Please excuse the absence of The Dismal Optimist over the last few months. I have been on my back “meditating” while recovering from a full knee replacement. I don’t recommend the latter.
I confess to having voted for Trump in 2016. Year one of Trump brought all kinds of business-friendly measures including a tax cut, regulation rollback and, conservative judges. The stock market boomed.
Now Trump’s early good deeds are in stock prices. In my opinion, unless there are radical changes in Trump trade policy, this policy will be a major headwind for the American stock market. The market will suffer as long as the American president is single-handedly trying to destroy the global trading system, is waging an economic war against China, and is trying to politicise the Federal Reserve. As long as the American president, using a dishonest and exaggerated justification of national security, issues arbitrary dictatorial decrees without any supporting economic analysis or approval from Congress. Any objective economist and any constitutional lawyer should be in shock at what Trump is doing. He is reviving Cold War-era laws, which delegated emergency powers to the President in the face of real Soviet national security threats.
The postwar global trading system and the Federal Reserve are success stories that have brought so many benefits, such as low inflation, the advance of technology, and the supremacy of the dollar. China — once an inward-looking economic basket case — has joined the global trading system, has raised millions out of poverty, and has become a major contributor to the acceleration of global technology.
So Why Is China Suddenly An Enemy?
Trump justifies his initiation of an economic war on China on the grounds that China has inflicted severe economic damage on the United States that prior presidents allowed to happen. Think about it. In Trump’s world, the United States — the world’s number one economic, financial, and military power — is a victim? It’s just not believable. Trump trots out a variety of mercantilist and often factually-incorrect tropes to prove his point.
For example, Trump regards China’s balance of trade surpluses with the US as evidence that China is stealing from the US. I doubt there is an economist in the world — with the exception of Trump’s economic Rasputin Peter Navarro — that would agree with this. Balance of trade deficits are not indicators of economic malfeasance. Students in Econ 101 learn about David Riccardo’s comparative advantage. Every country should export what it is best at and import what it does least-efficiently and least-best. China supplied the US consumer with cheap goods. This is a crime? Furthermore, China has a higher savings rate than the US. This automatically pushes it to have a current account surplus. Finally, in a multilateral trading system, trading and current account deficits with one country are balanced with surpluses with others.
Another “crime” attributed to China is the theft of American intellectual property. No specific instances of this have been provided. Rather, China’s insistence on American companies having to set up JVs in order to enter China is cited. An American company has to transfer technology to its Chinese JV partner. From the viewpoint of economic efficiency, the Chinese JV system may not be a good system for the Chinese or the Americans. But it isn’t theft. The American companies are big boys. They set up these JVs voluntarily, they know the rules. The Chinese did not steal from them.
Trump brags that all his tariffs on Chinese goods are being paid by China. This is, as every commentator knows, a total fabrication. Americans pay the tariffs. According to some analysts, the tariffs, if imposed by year-end, will be offsetting the earlier tax reduction.
Trump’s “evidence” for the harms done by Chinese and others in international trade are the spikes in unemployment caused in the American Midwest in prior years. The shift to a global economy where China played a major role did have its losers. It was the American government’s role to take care of those Midwestern losers. Trying to halt the inevitable rise of globalization and technology, in which China plays a major role, is a huge mistake. Finally, unemployment is at an all-time low. If all the jobs were brought back to the US, who would do them today?
Navarro in his writings has endorsed the disgraceful policy of making China poor. It would seem that the Trump/Navarro objective is to separate the US and Chinese economies. Trade experts Chad Brown and Douglas Irwin sum things up in a September Foreign Affairs article:
The US, if it does this [separate the two economies], will have to pay an economic price…Whether Trump appreciates these costs isn’t clear, but it’s evident that economic considerations aren’t driving policy. The president’s willingness to look past stock market slumps and continue to push China shows that he is willing to pay an economic price — whatever he says in public.
So what are the non-economic considerations?
The Trump Economic War on China at Its Core Has a Racial Component
This is a fight with a really different civilization (China) and a different ideology…It’s also striking that it’s the first time we will have a great power competitor that is not Caucasian
From a speech by Trump Appointee Kiron Spinner, Director of Policy Planning at the United States Department of State
The passage quoted above is a “Freudian” slip by a senior Trump appointee. But Ms Spinner happens to be African-American and therefore may subconsciously see things from a different perspective than Trump’s typically less-educated white male base. That Trump’s real goal is to maintain American global dominance — by any means foul or fair — is so obvious. And is a widely held view in Asia. The fundamental underlying motivation for the Trump economic war on China is that Trump’s America does not want to see another country — especially another non-democratic country peopled by non-Caucasians — take over the US position of global primacy. You can use the polite academic term and call this “a clash of civilizations”. But the term “race war” hides right below the more elegant academic terminology.
Many Americans — Democrats and Republicans — have accepted uncritically Trump’s unproven accusations that Chinese trade policies have hurt America and that the Chinese have cheated on America. Why was this such an easy sell for Trump? There are several possible reasons.
One might be that Americans were trained by the cold war to automatically mistrust a Communist superpower. Substitute China for Russia.
Another reason might be that, as many economists lament (See Bryan Caplan, The Myth of the Rational Voter), most people in most countries are by nature protectionist. Trump just hit a basic chord in the populace that had been left undisturbed by prior post-war internationalist American presidents.
But there is another factor American people don’t talk about but may lurk in the collective national subconscious. The fact is that the United States has a history of hostility towards Asians. It’s a history replete with lynchings, numerous discriminatory laws against Asians, the Chinese Exclusion Act of 1882 signed by President Arthur, President Theodore Roosevelt’s Gentlemen’s Agreement of 1907 with Japan barring Japanese immigrants, and of course, the infamous camps for Japanese-American citizens during WWII. All this long ago some will argue. But maybe not that long ago.
During the late 1980s and early 1990s, the Japanese were the “bad Asians.” Trump at that time in his real estate developer days has been quoted as saying the Japanese were ripping off America — just like the Chinese are supposedly doing today. Americans fell into line mistrusting the Japanese. President Reagan put up tariffs against selected Japanese imports. Michael Crichton penned a best-seller called Rising Sun in which the Japanese were depicted as intelligent but mysterious and ruthless and having a secret plan undermining American interests. (The plan seems to have failed.)
Low Interest Rates — Good for the Stock Market
Interest rates are plunging around the world. That’s what is holding the stock markets up. Investors need returns. Naysayers are worried about inverted yield curves, whereby long rates fall below short rates. And they worry about negative yields, whereby interest rates in many markets have fallen below zero. Supposedly this is a sign of recession.
My opinion is to relax and to enjoy the low rates. And the good supply-side driven low inflation that comes with them. There are three driving forces for low rates and low inflation. The first is globalization which drives down costs globally and which Trump, unfortunately, wants to disrupt. (Trump’s trade disruptions just might cause a recession and bad inflation.) The second is the global acceleration of technology, which again with his war on China Trump wants to disrupt. The third is the aging of all the major countries’ populations. The fogies just don’t spend like they once did.