At this point, there’s no utility in trying to explain to anyone who still doesn’t understand how all of this works, that Donald Trump is mischaracterizing tariffs.
We’ll just say this one more time because it feels obligatory: Tariffs are a tax on consumers and they are enormously irritating for companies whose bottom lines are squeezed by rising input costs. That goes double at a time when wage pressures are materializing thanks to a tightening labor market. Management teams can either eat these costs to the detriment of profitability, or they can raise prices to consumers. Either way, it’s “not good, not good” – to use Trump’s own lexicon.
All of that is to say nothing of the deleterious effects of retaliatory measures taken by countries targeted by the tariffs. As we’ve seen, those tit-for-tat escalations and efforts at import substitution on the part of buyers abroad can be ruinous for some American businesses.
Trump doesn’t have a good grasp of macroeconomics (just ask Janet Yellen) which means he likely doesn’t understand all of the above, but perhaps more importantly, he doesn’t care.
The fight with China is first and foremost an ego thing for him and the longer it drags on, the more true that assessment becomes. Unfortunately, his base knows even less about economics than he does, and they love the idea of “getting back” at purportedly nefarious Chinese devils who, according to Trump, have been “ripping off” America for years.
And so, “tariff man” is free to fight this battle in perpetuity.
On Friday morning, hours after the US hiked the tariff rate on $200 billion in Chinese goods to 25%, Trump took to Twitter and unleashed a convoluted verbal barrage so long that it took 11 tweets to cram it all in. Here’s the full “statement” (and this is edited to remove duplicate tweets):
Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S………..The process has begun to place additional Tariffs at 25% on the remaining 325 Billion Dollars. The U.S. only sells China approximately 100 Billion Dollars of goods & products, a very big imbalance. With the over 100 Billion Dollars in Tariffs that we take in, we will buy………agricultural products from our Great Farmers, in larger amounts than China ever did, and ship it to poor & starving countries in the form of humanitarian assistance. In the meantime we will continue to negotiate with China in the hopes that they do not again try to redo deal! Tariffs will bring in FAR MORE wealth to our country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do. Our Farmers will do better, faster, and starving nations can now be helped. Waivers on some products will be granted, or go to new source! ….If we bought 15 Billion Dollars of Agriculture from our Farmers, far more than China buys now, we would have more than 85 Billion Dollars left over for new Infrastructure, Healthcare, or anything else. China would greatly slow down, and we would automatically speed up! We have lost 500 Billion Dollars a year, for many years, on Crazy Trade with China. NO MORE!
As ever, the English language is not a sufficient tool to communicate how absolutely absurd that is.
Trump continues to perpetuate a highly misleading narrative about “massive payments go[ing] directly to the Treasury of the U.S.” What he doesn’t mention is that China is a massive US creditor. America borrows from China, which means that, in essence, any measures the government takes to ameliorate the effects of the tariffs on Americans (e.g., farmers) are being paid for with borrowed money from Beijing.
Read the history of Trump’s farmer bailouts
But Trump took things to a whole new level on Friday.
Apparently, he is now trying to convince the public that what he will do is use 15% of what he clearly thinks is free tariff money and use it to buy agricultural goods from US farmers, which he will then ship to “starving nations”. That, despite the fact that Trump has, at various intervals, called a bevy of poor nations “sh*tholes“, banned immigration from countries suffering from humanitarian crises of one kind or another and, most recently, cut off aid to three Central American countries on the excuse that they are involved in a conspiracy to “invade” Texas (the House is currently trying to rescue that aid, by the way).
And it didn’t stop there. The balance of that tariff money, Trump claims, will go towards rebuilding America’s infrastructure – “or anything else.”
Of course, what would make a whole lot more sense, would be to just drop this exceedingly Quixotic tariff crusade and issue some ultra-long-term bonds. Because then, China would start buying US farm products again, and, having been spared the trade war, Beijing would also be happy to buy the debt, the proceeds from which Trump could plow into an infrastructure program.
