Capitalism needs a strong social safety net to survive.

Conservatives need to learn the difference between socialism and social democracy. Because if they continue to denounce as socialism any attempts to make life less nasty, brutish and short, more people will start to think that socialism is okay.

“The power of the State should not be used for its own sake, but as a way to give people the security they need to pursue the lives they choose.” The Economist

And as I’ve written before, this is how to make globalisation, free trade and free markets work – through redistribution. Not through a wholesale retreat from globalisation. And certainly not through the government taking ownership of the private sector. But by taxing it appropriately so that everyone gets to enjoy the benefits.

Otherwise, capitalism’s disenfranchised and dispossessed masses – the ‘losers’ from unfettered free markets – will become too great in number, and will fight back against the system, without necessarily realising that the problem is not globalisation, but the distribution of its benefits. As The Economist stated “… by insuring people against some risks of creative destruction, welfare states would bolster democratic support for free markets” (at first glance, counter-intuitive for an institution that has traditionally been very much in favour of free markets and State inaction, but upon closer inspection, actually consistent).

It seems there is specific terminology to help with this distinction – ‘socialism’ vs. ‘social democracy’. Socialism if you want the government to seize the means of production; social democracy if you just want them to redistribute the benefits more fairly.

And that’s an important distinction if we want people to realise the difference between countries such as Denmark and Venezuela, both of which conservatives dismiss as ‘socialist’. This is only true of Venezuela, which ranks 179th globally in terms of economic freedom and is currently suffering through widespread starvation and hyperinflation. Denmark is ‘social democratic’ – a strong free market economy that ranks 12th in economic freedom, but with a government that imposes an average tax rate of over 50%, and therefore redistributes significantly without actually owning the means of production.

The result – compared to the US, Denmark has higher life expectancy, more vacations, higher happiness and life satisfaction rankings, lower income inequality, only marginally lower GDP per person (largely due to the aforementioned vacations), and – contrary to conservative ideology that social welfare disincentivises work – higher working-age employment rates (11 places higher than the US in OECD rankings!). There’s probably also something to be said for the fact that two-thirds of working Danes are unionised.

Of course welfare states can be reformed – especially in light of increasing demands on them from ageing populations and immigration. This could include gradually raising retirement ages and some restrictions of recent immigrant access to social welfare, or to immigration itself. But their effectiveness in terms of reducing poverty and inequality while maintaining incentives to work, is far more important than their size.

If conservatives really cared about avoiding the evils of ‘socialism’, they wouldn’t use the label on countries like Denmark. And they wouldn’t use it to describe any efforts to make life in the US less nasty, brutish and short. As Paul Krugman eloquently puts it, if you spend all your time dismissing health care, social safety nets, child care and disability support as ‘socialism’, people will eventually (and incorrectly) decide that socialism is okay.

Don't be fooled by the strong US growth figures this quarter.

This is the growth Trump is boasting about. Hardly spectacular, especially considering the future he is mortgaging and the reputational capital he is squandering to achieve it. Just remember:

·         GDP is naturally volatile. Obama achieved growth this high too – around four times. So individual quarters mean virtually nothing;

·         Soybean exports jumped an annualised 3,000% in the race to beat retaliatory tariffs this quarter (adding around 0.6% to growth figures), and will probably plummet soon thereafter;

·         Similarly, a lot of other companies stockpiled raw materials, intermediate goods and finished goods before tariffs kicked in;

·         Any ‘sugar high’ from the tax cuts will be short lived with long term consequences for government debt and economic inequality;

·         Wage growth is still stubbornly flat.

I know this sounds pessimistic, but I also know Trump is going to try to claim vindication from these numbers. And I’m terrified people will believe him.

The trade war is not working. And the binge the US is on right now is leading up to a whopping great big hangover. Stock up on aspirin.

https://www.washingtonpost.com/opinions/the-economys-great-that-doesnt-mean-trumponomics-is/2018/07/26/2327dd6e-910c-11e8-bcd5-9d911c784c38_story.html?noredirect=on&utm_term=.3c018d4f94fa

Another reason this trade war is not “good and easy to win” - China has a lot more recent experience in cheating.

