No More China Tariffs? - The Arthur Martin

Monday, December 3, 2018

No More China Tariffs?


Well over an hour after "the most anticipated dinner between US and Chinese presidents in years" was over, Chinese state-run TV, CGTV, finally reported that Trump and Xi had agreed to keep the US-Chinese trade war from escalating with a promise to temporarily halt the imposition of new tariff, effectively declaring a truce.

As part of the truce reached between the two leaders, no additional tariffs will be imposed after Jan. 1, CGTN reported.

Meanwhile, according to the White House, Trump and Xi had a "highly successful meeting", with the White House saying that Trump had agreed to leave tariffs on US products at a 10% rate after January 1 as China agreed to buy a substantial amount of products from the US.

However, the trade war "truce" is only temporary: after 90 days, if a trade pact is not reached between the US and China, the tariffs will rise to 25% after all.

From Bloomberg:


  • TRUMP AGREED TO LEAVE TARIFFS OF PRODUCTS AT 10% RATE ON JAN.1
  • WHITE HOUSE SAYS U.S., CHINA AGREE TO 90-DAY NEGOTIATION ON RANGE OF SUBJECTS: DJ
  • IF CHINA, U.S. DON'T REACH PACT, TARIFFS TO RISE TO 25%: WH
  • U.S., CHINA TO STEP UP TALKS ON CANCELING ALL TARIFFS: WANG
  • XI OPEN TO APPROVING QUALCOMM-NXP DEAL IF PRESENTED AGAIN: U.S.

Meanwhile, in order to achieve the temporary ceasefire, and in what may be seen as a victory for Trump, the White House said that China has agreed to start purchasing "very substantial" US agricultural, energy, industrial and other products "immediately" from the US to reduce the trade imbalance. [Source]

The trade war hurting the US has always been simple propaganda and anybody with a rudimentary knowledge of money knows that the US could only benefit by raising tariffs on countries that have been benefiting from cheap US goods and resources for decades. In fact, I don't even know where anybody came up with the idea that "tariffs" are bad. Actually I do, it stemmed from Fake History propaganda that lead uneducated Americans to believe that the Great Depression was caused due to the Smoot-Hawley Tariffs:

Basically, before WWI, America was the world’s biggest debtor nation, importing capital from all over the world to build and invest in the United States. During and after WWI, America became the world’s biggest creditor. Out of the national income of $30 billion, Woodrow Wilson lent $11 billion to England and France to fight WWI. After the war, America lent an additional $14.7 billion for private and public investment, a lending boom that continued to grow throughout the roaring 20’s. This means that during probably the biggest boomtime in US history up to the period, where the economy grew to $100 billion before the crash, the United States was accumulating a massive bond portfolio where a sizeable percentage of assets were concentrated in foreign bonds.

Because the US was on a gold standard where $20 bought an ounce of gold, the only way for foreign entities to pay for their dollar-denominated debts was to sell to the United States, exchange goods for cash, and then meet the terms of their bond agreements. To guarantee that they could sell goods, gain cash and pay debts, European firms were dumping product in the United States.

The dumping was at first concentrated in the agricultural sector and it was wreaking havoc on farmers. Because farmers accounted for 25% of the population, they managed to push the Fordney-McCumber Act of 1922, a tariff of not only 34.8%, but with a Tariff Commission whose duty was to equalize production costs as a condition for any tariff removal. Yet, throughout the 1920’s, not only did the dumping continue, it moved upmarket. Wisconsin Senators, by the late 1920’s, were complaining about Belgian cement undercutting Wisconsin cement companies.

Jude’s book provides great insight into what was going on in the 1920’s American economy. Warren Harding ran on a campaign of “returning to normalcy” by repealing the high income taxes of the war years. This caused the US economy to boom. By 1925, the top marginal tax rate was reduced to 25% and the US economy was roaring along.

Unfortunately, the malfeasance of the Wilson administration led the United States to lend enormous amounts of money to the rest of the world, a practice that continued among private sector banks throughout the 1920’s. JP Morgan would lend money to Belgian cement makers that would then export government-subsidized cement to the US, sell it, and then service the bonds, which reflected in higher stock prices for JP Morgan and Belgian cement companies, but would wreak havoc on local businesses that then lobbied for tariff protection. This process was repeated across hundreds of different industries.

The stock market was not worried that the drop in international trade would tank the US economy. International trade was small as a percentage of the US economy, roughly 4% total. But, that 4% of international trade was servicing the accumulated lending that amounted to anywhere from 30-50% of the value of the entire US economy. The tariff meant that firms would not be able to service the money lent to them by Americans and, thus, lead to massive bond defaults.

What happens to the value of company stock if the company defaults on its bonds? The stock goes to zero.

That is what the market was paying attention to and why it was reacting the way it did to the Smoot-Hawley tariff.

We can see why today tariffs will not have the same effect that they did in 1929: the US is not the world’s biggest creditor. Our debtor status means that we are not vulnerable to a bond-market dislocation. Other nations are. We can safely go back to raising tariffs and building the United States. [Source]


All the fears of a new depression caused by Trump taking a hard stance on international-trade are simply fears of ignorance. The Depression just like the 2007-08 collapse happened due to stock market inflation and over-leveraging (ie too much debt). That's not to say that economic collapses are isolated events, because the world economy is so inter-linked there are possibilities of snowball effects if one nation collapses (let's say the EU) it will impact other nations like America. The difference is like the last paragraph stated the difference between being a creditor and a debtor.

America is broke and can only benefit from trade wars.

We know this because China backed down. 



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