Trump's Unwinnable Trade War: Gold Explains Why

-edited

Trump wants to cure trade imbalances via tariffs. It cannot possibly work.

Another Look at NAFTA

One of my readers proposed that problems US balance of trade issues started with NAFTA. Wrong!

Please consider Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?

Explaining Balance of Trade

Trump's Mission Impossible

It is impossible for tariffs to fix problems caused by making the dollar the world's reserve currency then removing the last constraints on global deficit spending!

If you support Trump's tariffs as some sort of cure to trade imbalances, please read the above sentence over and over again until it finally sinks in that Trump is on a foolish path.

Historic Balance of Trade

From 1866 to 1968 the US generally had a trade surplus.

The US had huge trade surpluses during and just after WWI and WWII.

Why?

The productive output of Europe was destroyed. US production was not harmed in either war.

Although no US production was destroyed in the Korean War or the War in Vietnam, in both cases US production was diverted from productive uses to asinine uses, especially true for the Vietnam war.

Other nations were not stupid enough to get involved in a significant way, if at all.

Chinese Imports

Tut tut some may say. Harsh words indeed.

Their argument is that Nixon established trade relations with China in 1972.

OK let's take a look.

US Imports from China did not soar until after China joined the WTO in 2001.

The US current account stared sinking well before NAFTA.

So, what is the cause?

No Enforcement Mechanism

Gold provided an enforcement mechanism against mercantilism, massive deficit spending, and huge government subsidies.

Starting August 15, 1971, when Nixon closed the gold window, there has been no enforcement mechanism.

That's a problem that tariffs cannot possibly cure.

Why the Delayed Response to Nixon?

Nixon said it was "temporary".

Guess what? It wasn't.

Tariffs cannot possibly fix this issue.

Tariffs can only make matters worse by increasing costs on consumers and industries.

Trump is barking up the wrong tree, and loudly.

Mike "Mish" Shedlock

Comments (44)
No. 1-16
jivefive99
jivefive99

Im sure you have your disagreements with Rickards, but his book is pretty clear: while 1939 Smoot-Hawley tariffs were dumb, the tariffs of 1861, 1864, 1890 and 1922 only strengthened America. Perhaps the Nixon gold cut-off in 1971 changed that calculus. Generally speaking, tariffs arent the bad guy. The whole world uses them to this very day (Germany and Japan for starters). And, above all, since 1980, the real jobs in America have started to disappear. How, why, what would be nice to figure out, but since we cannot possibly compete with 10 cents an hour labor, I still see the Chinese government as the adversary ...

Tony Bennett
Tony Bennett

"The US had huge trade surpluses during and just after WWI and WWII"

...

Cruise missiles + B-52s = problem solved

2banana
2banana

And yet, Germany actually has a trade surplus with China.

Germany is a very tough trade negotiator and fiercely protects their manufacturing base.

Maybe a lesson in there somewhere...

Casual_Observer
Casual_Observer

Expect more chaos now that impeachment proceedings are underway. I don't think using tariffs as leverage is a bad idea but Trump is a terrible negotiator and not a smart guy. Being self-reliant as a country is a good thing. Relying on possible enemies for your supply chain and logistics should a war break out is never a good thing.

Realist
Realist

Weighted Mean Tariff Rates, 2017

US 1.7%

Japan 2.4%

Europe 1.8%

Switzerland 1.7%

Iceland 1.6%

Canada 1.5%

New Zealand 1.4%

Australia 0.9%

Singapore 0.1%

Hong Kong 0%

Europe and many other developed countries have similar tariff rates compared to the US. Attacking them is all about politics, not trade.

Eighthman
Eighthman

I think Russian autarky combined with currency swaps could crash the US empire. If Russia/China can supply anything needed, then they don't need the US/West. Further, with currency swaps, they might get goods cheaper than using the dollar. We could see nations in defacto alliance with Russia/China to gain independence from US hegemony.