This is all manifestly insane and underscoring the sheer, blatant stupidity of it all is the fact that some of Trump’s 11-tweet harangue were duplicates. Realizing that, the president went back and deleted the entire string, only to start tweeting it back out again in truncated form. He added the following:
Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch! In the meantime, China should not renegotiate deals with the U.S. at the last minute. This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with “murder!”
Nothing further.
Not to mention tariffs are, at least initially, inflationary. You would think that a stable genius that wants a rate cut would know that.
“mischaracterizing”. He’s just plain lying!
“America borrows from China”
That is not accurate. The US trades dollars for goods as per the current account, and China keeps those dollars in their Treasury account at the Fed. If the US was borrowing from China (instead of trading dollars for goods and services), it would be taking a loan in Yuan…similar to Argentina taking an IMF loan in dollars.
China won’t repatriate all of the funds it holds in their Treasury account because the conversion to Yuan would cause the Yuan to rise against the dollar and make their exports less competitive. The US can access all kinds of stuff by creating the dollars at almost no cost. The higher the value of the dollar, the more stuff they can buy. They are not borrowing dollars from China. China is leaving the dollars they earned in the US.
“They are not borrowing dollars from China. China is leaving the dollars they earned in the US.”
In what form are they “leaving the dollars” in the US? In treasuries right? That’s exactly what the article means, that is the loan, that is America borrowing from China. Second, Who do you assume that China after selling their treasuries will convert their USD to RMB? They can convert them to EUR YEN to Gold to whatever else.
lol. no. America is literally borrowing from China, A.I. What do you think China’s FX reserves consist of? China owns $1.13 trillion of US debt across bills, notes and bonds.
there’s more here: https://heisenbergreport.com/2018/01/11/morgan-stanley-says-bonds-are-not-in-a-bear-market-no-word-on-men/
China exports to the world and therefore needs Treasury (savings) accounts around the world, and needs to watch the value of the RMB against its other major export destinations also, although the dollar’s senior reserve status makes it the most important.
The US does not NEED China’s Treasury balance in order to pay for whatever it is buying. It is choosing to pay interest on the deposit, partly, if not mostly, to create demand for the dollar–which allows it to bring more dollars into existence (to spend) without causing inflation.
i am not 100% sure you understand how all of this works, but that’s fine.
I am not 100% sure of anything. But I am quite sure that the US can create dollars (does not need the old dollars it created earlier and are now held by the Chinese) and that there is a demand for these dollars which will moderate inflation.
Not to be redundant but all this is playing out in a Geopolitical format (chessboard).. The belt and road initiative and before that The BRICS concept were all attempts to break the stranglehold of the US on the whole of the worlds financial mechanism dictated by the Reserve currency status of the Dollar. . The goal is an alternative system whereby this sanctions and tariff related phenomenon is not the primary tool of International Politics and Existential Crisis for Random selected Nations… Short term pain and long term gain will inevitably make it’s way onto the playing field to reshuffle the entire Deck of cards. I do agree that Trump and his base are a misguided lot facilitated by the media and the very system it damages , on purpose I suppose. Look and see the sudden attempts at the Political destabilization of the worlds primary energy producers all in consortium and tell yourself this is going unnoticed by other than our mainstream media…
I don’t know. As long as the United States has the most liquid financial markets in the world, Treasuries are the default ‘risk-free’ asset, oil transactions are denominated in dollars, dollars are the premier global reserve currency, and the American government dominates S.W.I.F.T., China has a long belt and road to hoe.
I agree with that Harvey, and the short term pain will at some time try to hatch the long term gain part.. They are looking 20 or so years ahead… If a war is averted , then the mechanism to alter the Financial playing field gets to be 20 years or more. It is a do or die situation to maintain control thus the attempt at monopolization of energy resources you are currently seeing. All growth is temporary say the Historians….
After the “truth” finally came out about the state of negotiations, the expectations for what is possible from a trade deal have to be scaled WAAAAAYYY back.
Yeah you would have to think so ….but look at the market front run the next delectable tidbit of news .. The can just got kicked down the road…again.. Trump Put they are calling it !!