Friday, September 6, 2019

The Ugly Truth About The Trade War

Source: Al-Market

Thursday, 05 September 2019 | By Brandon Smith


This past week was an interesting exercise in false expectations and assumptions. Once again, trade war theatrics were used to stall a stock market plunge as insinuations of a possible "deal" were made by Donald Trump, followed by China's claim that maybe, just maybe, they would not immediately issue a new round of tariffs right now, but possibly tomorrow, or in a month...

Then, all hell broke loose again when only a few days later both sides jumped into a new round of tariffs leaving markets confused and algo trading computers bewildered, so much so that sometimes they even buy on bad news thinking it's good news. This is the problem with the Pavlovian response mechanism – You train a dog to salivate at the sound of a bell because he thinks he's going to get a treat, but then what if you change the bell, or the treat, or the entire dynamic of the process? The dog's whole world is turned upside down and he curls up in a ball in the corner of the room to make the mental anguish stop.

This is exactly the kind of reaction the globalists are looking for, hence the stop/start insanity of trade discussions, not to mention the dove/hawk behavior of the Federal Reserve. Everything people once thought predictable is being deliberately discombobulated.

Ultimately the circus and the confusion are only products of peoples biases. They want to believe they will get a treat if they act a certain way when certain indicators signal. They want to believe the trade war can be won, or at least that Trump is trying to win. They want to believe that the Fed will save them with a surge of QE. They want to believe that the instability will be smoothed away by the hands of the political and banking elites. But what if the elites have no intention of doing this? What if they WANT an economic crisis?

In terms of the trade war, there are some facts that do not support some of the assumptions out there on either side of the debate. These facts run contrary to the mainstream narrative, as well some narratives within the alternative media. On the conservative side I'm seeing a kind of artificial patriotic fervor; an organized attempt using memes and propaganda to convince conservatives that the trade war requires mindless fealty to the anti-China message.

First, to be clear, I think China is a despicable communist regime with a record of human rights abuses, but that's what makes it a rather perfect distraction for Americans on the political right. I'm reminded of the war fever against Iraq after 9/11, and how so many conservatives bought into the very thin claim of Iraqi involvement and the lies about WMDs. We don't like dictators, and we don't like China, but conservatives are being duped into thinking the trade war against China is an ideological crusade that will lead to a better America, or a better world. This is not what the trade war is intended to do.

Let's start with the assumptions (as well as lies and disinformation) surrounding the trade war and then look at the evidence that debunks them...

Fallacy #1: China Is Dependent On The US Consumer

I'm not sure where this idea comes from specifically, but it's not based on anything tangible. I sometimes wonder if the notion that the world depends on the American consumer for its bread and butter is perhaps a kind of appeal to people's narcissism? Making the average American feel superior, or feel special, simply by telling them that their steady debt based consumption keeps the engine of the global economy running.

In the case of China, here are the facts:

The US only comprises around 18% of Chinese exports. While this is a nice piece of the pie, it's hardly enough leverage to bring down China's economy. China would suffer profit losses in certain sectors as well as a recession, but not the kind of crisis that some in the alternative media are predicting.

Around 40% of China's GDP is generated domestically, and 80% of its GDP growth comes from private consumption. For quite some time I have warned that China was shifting its economic model from an export based system to a more self reliant domestic based system, and that this might be an indication of a coming economic war with the US. As it turns out, this is exactly what has happened. Since 2010, China's domestic market has grown dramatically, indicating that China has no intention of relying on the US consumer as an economic pillar.

The US consumer is almost tapped out. While retail sales in certain areas remain steady and this has been used by the mainstream media and the Fed to promote the idea that the economy is still “going strong”, this is not the big picture. The reality is that US consumption is driven by historic levels of debt. Household debt is now FAR above levels last seen after the last financial crisis, with total debt at $1.2 trillion higher today than its last peak in 2008.

The downturn in retail is more obvious in the steady closings of thousands of outlets in 2019 alone. This year has seen a 29% increase in store closings compared to 2018, even though 2018 saw a considerable spike in store shutdowns. Around 12,000 stores are slated to close this year.

So the question is, with the US consumer stretched thin by debt and US retail on the verge of a recessionary plunge, why would China feel threatened by the loss of the American consumer market? They are losing it already by attrition. The truth is they aren't threatened, which is why, as I predicted last year, the trade war continues unabated despite the fact that so many people argued that China would "quickly fold" to Trump's demands.

I realize this is not what many people want to hear, but it is foolish to get caught up in a farcical mob mentality and ignore the fundamentals in the trade war. If you think that the US is going to "win" based on leverage, you are sorely mistaken. The US is in no better shape economically than China; in many ways we are much worse off.

Fallacy #2: Manufacturing Will Come Back To The US

This is perhaps the most persistent and fraudulent "carrot" that has been held out to the American people over the years to get them to go along with certain destructive fiscal policies. Whether it be dollar devaluation or a trade war that goes nowhere, the American people are always being told that manufacturing jobs are "right around the corner". People buy into it because they desire a return to the golden years of American economic expansion, and there are a number of reasons why this is an absurd fantasy.

First, as it stands now manufacturing in the US makes up only 11% of total economic output. I don't think that many people understand the consequences of this. We have a 70% retail and service based economy, meaning the majority of US citizens in the job market have no experience whatsoever in the manufacturing sector, and the average US company has no guidelines for how to establish a manufacturing base using the American labor pool.

Second, American labor expects a certain level of wage compensation as well as union organization that makes manufacturing far more expensive here than in China or in other parts of the world. The average factory worker in China makes around $3.60 per hour – how exactly would the American market ever compete with this? Tariff's alone are not enough to force corporations to spend the billions necessary to rebuild factories in the US and hire American workers at $15+ an hour. It's just not going to happen.

Third, there are many places besides China to build a manufacturing base. No company is going to bring its factories to the US when they can build in Vietnam, or Taiwan etc. In many cases, it is cheaper to ship raw materials and products to these countries, have them finished by workers in Asia, and then have the items shipped back, than it is to build the product from start to finish in the US.

Fourth, we can talk all day about patriotism, but in the end the average American is not going to buy “Made in USA” for most goods out of a sense of patriotic duty if the price is twice as much or more. Walmart and Amazon dominate the retail market for a reason – they sell things cheap.

Fifth, raising tariffs on foreign exporters would only work to encourage consumption of domestically manufactured goods if the US already had a large manufacturing base and produced all the items other nations produce. Entering into a trade war without a resilient manufacturing sector is backwards. You don't fight a trade war to get manufacturing to come back, you fight a trade war to promote the goods you already manufacture.

If Trump had really intended to bring factories back to the US, he should have given corporations tax break incentives in exchange for creating manufacturing jobs on US soil. Instead, he gave corporations tax break incentives for nothing.

Please go to Al-Market to read the entire article.
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