Trump thinks he has the upper hand in a trade war with China because the US imports so much more from China than China does from the US. So he has so much more scope to impose tariffs than China does. But overlooking the fact that bilateral trade deficits are NOT inherently a problem, Trump is overlooking three key facts:

1.       China has significant potential for non-tariff barriers against the US companies in China including unplanned inspections, delays in approving licenses, M&As and financial transactions, additional regulations, and other administrative headaches, etc. 

2.       If Trump keeps alienating his allies in the EU, Canada and Mexico, there are a whole bunch more US exports they can slap tariffs on too (including countries with whom the US has bilateral trade surpluses and therefore, according to Trump’s own logic, strategic disadvantages); and

3.       As I’ve recently come to realise, currency manipulation. 

China hasn’t officially been listed as a currency manipulator for years now (despite Trump’s claims to the contrary). Officially they now essentially have a market-based exchange rate. But this could easily change. They have precedent. They have a history of undervaluing their currency so it wouldn’t be hard to do it again. And this would offset any impact of US tariffs on Chinese exporters. 

For the US to do the same, Trump would have to successfully pressure the Federal Reserve to start targeting the exchange rate instead of the inflation rate - a drastic and frankly unthinkable change in the Fed’s mandate (far more drastic than for China’s central bank). No president was supposed to even THINK it, let alone say and do it!

An independent central bank is a key and crucial institution in the US’s economy (with global impact greater than any other). It has been demonstrated that politicians simply can’t be trusted with control over interest rates and the supply of money. So presidents have traditionally respected their independence. Most were too afraid to even COMMENT on Fed policy, lest it be construed as undue political influence over an independent body.

Not Trump though. He’s criticised Fed decisions publicly both before taking office and this last week.

But even if he is reckless enough to try taking back the Fed, China already has a head start. You really want to challenge China to a game of “let’s manipulate the markets”? Girl, please!

China is harder to beat than you think, Trump. And the way you’re treating your friends, they may not be on your side either. And you can’t beat the whole world!

It's high school economics, stupid!

Aww, poor baby Trump. You’re upset interest rates and the US dollar are rising, which will also ironically worsen the trade deficit you have been bemoaning. If only someone could have warned you this would happen. Oh wait ... a high school economics student could have told you it would happen.

If your policies do what you want, higher interest rates, a higher US dollar and a worse trade deficit are EXACTLY what we could have told you would happen:

·         Any short term stimulus from your income and corporate tax cuts, in an economy already near full employment, will drive household and corporate expenditure, thereby pushing up inflation and increasing pressure on the Fed to increase interest rates. It’ll also push up the US dollar;

·         Income tax cuts will also drive import demand, thereby worsening the trade deficit;

·         Corporate tax cuts will also drive foreign investment, thereby driving up the US dollar, hurting exports and worsening the trade deficit again; and

·         Your trade war, to the extent it hurts the EU and China more than it hurts the US, will drive up the US dollar relative to the Euro and the Yuan, hurting exports and worsening the trade deficit AGAIN.

And this is ignoring the long term disaster your tax cuts will be for the budget and income inequality.

So many people could have told you this would happen. And so many people did!

By your own design, you literally brought this on yourself. Or ... you’re literally admitting your policies didn’t work.

And if you’re thinking of interfering in Fed policy ... think harder! You think the stock market and the business community is upset with your trade interference? Try upsetting the centre of the financial sector and arguably the most powerful institution on the planet.

Seriously, I dare you. I double dare you!

Brexit is Britain's own personally-inflicted trade war - but different.

Some have wondered why estimates of the cost of Brexit to Britain are comparable to (if not worse than) estimates of the cost of an all-out global trade war, even though the predicted reductions in trade from Brexit are far smaller.

