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Home / Business / John Mauldin says the Trump government is right against China, but complains about how they do it. If you want to wage a trade war, do not point the weapon at yourself, he argues

John Mauldin says the Trump government is right against China, but complains about how they do it. If you want to wage a trade war, do not point the weapon at yourself, he argues

By John Mauldin *

Good news: The trade war is over. No, it's getting worse. Or maybe it stops, but it could start again tomorrow.

Confused? All of this has happened in several places in recent weeks. The markets moved in response. And we still are not closer to knowing how everything will end.

Needless to say (but I say it anyway), this uncertainty has a disquieting effect on business investment. When you're considering spending billions on new production capacity, opening stores, or hiring new employees, you need to know your costs and have reliable supply chains. This is next to impossible if tariffs go up, down, or sideways, depending on the day.

The saddest part is that the world trade system is indeed in serious trouble, many of which come from China. We have to fix it. I fully support this goal. I'm glad that we have an administration that takes Chinese behavior seriously. But the tariff strategy worsens the situation, does not improve it, and the focus on trade deficits is completely inappropriate.

This will be a potentially brand-new writing, but sometimes only things have to be said.

China and Intellectual Property

I will start with a story that might fit better in the middle of the letter, but I suspect that some readers will not get there. You will read my fairly strong free trade deviations and feel that I do not recognize the problem that China poses. Nothing is further from the truth. While I'm not happy with the way Trump leads the "trade war," I'm glad he does something about it.

China is producing a drug that works well against strokes and numerous other less devastating medical problems. It is derived from porcine pancreas or human urine. It is not approved in the US due to legitimate regulatory issues, but is used both in Europe and in China. The production and the purchase are quite expensive.

A small biotechnology company in the US has the technology to synthesize this drug without the use of pancreas or urine. This would be safer and cheaper. The Chinese company agreed to pay US $ 4.5 million to the US company after compliance with certain guidelines and then purchase the drug from the company at a fraction of the Chinese production cost. It was good business for the US company to get the main distributor to buy their drug without having to set up the sales process.

The US company spent a lot of money and met the guidelines to provide the Chinese company with everything it needed the contract. The Chinese company then basically said, "We need to see the actual process and cell lines to verify the process."

This essentially means: "Give us your intellectual property." With this knowledge, the Chinese company can would not have needed the US company anymore. When the US company had to tell shareholders that the deal had failed because the Chinese company had (rightly) advised buying Pfundsand, the stock price collapsed. The Chinese company knew that would happen and had bet that the Americans would fold. In this case this was not the case.

This happens several times a year with Chinese companies on a hundred different fronts. Standard procedure. For this reason, the US and other countries reject the theft of intellectual property by Chinese companies.

Let me go a little further. This is not just a widget or a better way to make a phone. This is a drug that, if introduced to the United States and industrialized countries, would allow much faster treatment of stroke victims and the saving of thousands if not tens of thousands of lives per year.

This is only a small part of The cost of theft of intellectual property in China.

Binary Thinking

I have long said that protectionism is the greatest threat to global prosperity. As we approached the 2001

recession, there were calls for trade protectionism. I wrote back then that the most destructive economic force that can be unleashed against the United States would be a serious trade protectionism.

Unfortunately, I have to say that again and again because politicians keep trying. What Trump is doing is not new. I wrote this in in 2007.

This is the growing mood in Congress for the passing of trade protection laws that could trigger a series of retaliatory actions around the world that could lead to a trade war, a la Smoot-Hawley in the 1930s.

Stephen Roach, chief economist at Morgan Stanley, writes a rather daunting description of his recent statement to the Senate Finance Committee. He noticed that he looked up as he entered the room and saw a picture of Senator Reed Smoot on the walls, as Smoot was a former chairman of the committee and the co-sponsor of the 1930 Smoot-Hawley Tariff Bill, which was largely responsible for the Great Depression.

At the hearing, it became clear that a bipartisan effort is preparing to pass laws that punish China for the large trade deficit we face with this nation.

As I recall It was Democratic Senator Chuck Schumer and Republican Senator Lindsey Graham, who were primarily worried about trade deficits and above all proved that neither knew anything about trade deficits. As we'll see shortly, trade deficits are not the problem. Fortunately, these efforts subsided, though I suspect they have helped launch the 2008 fireworks.

Politicians of all parties love free trade in theory. The benefits are obvious, but are also unevenly distributed. What I have to admit is a problem.

As long as we have sovereign national governments, goods across the border will face obstacles and delays. We can not have real "free trade" unless we remove the borders, which of course creates other problems. (Imagine the US as a free trade area: would we be almost as successful if we had to negotiate any small trade agreement between different states?)

Countries that trade with each other need fair and reasonable rules that govern this, and both The sides have to enforce the rules. Obviously, this is complicated in a modern economy. This is one of the reasons why trade agreements take so long. And of course there will always be arguments and arguments. But in general, open trade is possible, as we see in blocs such as the European Union and NAFTA. It works because all sites work to make it work.

Problems arise when a country disregards or selectively enforces the rules, as is the case in China. I have often talked about China's rapid entry into the advanced world economy. In less than a few generations, the subsistence economy became modern industry. This happened because the US and others had agreed to have their domestic companies deal with China on favorable terms.

China should reciprocate with similar terms of its own. It did, but it was not thorough or consistent. This is most evident in intellectual property. The Chinese government routinely extracts (or steals) trade secrets from foreign companies wishing to operate in China. Software code, drug formulas, and other information then arrive at Chinese companies that shamelessly copy them.

Again, this is nothing new. The same thing happened years ago when Chinese merchants pirated all kinds of western consumer goods. More recently, they have done the same thing for intangible technologies and put them into high gear. And the Chinese government does nothing about it.

