AT PENPOINT
US President Donald Trump is definitely unstable. There is really no other way that one can interpret his flip flop on tariffs. It does not matter whether there is method to his madness, or whether his actions are whimsical to the point of being arbitrary, the effects that were caused were too drastic to have been deliberate.
That Trump has paused the tariffs for 90 days is a relief, but is only temporary, and carries within it the seeds of further disturbance. True, even without Trump’s strange intervention, the trading landscape of the world was hardly peaceful, but there does not seem any need to roil the waters as much as Trump has done.
The dust has not fully settled and will not until the world has avoided a depression or fallen into one, but the starting point the USA has in stages imposed a 125 percent tariff on China, which has retaliated with tariffs of 85 percent. As one economist observed, that amounts to not trading with one another. The USA, perhaps realizing the consequences of what had been done, had issued exemptions for Chinese electronics and chips.
The latter in particular indicates why tariffs and a trade war are not really a good idea. The US tariffs have made more expensive parts that the USA would include in its own products. Thus the price of goods apparently made in the USA would go up, and already uncompetitive goods would fail to be exported.
The problem is that final goods are assigned nationality as exports even though many (perhaps even all) components have been manufactured elsewhere and imported. The building of nationally independent supply chains is not feasible in this globalized world, at least not at economic rates.
However, Trump seems to be trying to introduce noneconomic reasons into import and export decisions. On the one hand, he wants less imported into the USA, and on the other, he wants more exported by it. That implies import substitution on the one hand, and on the other, prevention of exports. Import substitution implies that industries exist which can provide the required goods. But what if they have shut down? There will be investment required, and the requisite expertise must be there. Then there are the questions of pricing and quality. If tariffs affect pricing, they do not affect quality. US manufacturers have already tried competing with cheaper imports by producing shoddier goods.
The basic problem has been that US labour is not cheap enough, so quality compromises are not enough to produce goods competitive enough to export. Trump is trying to drive imports by threatening other countries with tariffs.
Pakistan is case in point. Once Pakistan imported US cars, like Fords and Buicks, until they were driven from the market by Japanese cars. Japanese cars are being driven out by South Korean, and it seems that Chinese carmakers will dominate the EV market, which is emerging, but which will be increasingly prominent/ One way out will be for Pakistan to import fuel from the USA to help the balance trade with the USA, even though this cost the Pakistani consumer more because of greater transportation costs. The least cost is from Iran, closely followed by the Gulf
Even fuel from Malaysia or Indonesia would be cheaper than fuel from, say, the Gulf of Mexico and crossing the Pacific.
One thing is certain. Trump has taken the world on an unforeseen and unpredictable economic journey/ Even if he converts the pause into a permanent suspension, ir is unlikely that anyone will ever trust him or the USA ever again.
It should be noted that Trump is making the world buy commodities from the USA. Another favourite will be soybeans and other grains. US manufactures have been priced out of the range of the rest of the world by expensive US labour.
Perhaps the most favourable comment on Trump came from fellow New Yorker Washington Irving, who wrote both Rip Van Winkle and The Legend of Sleepy Hollow, which must rank as among the most seminal works of American literature. He helped establish American literature as an independent entity, rather than just a branch of English literature. Interestingly enough, Irving’s sketch on John Bull seems to apply to Trump
“[A] plain, downright, matter-of-fact fellow, with much less of poetry about him than rich prose. There is little of romance in his nature, but a vast deal of a strong natural feeling. He excels in humour more than in wit; is jolly rather than gay; melancholy rather than morose; can easily be moved to a sudden tear or surprised into a broad laugh; but he loathes sentiment and has no turn for light pleasantry. He is a boon companion, if you allow him to have his humour and to talk about himself; and he will stand by a friend in a quarrel with life and purse, however soundly he may be cudgelled.”
Such is the plight of honest John Bull at present, yet for all’ this the old fellow’s spirit is as tall and as gallant as ever. If you drop the least expression of sympathy or concern, he takes fire in an instant; swears that he is the richest and stoutest fellow in the country; talks of laying out large sums to adorn his house or buy another estate; and with a valiant swagger and grasping of his cudgel longs exceedingly to have another
bout at quarter-staff.”
Certainly, that is how Trump would like to look upon himself, a basically good fellow. But it should be remembered that Irving’s sketch was published in 1820 in The Sketch Book of Geoffrey Crayon Esq, when Britain was a bully, and about to embark on the Opium Wars with China, to force it to import the opium which was destroying it, which it was producing in its Indian colony. Apart from the resemblance of the grandchild of German migrants to John Bull, it shows Trump as facing China’s problem, in the shape of the fentanyl and more general opioid crisis. In a way, Chinese fentanyl exports to China are a revenge for the opium wars.
However, the question that bothers everyone is whether the tariffs will cause a depression. This may be because of a certain conflation of events. The Wall Street crash of October 1929 was caused by too much speculation, too much trading on margin calls. That threatened the banking system and ultimately 4000 banks went under. The Smoot-Hawlet Tariff Act was passed in 1930, and tried to protect US industry from the consequences of the Depression by protecting it from imports.
This time, however. The stock market slide was caused by the tariffs, not the other way round. US industry was not protected to save it, but because of Trump’s economic nationalism. It didn’t work back then, and it took World War II and its massive destruction to pull the world out of the Depression. It will probably not work now.
Apparently, Trump did not grt cold feet because of the stock market declines, but the fall in the yields of US Treasury bonds, which reflected not a negative view of one company or the other, but of the USA’s very banking system.
The last time round, the Great Depression caused the abandonment of the gold standard. It is interesting that the previous worldwide depression, the Long Depression, started by the adoption of that standard, when bimetallism (in which silver was also the standard) was abandoned. At present, there is no metallic standard, and fiat US currency is sort of standard, an international currency. Will the crisis lead to a new type of currency? Is cryptocurrency a candidate?
It is impossible to imagine the transformation, just as it was impossible in 1929 to foresee how a world of fiat currency would look. Yet here we are.
One thing is certain. Trump has taken the world on an unforeseen and unpredictable economic journey/ Even if he converts the pause into a permanent suspension, it is unlikely that anyone will ever trust him or the USA ever again.
