Thursday, June 21, 2018

An Incredibly Destructive Trade War is Looming (It Could Be Worse Than Smoot-Hawley)

By David Stockman. During the last few days, the Donald has gone stark raving mad on the trade front. Yet the bozos on Wall Street are already sounding the "all clear", claiming this is some kind of brilliant Trumpian 3D chess maneuver or that it's just a skirmish and it will all soon blow over. Indeed, the over night rally in equity futures was pegged on a reed so thin as to be truly pathetic. According to one Irene Cheung, a purported "FX strategist" at ANZ bank, there's nothing to sweat: "China’s stronger-than-expected yuan fixing should help to calm the market and the visit of the North Korean leader to China suggests that perhaps there is room for trade negotiations" she added. Really?
The Donald has declared a tariff war on 91% of China's exports to the US ($450 billion out of $505 billion). Yet without its massive export earnings the Red Ponzi would collapse under its $40 trillion of unpayable and unsupportable debt, and its communist ruling party would find itself high and dry. So one night's FX fixing is supposed to prove that Beijing's rulers are going to come trundling to Washington tin cup in hand? More importantly, this morning Trump's dangerously foolish trade advisor, Peter Navarro, published a 35-page screed that is an unhinged outburst of anti-Chinese bellicosity. Entitled "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World", it is a testimony to sheer economic ignorance and a nasty form of Big Government nationalism. For instance, Navarro's paper whines about "reverse engineering" as if this staple of business life from time immemorial were some insidious new trick invented by the Chicoms: ".....reverse engineering in China is widespread and entails the process of disassembling (products).... for the purpose of cloning something similar without authorization from the rights holder.....(which) is illegal when the unauthorized production is of technology under patent or other protection." Goodness me. Illegal patent infringement is exactly why more than 7,000 patent cases are filed in the US court system each year. Under the rules of honest capitalism, it is the job of the patent owner to protect his property rights in court----not some Trade Nanny in Washington. Similarly, the Navarro screed complains that China forces US companies doing business there to share their technologies and that getting a government license or regulatory approval can often require the same: A long-standing feature of China's industrial policy is that foreign companies are often pushed to transfer technology as the price of market entry.. (Also) the Chinese government uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous approvals needed to establish and operate a business in China. So what? Exactly no one mandated US companies to do business in China. If the Red Suzerains of Beijing are stupid enough to enforce a "no tickee, no washee" policy on foreign capital, it's their loss, not the business of the US government. As investors have long understood, capital goes where it is appreciated and treated nicely or at least fairly. If China wants to be hostile to foreign capital by imposing unreasonable conditions, capitalists should take the cue and go elsewhere----not run to Washington seeking redress. Stated differently, corporate America wants to have its cake and eat it too. For crying out loud, China is a communist country, not Texas! So, of course, the government will impose onerous conditions on business----foreign and domestic, too, because that's what statist regimes do. And that's why Navarro's whole screed against China's supposed "economic aggression" is actually a giant "so what!" in substance and a dangerous policy misdirection in practice. For instance, it also whines that China seeks to: • "force foreign patent and technology holders to accept below-market royalty rates......." • "limit the time that a foreign patent or rights holder has exclusive control over the technology...." • "use security reviews to force foreign enterprises to disclose propriety information....". • "impose burdensome and intrusive testing be certified before marketing certain productions in China" • "(force) the placement of foreign research and development facilities in China as a condition of access to the Chinese market....." • "(mandate)including Chinese Communist Party Committees in corporate charters and in their corporate governance" All of this and much more belongs in what free traders have always called the "rocks in your harbor fallacy". That is, the self-punishing idea that if a foreign country imposes tariff or non-tariff (like those listed above) barriers to your commerce, you should respond in kind by filling your harbors with like and similar obstructions. But what we have in the present instance is far more insidious than this traditional tariff-for-tariff fallacy because it involves a three-way merger of ideas that are fundamentally inimical to both capitalist prosperity and political liberty. To wit, the Trump White House and the usual suspects in the Imperial City are ginning up a witches brew of: • Tariff-based economic protectionism • Trade Nanny-based crony capitalism • Empire-based economic warfare The latter feature is found in the Navarro report's hyper-ventilation about alleged Chinese cyber-enabled espionage. It's also the basis for the recently enacted Senate ban on China's #2 telecom company (ZTE) from doing business in the US and from buying key components from Qualcomm and Intel. Why? Because ZTE apparently failed to act with the requisite zest as an enforcement arm of Imperial Washington's hex on trade with Iran and North Korea. Self-evidently, these items have no more merit than traditional economic protectionism. A legitimate homeland based national security policy would have no quarrel with Iran and no need for waging economic warfare against it under the euphemism of "sanctions". Likewise, it would never have put American forces on the Korean peninsula in the first place---let lone hung around for 65 years threatening regime change and military action against the north. So the fact that Washington is having a fight with China over the ZTE ban is more than