Kingcanute
Kingcanute

Mostly makes sense to me, but can someone describe why a gold standard makes mercantilism difficult?

lol
lol

The economy the last decade is basically a dead mutant held to together with hundreds of trillions printed out of thin air to prop well...everything up,with an army of central bank maggots eating away at it's rotting corpse,what has he got to lose?

we_will_be_Ok
we_will_be_Ok

Looks like my post disappeared (may be because of a link in it) but my point was that US had already issued too many dollars before Nixon went off the dollar standard. The balance of payments was bad, even through trade was balanced. But by the 60s, it was obvious that US will fall behind in exports as other countries had recovered. Trumps talks about tariff and too many US obligations. During Nixon time US took on too many obligations and struggled to increase export.

As evidence I quote from an article from that time: I n THREE YEARS, 1958-1960, the United States experienced deficits in its balance of payments averaging $3.7 billion per year. During this period an annual average of $1.5 billion of U. S. gold reserves was transferred to foreign ownership. These recent U. S. payments deficits and related gold outflows have evoked considerable public concern both here and abroad with respect to the gold position of the United States

abend237-04
abend237-04

The man who led China from Mao suits, cultural wars and Great Leaps Forward was Deng Xiaoping, starting in 1979. When he died in 1992, the stage had been set for future success of the Chinese mercantilist model still in use today.

In 1980, a good rule of thumb for manufacturing cost of a mainframe-class product was 80% unburdened material and an additional 20% burdening cost, most of that, labor. If you had done a good job in technology development, strategic planning, etc., you could reasonably expect 50% gross margins in the marketplace, leaving 50% with which to pay for Engineering, Marketing, G&A, Service, etc. and post a profit to keep the doors open. A typical, fully burdened North American corporate cost per manufacturing hour was around $23 in 1980; China's was less than $2. That cost delta set off the stampede that NAFTA and WTO magnified.
When Deng opened China north of Hong Kong up for manufacturing, the local roads and infrastructure were primitive. Sixty miles over rutted dirt roads was not uncommon. BUT, their brains and work ethic were just as good as ours.

Fast forward 40 years and China has come from mud hut poverty and a $250 Billion GDP to $13.5 Trillion GDP, but insists on continuing to be treated like it's 1980. I don't blame them...nor support them.

We, the world, need a new agreement, not blunderbuss tariffs, but if the blunderbuss will get their attention, load'er up.

Matt3
Matt3

Pointless article. Make an assumption and then find charts to support it. So what? We are where we are. What do we do now? How about we set trade policy to benefit American citizens? Can we agree that that should be the goal? Maybe if we can agree with that, we can have discussions on what policies are best.

truthseeker
truthseeker

Why no charts on what the tariffs have done to China’s economy?

Ted R
Ted R

Bring back the gold standard and let the chips fall where they may. Sure some people will get hurt in the short run but it is for the greater good. It might also be a good idea for the average American to learn to stop depending on the government for jobs, food stamps, medical care, public housing, government subsidized jobs, student loans, and all the other government giveaways that cause the government to borrow money from other countries and run huge budget deficits. It is time for the American people to learn to depend on themselves and return this great nation to a constitutionally correct government.

Mish
Mish

Editor

"Looks like my post disappeared (may be because of a link in it)"

Posts don't disappear because of links. Hopefully it has reappeared. Thanks for noting the problem. I will report the problem.

Fulgurite
Fulgurite

Excellent article Mish! Gee, I really wonder when ZionHedge will publish this...

Of course ZionHedge won't post anything that is critical of Trump, because Trump is the best POTUS that AIPAC Dollar could buy!

"Best economy ever." /sarc

George265
George265

The author is wrong. He is proposing free trade on the same basis most economists do - and that is on the outdated theory of comparative advantage. But Ricardo was wrong! China is a much wealthier country, and its primarily because they base their economics in real time, without massive red-tape, in the moment, and with clear objectives that benefit the individual. Modern economists in the west have been wrong for a long time now and thats why you are seeing a tremendous transfer of wealth. Any article to the contrary is propoganda. They want to transfer the wealth because it benefits them, not you. Dont let them do it.