Well it’s quite fascinating (for a nerd like me, anyway). An all-out global trade war costs the world in terms of higher tariffs, less trade, more expensive imports and less efficient production. Brexit costs Britain though, in terms of red tape.

You see, the EU is a customs union. This means that goods don’t have to pass a customs inspection once they are inside the EU. Once they reach Rotterdam, they’re in! This makes trade soooooo much easier. The UK auto industry for example, can engage in what is known as ‘just-in-time’ production, where their inventories are kept at relatively low levels to save on storage costs. This is because they are virtually guaranteed quick imports of parts from Europe when they need them. There are no customs inspections along the way to slow them down. Compare this to NAFTA. While it is a free trade agreement that generally imposes no tariffs, goods from Mexico still have to pass a customs inspection before going into the US. This is to make sure that they are, in fact, Mexican, and not say, Chinese goods trying to avoid US tariffs.

This is why Britain’s relationship with the EU is one that could simply not be replaced by a free trade agreement. And certainly not by a free trade agreement with the US[1] (despite Trump, the Saboteur in Chief’s, suggestions to Theresa May). And a customs union with the US, given the fact that it would render Brexit completely obsolete anyway[2], wouldn’t be as good as one with the EU either. So it is a huge advantage for Britain to be part of the EU.

But upon Brexit, Britain will leave the EU customs union. And while they won’t face massive increases in tariffs (as would occur in a trade war), these sudden customs impediments are even more problematic and costly. At least with a trade war, the government earns some tariff revenue.

This is why Theresa May is now trying to do a ‘soft Brexit’ or BINO (Brexit In Name Only), where Britain still remains within the customs union. Though ironically, as Paul Krugman notes:

“...that, of course, ain’t much of an exit: Brussels will still set UK trade policy, except Britain will no longer have a vote. So what was the point of Brexit in the first place? Good question. Too bad more people didn’t ask it before the referendum.”

And this is why Brexit could actually be worse for Britain than an all-out global trade war.

Because tariffs are one thing, but red tape is another.

---

[1] Given the distances involved and the already low tariffs with the US.

[2] Because of the vastly greater size of the US, it would involve Britain effectively giving Washington complete control over its policy – precisely Britain’s objection to the EU and Brussels.

The new post-US world order.

I warned (obviously I’m not the only one) that Trump’s alienation of friends and undermining of Western alliances would only serve to help China and Russia. And now this.

Trump has been openly hostile to NATO, the WTO, the EU, the G7 – the very foundations of the post-WWII world order that the US helped set up. Not to mention his hostility towards NAFTA and his abandonment of the TPP and the Paris Accords. Trump’s friendliness to Putin (and dictators in general) will only embolden Russia’s ambitions in Crimea, Ukraine, and their interference in Western elections. And Trump’s abandonment of the TPP set back what would have been significant progress in reigning in China’s influence and their unscrupulous trading practices[1] – something Trump himself has bemoaned[2].

Now China is on a mission to portray themselves as champions of free trade and guardians of the multilateral trading system, rather than the US:

“We must promote trade and investment, liberalisation and facilitation through opening up – and say no to protectionism,” President Xi Jinping at the Global Economic Forum in Davos, Switzerland.

They have been promoting new closeness with Japan and India (relationships that have historically not been without strain), even formerly fierce rival in manufacturing Mexico. And Russia is on the way towards its first free trade agreement with South Korea.

Chinese state media is already promoting the idea that the EU is on their side, calling China and the EU “natural partners [who] firmly believe that free trade is a powerful engine for global economic growth [and] should resist trade protectionism hand in hand”. In public comments in Berlin this week, Chinese Premier Li Keqiang and German Chancellor Angela Merkel both expressed their joint commitment to free trade. China is even offering to open itself more to the EU in exchange for the EU issuing a strong joint statement against Trump’s trade war. Maybe even launch joint action against the US at the WTO.

Joint. Between China and the EU. Against the US.