a bit ironical. Having waged economic aggression against both Iran and North Korea, Imperial Washington now proposes to wage economic warfare on China because one of its state companies did not take up arms as instructed by Washington; and while it's at it, Washington also proposes to wage war on American jobs by forbidding acts of commerce between Qualcomm and its Chinese customer. Likewise, the Navarro screed foams at the mouth about Chinese cyber-espionage and its alleged "state-sponsored campaign of theft" conducted by "40,000 intelligence offices abroad (and) more than 50,000 intelligence officers in mainland China". Now that's precious. It brings to mind the notion of the cat-calling-the-kettle-black. After all, the US spends $75 billion per year on its massive, globe-spanning surveillance and spying operations that pales China's operations into insignificance. Moreover, when it comes to the commercial side of things, why in the world do Navarro & Co think there is a $150 billion per year global cyber-security industry selling exactly the kind of ultra-sophisticated technological protections needed to block hackers and thieves in the internet age? Stated differently, cyber-theft is indigenous to the global internet and is unfortunately conducted by tens of thousands of private and state hackers, not just the Chinese. But the threat is creating its own solution. To wit, cyber-security defense is an increasingly valuable economic commodity, as were guards and brinks trucks in the days of cash-based banking. Accordingly, vendors are developing ever more powerful and effective cyber-security systems, which are available to every US business for the purchase. Needless to say, K-Street and its polished racketeers are dedicated to the business of inventing missions and functions for Big Government that need 'splainin' and persuasion by high-paid lobbyists, and which involve soaking the tax payers for what corporate clients and other interest groups should be doing for themselves. In that context, no more insidious notion is at loose in the beltway than the Trade Nanny predicate which underlies the Donald's attack on China's alleged technology theft and "economic aggression". In the specific case of cyber-theft, companies should buy their own cyber- security protection---just as they guard their own plants, insure their goods against damage or loss, sue infringers on their patents and undertake a whole gamut of like and similar actions which are the cost of doing business in the modern world. Nevertheless, the reason the Donald's launch into the trade wars is so dangerous is that once again he has been taken hostage by the Swamp creatures on the broader matter of trade. His primitive 18th century mercantilism, in fact, was a plump target for the neocons' insane war-mongering about China and corporate America's ever out-stretched hand for crony capitalist subventions. As is always the case, of course, main street America will be the ultimate victim of this noxious brew. As we pointed out yesterday, even the first $50 billion round of Trumpian tariffs was allegedly imposed to punish them not just for conventional tariff barriers; it was actually directed at China's alleged technology theft and was intended to spank them for not being nice to American capitalists. That is, our stock price obsessed C-suites, which foolishly bring their capital to the Red Ponzi so they can brag about it on bubble vision, and then whine about the "unfairness" inherent in the regime. So here's the sad story again. The good folks who buy milking machines and industrial magnets will be forced to pay 25% more because corporate lobbyists have convinced the Donald that a Trade Nanny in Washington is the route to MAGA: The list includes air compressors for refrigerators, industrial scales, backhoes, hay mowers, chicken incubators, cow milking machines, wheat combines, printers, light bulb machinery, food processing equipment, industrial magnets, televisions, electronic traffic signs, pacemakers, pressure gauges and thousands of like and similar items. Indeed, you only need to read the new White House screed against China to recognize that what is unfolding is the very opposite of a trade skirmish----it's an unprecedented act of Washington-led economic aggression against another sovereign state that happens to have unfortunately saddled itself with a statist economic model that we call the Red Ponzi. That is to say, the gravamen of Navarro's complaint is not this or that high tariff or NTB, which presumably could be negotiated away---even if that really isn't Washington's proper role. To the contrary, the attack of Navarro and the Donald on China is a attack on the entire warp and woof of its jerry-built $12 trillion red capitalist economy. That amounts to Regime Change on steroids and portends an existential collision with the rulers of Beijing. And it also promises to be a demolition derby that cannot possibly by managed by an amateur lightweight like Treasury Secretary Mnuchin or the Donald's geriatric secretary of Commerce, Wilbur Ross. Instead, the ball is in the hands of Peter Navarro and Robert Lighthizer, and that fact alone ought to scare the living bejesus out of Wall Street. Navarro is the most dangerous economic ignoramus and fanatical nationalist ever to hold high office in the White House; and Lighthizer, who is Trump's top trade negotiator, is a career swamp creature and the walking embodiment of Washington's crony capitalist system. Lighthizer actually made a career of the Trade Nanny syndrome first as chief of staff on the Senate Finance committee, which has jurisdiction over trade policy, and then running a lucrative law practice out of Skadden, Arps' Washington office in behalf of cry-baby corporate trade clients. So we don't think the trade skirmish is going to be over soon. What is actually brewing is an epic trade war that will give Smoot-Hawley a run for its money and then some. The above originally appeared at David Stockman's Contra Corner.The above originally appeared at David Stockman's Contra Corner.

1 comment:

  1. Such impasse situations at that level are usually resolved by war - a war China does not want, and US cannot win, so the US will have to start it and lose it one way or another.