything China sends to the United States, from iPhones to New Balance sneakers to children’s books.”

Republicans and Trump seem to have a bad case of historical amnesia. Historians generally agree it was the Smoot-Hawley Tariff Act of 1930 that helped to precipitate the Great Depression. The US lost some 50 percent of its foreign trade as a result. Other governments reciprocated with higher tariffs, just as the China is doing with Midwest farmers, and now devaluation that makes their exports cheaper. They are also threatening to ban the export of rare earth minerals used in high-tech manufacturing components, of which China is the world’s major supplier.

China’s Commerce Ministry said Trump’s announcement is a violation of his agreement with President Xi Jinping in June to revive negotiations aimed at ending their fight over Beijing’s trade surplus and technology ambitions. The ministry had earlier said if the U.S. measures took effect, “China will have to take necessary countermeasures to resolutely defend its core interests.”

What is really happening between the lines? One Chinese minister posited that China had slowed negotiations for any meaningful trade agreement to a crawl until after the 2020 election, when it will know with more certainty who to deal with over the longer term.

Whereas President Trump sudden announcement must mean he is trying to divert media attention away from his other problems. To name a few: Trump hadn’t vetted Republican Congressman Daniel Radcliffe, who had to withdraw from consideration for the CIA Chief after it was obvious he wasn’t’ qualified for the job; Senate Majority Leader “Moscow Mitch” McConnell is drawing fire from all sides for refusing to allow a Senate bill to come to the floor that protects upcoming elections from foreign interference; and lastly, all signs are pointing to a gradually slowing economy precisely because of the ongoing trade war.

It is not a pretty picture, but empty bluster and posturing rarely is. We now have the makings of a currency devaluation war, says former Fed Vice Chair Alan Blinder, when other countries may now want to also devaluate their currencies. Such a result could lead to plummeting commodity prices worldwide, and what else…?

The Chinese know the clock is ticking on the Trump administration and Republicans who continue to blindly support him, when congress is by law the real maker or breaker of trade agreements. Who will step up that actually knows the “Art of the Deal?”

Harlan Green © 2019

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