If China wanted an ally to its claims in the South China Sea, its questionable trade practices, its environmental standards (or lack thereof), or its positions on human and labour rights, this would be a fantastic way about it.[3] As Catherine Rampell of the Washington Post said:

“China has correctly been accused of stealing U.S. companies’ tech, copyrights and other IP to get an edge in trade. Now they’re borrowing one of our best foreign policy ideas, too: banding together with allies to punish a cheating, trade-obstructing bully … the strategy Trump ditched that actually could have curbed China’s bad behaviour … China is now trying to use against us.”

And then there is the 16-party Asian regional trade deal which would cover half the world’s economy. And, unlike the TPP, the US has no say in these negotiations. But Beijing does.

Trump thinks that because the US imports more from China than China does from the US, this gives him more scope for tariffs and more leverage. But in addition to the non-tariff barriers China has up its sleeve (see my previous blog), the US is less than a quarter of the global economy nowadays. And if China manages to obtain the cooperation of Europe (the largest trading bloc on the planet!), and the rest of Asia … game changer!

This is the one time in decades when we really need Western allies to be united against the rise of China and its unscrupulous behaviour, and the strategic undermining by (and ambitions of) Russia. And our most powerful player is the Siberian Candidate – and he didn’t even have to be brainwashed.

---

[1] Think “counterfeited US luxury goods, bootlegged Hollywood films, fake Apple stores, trade secrets pilfered from cutting edge US tech companies. It forced US firms to hand over their technology if they wanted to operate in China.”

[2] And no, tariffs are not a suitable alternative to the coalition of countries under the TPP that would have been far more effective at pressuring China to behave. Especially when it’s actually legal under WTO rules for China to retaliate against tariffs.

[3] Again, it really doesn’t matter that the EU has shown great reluctance towards such an alliance. The swing in the global balance of power is now clear. All because the US has given China an opening that never should have existed in the first place.

We should have left it.

When Trump first announced his steel and aluminium tariffs, I wrote that we should let him get away with it. Don’t retaliate.

To be clear, letting Trump ‘get away with it’ would only work assuming Trump really was trying to extract concessions from the rest of the world; that threatening to destroy Western alliances and the modern world order was just a risk of his approach, but wasn’t, in fact, the entire point. Hey, economics is built on crazy assumptions.

Anyway, I knew non-retaliation wasn’t a realistic hope – politics is rarely rational. And even to the extent that our retaliation would hurt us too, it wasn’t surprising that we refused to let it slide.

The EU, Canada, Mexico and China (among others) all announced retaliatory tariffs[1]. And these tariffs have been far more strategic and effective than Trump’s. Not only did Trump’s tariffs hit intermediate goods used by other US industries (thereby directly costing the US more than it gained by an employment factor of 16:1), we targeted US exports in very politically sensitive areas[2].

To the extent that it’s possible, we’re winning.

But Trump hasn’t backed down. On Friday 6^th of July at midnight, $34 billion of new tariffs on China came into effect[3] – and China retaliated with an equivalent amount at 12:01am[4] (they were prepared). Consequently, a massive soybean shipment from the US didn’t make it to China in time to beat these new tariffs.

This means the Trump trade war now covers over $100 billion worth of trade. But it won’t stop here.

Trump has threatened to retaliate against China’s retaliation against Trump’s ill-informed retaliation against China (right?) with a further $400 billion+ of tariffs. To which China has vowed to respond potentially on close to $100 billion more US goods, plus a series of additional non-tariff barriers[5].

Trump’s also pushing further 20% automotive tariffs, which could exceed $300 billion. And in response, the European Commission has listed $294 billion worth of US exports that could be subject to further tariffs – a whopping 19% of the US’s total exports.

Yep. Using these estimates – just from announcements already made – the Trump trade war could escalate to over $1 trillion (yes, trillion).

Add to this the fact that Trump has ordered the drafting of a bill that will effectively give him the authority to abandon the WTO entirely and impose whatever future tariffs he wants without congressional consent[6]. Furthermore, I haven’t even mentioned what Trump might do to NAFTA, which alone covers $1.1 trillion of trade between the US, Canada and Mexico.

