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The Path From Trade War to Economic Collapse Is a Short One Lombardi Letter 2018-07-12 10:45:16 economic collapse trade war China tarriffs The sound of gunfire has not gone off. The weapons of choice in a trade war are tariffs, and the only result they can produce is economic collapse. Analysis and Predictions 2018,International Markets,News,Stock Market,Stock Market Crash,U.S. Dollar,U.S. Economy,U.S. Politics,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/07/iStock-910139426-150x150.jpg

The Path From Trade War to Economic Collapse Is a Short One

Path From Trade War to Economic Collapse

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Trump’s Trade War With China Raises the Ugly Prospect of Economic Collapse

The United States and China have started a war. As with all wars, there will be victims. This one is no exception; economic collapse will occur before anyone can claim victory.

The sound of gunfire has not gone off yet, because the weapons of this war are trade tariffs. But the global economic hegemony is at stake.

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President Donald Trump’s threats against German cars and European foods was just the sideshow. Trump is using the threat of sanctions against products from other countries—that, let’s face it, Americans want—to extract concessions out of them vis-à-vis NATO and defense spending.

The real target of the trade war is China. The risks are bigger for the United States however, even though China did not fire the first shot.

Trump did.

Pearl Harbor in Reverse

The United States has engaged in a kind of “reverse” Pearl Harbor moment. In 1942, an ultra-nationalist Japanese leader launched an attack on the United States against advice from top officials that Americans would react—fiercely.

The Japanese dared, lost, and ended up waking the sleeping giant that would become the world’s sole superpower by 1990. The stakes this time are devastating in different ways.

Economic collapse doesn’t sound as bad as a world war with thousands dead and wounded, as well as destroyed infrastructure to contend withespecially because U.S. soil was never attacked in a major conflict.

But economic collapse means poverty, joblessness, and misery. It targets the very core of what it means to be “free” in the modern sense.

In other words, economic collapse represents nothing short of an existential hazard. Moreover, just as in the 1930s, economic collapse often leads to dangerous military conflicts.

Nobody should make the mistake of underestimating China’s ability to damage the United States, physically, socially, or—it goes without saying—economically.

Trump understands this—his advisors will have warned him. But many of his voters, and not without some justification, see China as the source and core of their economic woes.

It’s always easier to blame an outsider for big problems rather than focus on insidious factors operating under your nose.

The President has been playing his part in ensuring the Republicans win the mid-term elections, securing control of both Houses of Congress. This would all but guarantee that Trump’s plans pass with little obstruction.

China Is Not Pope Francis

China will obstruct. Certainly, Americans can be sure of one thing: China is not the Vatican of Pope Francis. It will not turn the other cheek.

A year ago, few could have foreseen that Trump would unleash the trade restrictions he hinted at during the 2016 campaign quite as stubbornly as he has.

China itself was likely taken aback. Trump, more of a poker than a chess player, always gave the impression of bluffing. Rather, he has shown a remarkable—if potentially harmful to wider U.S. interests—capacity to take risks.

Perhaps, this is the “black swan” that many have been trying to identify: Trump’s propensity to gamble—the essence of the “Trump factor.”

He has cast the first stone. Future historians will be able to claim that the trade war began in July 2018. But they won’t be able to tell or even imagine how it will end. In between, the prospect of an economic collapse looms large.

Trump’s first set of tariffs came into force on July 6, 2018, targeting Chinese goods to the tune of $34.0 billion.

Don’t Let the Number Fool You

The net worth of some individuals may have desensitized most people from just how large a sum $34.0 billion is. Suffice it to say that most billionaires own “assets.” Their value is not liquid.

In trade terms, however, $34.0 billion represents a significant number of products, involving thousands of workers.

Before Beijing even had a chance to respond—and you can bet the response will be as harsh or harsher—the Trump administration unleashed new tariffs. It intensified the dose to the tune of $200.0 billion worth of tariffs.

There’s no backing down at this point.

Trump Leaves China No Choice

China will be forced to respond—in a much harsher way. China blames Trump for having tampered with its effort to snatch global leadership away from the U.S.

Of course, while accusing China of abusing its economic power, Trump omitted to remind Americans that the United States has pursued military and financial dominance for years.

Trump’s measures could send the world into chaos.

The full Chinese retaliation has not come yet. So far, there are only hints of what shape it will take.

That said, American farmers will be taking a hit and you can expect your local gas station will be stocking more ethanol enhanced fuels.

Beijing has scrapped orders for over a million tons of U.S. soybeans due in August. It amounts to $14.0 billion a year in losses that many of Trump’s own supporters will have to endure. (Source: “North Dakota soybean processors hit hard by tariffs as China cancels orders,” CNBC, July 11, 2018.)

Soybeans are just the beginning. Expect the storm to worsen. China’s Ministry of Trade has described Trump’s moves as “bullying.”

The effects will blow up into possibly the biggest trade war in history. China will doubtless fight back. The fact that Chinese officials have not disclosed how they intend to fight back should be seen more as a dire warning than as evidence of weakness.

Trump plays his hand and takes bold moves that few expect. But China plays the long game. Its weapon of choice is patience.

If Trump hopes China will suddenly be buying more American products to secure a better deal, he should work on his patience as well.

Prepare to Say Goodbye to Disposable Income

American consumers—especially those in the lower classes—better become more patient and stoic as well. Just about many of the average products they buy, from tires to appliances, will cost much more.

Shopping malls can expect to see fewer patrons. Job losses in the retail sector will be inevitable.

Even Trump supporters will admit that the U.S. economy will suffer consequences as the trade war heats up. Nonetheless, while the optimists see short-term pain, many pessimists predict no gain at all in the long term.

If consumers will see higher prices, it won’t be long before a recession hits. Tariffs, in the words of Thomas J. Donohue, U.S. Chamber of Commerce President and CEO, are taxes that “raise prices for everyone.”

The End of Disposable Income

Disposable income has driven the U.S. economy for the past few decades. Stoics, monks, and Sufi mystics may welcome the blows to consumerism, but the global economy has relied on it to keep the machine moving.

Trump may be hastening its end, but he has no substitute to replace it.

Moreover, China could start dumping U.S. Treasuries, putting more pressure on the Federal Reserve to increase interest rates. Now, that would truly serve a near-death blow to consumer spending, triggering a recession.

So far, Wall Street has not reacted. Economic growth numbers remained optimistic. That’s good enough in the minds of investors.

However, the more likely explanation for the financial markets’ silence on the trade war is that investors have not yet grasped the extent of the potential damage it will cause.

Chinese investors are reacting with fear already. The Chinese stock exchange dropped some 20% since the start of 2018, as Trump fired the first salvos of the trade war since being elected—the first salvos of economic collapse, as it were.

The yuan is falling against the dollar, “artificially” putting pressure against gold prices—yet also reducing the effects of the tariffs.

Like all wars, the ones of the trade variety are easy to start. But they’re also harder to win. Those who start them may score big points in the battles, but will still fail to win them.

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