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The US, EU, and China are all sharpening trade swords. China's Retaliation List Includes Boeing and Soybeans.

For now, Trump has backing off on the EU. The EU gets a temporary reprieve on Steel.

Apparently Trump does not want simultaneous trade wars on two fronts.

Belly Flop Reporting

Meanwhile, Wall Street Journal writer Greg Ip takes a massive belly flop off the high dive with his analysis China Started the Trade War, Not Trump.

"Unlike with steel and aluminum tariffs, economists see merit in Trump’s trade case against China" writes IP.

“China is undermining or taking away some of our rents, so we are relatively worse off and they are better off,” says Dartmouth College economist Douglas Irwin, author of “Clashing over Commerce: A History of U.S. Trade Policy.”

Taking China to the WTO might be a less dangerous approach. But he [Irwin] adds: “No one is saying we shouldn’t do anything.”

Belly Flop

I expect better from Greg IP. He's normally a good writer. Today, it is unclear what IP's position even is.

This debate reminds me of a first-grader's ploy, "Susie started it", to which my mom would reply along the lines "If Susie jumped off a cliff would you follow?"

Did you catch the irony?

Irwin did not say the US was worse off. He said the US was "relatively worse off."

Apparently we are all better off from free trade, but China is "relatively" better off.

Mercy Me! How can we possibly stand that?

Fire the bazookas.

We Must Destroy Free Trade To Have Free Trade

IP's discussion reminds me of my post a couple days ago: We Must Destroy Free Trade To Have Free Trade.

Economist Daniel Lacalle inexplicably posted an article, Trump’s Tariffs are a Tool for Free Trade.

The concept is ludicrous, as explained.

But as I noted at the time, Lacalle did not write it. He took a guest post, without comment.

Worst Way to Combat Protectionism

Today, Lacalle pinged me an article that he wrote, that makes far more sense: Tariffs Are The Worst Way To Combat Protectionism.

Protectionism only protects the Government. It does not defend obsolete industries, does not create jobs and certainly does not support growth. It only protects the government that imposes it, because the governments present themselves as saviors of the effects of something that they have no power to change.

Year after year, countries met at the G-20 to discuss the problem of steel and aluminum. Overcapacity continued to build and be subsidized. Everyone put on a smile, signed an agreement on paper pledging to “be transparent” and sold everything they could to the United States, sinking prices by selling below real costs, in cases at prices that were between 50% and 106% lower than fair price.

That is the main problem. We have accepted globally that countries flood the market at prices below cost in the hope that “someday they will change” and with the excuse that they are the engine of growth in the world. But overcapacity remains, jobs do not improve and real salaries do not improve. And protectionist measures remain.

Today, overcapacity in China is over 60% in some industries – we have also seen the case of solar panels – and the country continues to increase debt to the point that state companies are the least profitable and the most indebted. According to Gavekal, Chinese state-owned companies have an average return on assets of 3% and a debt of 160% of their capital. A time bomb. We just have to wait. Because it explodes, it always explodes.

But resorting to tariffs is not a solution. It is negative for consumers and the economy.

China will not suffer from these measures. They simply give them an excuse to justify its interventionism. The most disadvantaged will be consumers and poor countries, which suffer the double effect of lower trade and barriers to grow.

Almost Correct

Those paragraphs are "almost" correct and overall a well-needed breath of fresh air.

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Did you catch the mistake?

Take these two ideas and compare them.

  1. We have accepted globally that countries flood the market at prices below cost in the hope that “someday they will change” and with the excuse that they are the engine of growth in the world. That is the main problem. [sentence order switched for readability]
  2. Resorting to tariffs is not a solution. It is negative for consumers and the economy.

If tariffs are negative for the consumers and the economy, it stands to reason that foreign subsidies are in fact good for the US economy and long-term bad for them.

Mathematically, A=B, does not imply If Not A Then Not B. However, the slightest bit of common sense does suggest it is better to pay less and receive more than the other way around.

Perhaps there is some debate if national security is genuinely in play, but in this case, it is a farce for Trump to play the national security card as he did.

US Getting Bad Deals?

The notion is ridiculous. If US corporations believe they are getting a bad deal from China, they would not make deals with China!

Essence of the Matter

Looking for a perfect score?

Donald Boudreaux, professor of economics at George Mason University provide one.

Boudreaux wrote this Letter to the Editor of the Wall Street Journal just today.


The title of your report today on the looming escalation of trade restraints imposed by Washington and Beijing is accurate: “U.S., China Sharpen Trade Swords.” But your description of these restraints - as U.S. “tariffs on steel and aluminum” and Chinese “duties … on soybeans, sorghum and hogs” - misses the essence of the matter. Tariffs and duties are not paid by the likes of steel or hogs; they’re paid by people. Furthermore, the people who pay these taxes in each country include that country’s own citizens, for these are the people whose actions these taxes are first and foremost meant to punish. U.S. tariffs penalize Americans who buy American imports; Chinese tariffs penalize Chinese citizens who buy Chinese imports. And the higher the tariffs, the harsher the penalties suffered by fellow citizens - people whose only offense is to stretch their budgets as far as possible.

So yes, Uncle Sam and Beijing are ‘sharpening’ their trade swords. These weapons, however, when swung, will be swung by each government against its own people. So-called “trade wars” are wars in which, to persuade foreign governments to stop attacking their own citizens, each government attacks its own citizens.


Donald J. Boudreaux

Perfect Framework

Tariffs sharpen the axe against a country's own citizens. That is the perfect framework for understanding free trade.

Why do governments sponsor tariffs?

Governments like to buy votes. So they do. Politicians get loads of money from powerful corporations at the expense of the average consumer who is easy to manipulate with propaganda.

I discussed vote-buying and tariffs just yesterday in a radio interview with Lance Roberts.

You can play the radio interview here.

Fun Interview with Lance Roberts on Serious Topics: Trade, Inflation.

Words of Thanks

I appreciated being on the Lance Roberts show yesterday. I also appreciate Daniel Lacalle reaching out after I mocked a guest post on his forum.

Lacalle is one of few people it's easy to have exchanges with, even when you disagree.

I have exchanged emails with Lacalle on many occasions and he does not hold things against you, if you disagree with him.

I follow him on Twitter at @dlacalle_IA and Lance Roberts at @LanceRoberts.

Escape Now!

Lacalle has a book out called Escape from the Central Bank Trap, a title that certainly makes sense to me. I will review the book shortly.

Mike "Mish" Shedlock