Unfortunately, I can no longer see a way that this will end well (short of impeachment or a landslide victory for the Democrats in the mid-terms, neither of which I expect will happen).

So why, if the rest of us are ‘winning’ this trade war against the US, won’t we … you know … win?

Because Trump will never back down. The rest of us may be playing this game better than Trump, but that only matters if Trump is willing to concede defeat. He won’t. So even if we’re hurting the US more than they’re hurting us (and more than our own retaliation hurts us), Trump won’t concede. We’re now stuck in a staring contest with a man for whom his own people’s suffering isn’t enough to make him blink. He doesn’t care how many of his own people he hurts – as long as he wins.

Which means the only way out is to continue the trade war and completely destroy the existing world order, or spectacularly back down from our current retaliations – a move Trump will take as a massive victory (again, assuming breaking up the West isn’t the entire point).

This doesn’t absolve Trump. He’s still an economically-illiterate wannabe-dictator whose destroying decades of international relations for no discernible benefit (except to Russia and China). All of his tariffs are first and foremost, hurting the US itself. But if we’d just let him get away with his silly steel and aluminium tariffs (maybe thrown in another concession or two), he could have taken his little win and gone home. Now it’s too late and the only options I foresee are widespread pain or (if it’s even possible) an even more smug Trump. And who knows what he will feel empowered to do next?

All because we couldn’t swallow our pride.

---

[1] Specifically (though not exhaustively), to date, there have been tariffs announced in retaliation to Trump on: Iowa pork; Kentucky bourbon; Florida orange juice; Wisconsin-manufactured Harley Davidsons and yoghurt; Ohio washing machines; and US-made sunscreen, jeans, footwear, ketchup, blueberries, cranberries, peanut butter, rice, soybeans, beer kegs, autos and metal products.

[2] See Footnote 1. While many of these are key exports in States that voted for Trump, he is not the only target. Retaliatory Canadian tariffs on US yogurt – which only amount to $3 million worth of exports – mostly come from one plant in Paul Ryan’s native Wisconsin.

[3] And like the ill-conceived steel and aluminium tariffs, Trump’s latest tariffs will probably hurt the US and its allies more than China. They will actually mostly miss Chinese companies and instead hit US and other non-Chinese companies operating in China. For example, non-Chinese companies operating in China supply 87% of the computer and electronic products affected by these tariffs – Chinese companies only 13%. And they again significantly hit intermediate goods rather than finished goods, forcing US companies further down the supply chain to suffer (including Trump's beloved manufacturing industry). This ironically will hinder any corporate intentions (if any) to increase investment in response to Trump’s corporate tax cut. Some companies are even already relocating to countries like Vietnam and Mexico. And to the not insignificant extent that these tariffs filter down to US consumers, this will offset the minor benefit they received from Trump’s income tax cuts.

[4] China’s 12:01am retaliation covered things like soybeans, cars, port, dairy and other goods, disproportionately made in Trump Country.

[5] China can’t match the US’s $400 billion (even if you overlook the damage this would do to Trump’s own people) because it only imports around $135 billion from the US each year. But given how much more strategic China has been with its attacks (and how strategic Trump has not been), they are likely to make it count, along with many other non-tariff retaliatory measures to make up the difference, including making it more difficult for US companies operating in China with unplanned inspections, delays in approving licenses, M&As and financial transactions, additional regulations, and other administrative headaches. Furthermore, China is compensating its own companies caught up in the trade war, and encouraging their businesses to shift their demand away from US products like soybeans and automobiles – all of which will lessen the US’s impact on them. Nor does China’s government face mid term elections in November which would potentially hinder their ability to retaliate.

[6] The unlikeliness of Congress actually passing this bill is almost irrelevant – Trump’s motivation and direction is clear, and there are an infinite number of other ways he can continue in this direction.