Discussions to solve these and other problems have been unsuccessful. Beijing agrees but does not implement the changes, and does not succeed because the US and other Western democracies have these uncomfortable things called "elections." China's rulers know they can just wait until we get a new leader with different priorities.

The trade deficit is not a scorecard.

Give Trump the honor of at least recognizing the problem and doing something about it. Unfortunately, he has some strange ideas about what "winning" looks like. He also gets bad advice from so-called "economists" like Peter Navarro. I've deleted half of this letter, which was basically an exposé of Peter Navarro, whom I consider the most dangerous man in the Trump administration, if not the country. I know he has a Harvard Ph.D., but I think William Buckley was broadly correct in saying that it would be better to be run by 2,000 random names from the phone book than professors from Harvard.

We see this in the president's trade deficit obsession. He seems to think that it is a kind of scorecard. If the US buys more from China than China from the US, the US loses. That does not mean it at all. Both sides get what they want. China (or other exporters) gets cash, we get useful goods at fair prices (or we would stop buying them).

Better yet, since we have the reserve currency, we can pay these goods in dollars, which then return here, if the Chinese or foreign receivers invest in US assets, namely our treasury bills. That's good for Americans. In fact, it's critical. Our interest rates would be much higher and our currency much lower, if not the trade deficit, as US savers would have to cover the entire national debt. We almost do not save enough to do that.

And that's a very critical point. If other nations do not want your currency, you can not make trade deficits without serious economic problems. Valéry Giscard d & # 39; Estaing was right: the US has an exorbitant privilege to own the world's reserve currency.

If you have the reserve currency, you actually have to make shortfalls so the world has enough currency to trade. No country south of the Rio Grande has this privilege. The Europeans are doing that somehow. And the Japanese. The Chinese are working diligently to make the yuan a reserve currency, even though they are not there yet.

If the US has no real trade deficit, we will not have the reserve currency anymore. It's as simple as that.

Bilateral trade balances – Blowing dry?

Eliminating the trade deficit is not as easy as it sounds. Paul Kasriel sent a note this week, which I found convincing. Let me quote:

President Trump has partially imposed higher tariffs on US mainland Chinese imports to reduce the US bilateral trade deficit vis-à-vis China. The tariff policy of the president seems to work. As shown in Figure 1, the cumulative 12-month US trade deficit with respect to Chinese mainland goods (the blue bars) is decreasing. For example, with a record deficit of $ 419.5 billion in the twelve months to December 2018, the US trade balance deficit narrowed to $ 400.7 billion in the twelve months to June 2019.

Source: The Econtrarian

So far, so good for President Trump's desire to lessen the US bilateral trade deficit with China. But I think it is fair to say that the President believes that it is in the best interest of the US not only to reduce our bilateral trade deficit with China, but also our trade deficit with the rest of the world. And here it is not in the direction desired by President Trump. Figure 1 also shows the cumulative 12-month US trade deficit for goods with the world (red line). Although the bilateral US trade deficit with China has narrowed in recent months, the US trade deficit with the world has widened to a record $ 886.0 billion in the twelve months to June 2019. This seems to be a game of Whack-A-Mole. President Trump raises tariffs on imports from one country to reduce the bilateral trade deficit with that country, and our trade deficits with other countries are widening.

Again, the trade deficit is not a problem. But even assuming it is a problem, the tariffs will not solve it as long as the government continues to have large and growing deficits. Nobody in one of the parties intends to move towards a balanced budget at all. Therefore, the trade deficit will increase – with other countries, but not China.

The US uses the wrong weapon to solve the wrong problem, damaging our own economy. What would work better? I believe that Trump's decision (announced by the candidate Clinton) to cancel US participation in the Trans-Pacific Partnership was a mistake. This agreement would have created a huge free trade area as an antipole to China, and I think at least Beijing would have had to negotiate more honestly. TPP had more than a few issues, but they could have been fixed. But at best, it would have made it much easier for companies in the US to skip China for their supply chains.

The other TPP states continue to operate without the US and are now trading on more favorable terms. Thanks to TPP, Japan is increasingly importing food from Canada rather than the US.

Navarro does not seem to care, and Trump seems to agree. And to be fair, Trump had protectionist leanings long before his encounter with Navarro. Some of this could happen anyway. However, the combination of Trump and Navarro proves to be economically catastrophic.

A number of articles have indicated in the past five months that Trump's tax cuts averaged around $ 900 per taxpayer. The tariffs have already used up about $ 800 of this tax allowance, which essentially negates the benefits of tax cuts. JPMorgan said it again this week .

We spent two years digging a hole in China. Will we spend at least as many years refilling it? Trade wars are not easy to win.

Should we aggressively engage with China over its theft of intellectual property, its lack of fair competition, its mercantilist policies, and government subsidies for businesses? Absolute. And you can insert a few Expletiva, which were then deleted absolutely.

We can begin to conduct one-on-one interviews with companies that are clearly in violation of intellectual property and other WTO rules. Simply forbid them from doing business in the US or taking them bank privileges. The WTO should classify China as a developed market in the WTO, not as an emerging one. Just look at pictures of Beijing and Shanghai and dozens of other cities to see that China has emerged.

Tariffs harm US consumers. China does not pay these tariffs, and every economist (except Navarro) knows it.

Are you struggling with China? Damn Skippy. But do not let the Americans pay for it. If you want to wage a trade war, do not point the gun at yourself.

* This is an article from Mauldin's Economics & Thoughts from the Frontline, John Mauldin's free weekly investment and business newsletter. [19659053] This article first appeared here and is used by interest.co.nz with permission.

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