Posted on 08/04/2019 7:35:33 PM PDT by Oscar in Batangas
This is a 5-minute read via a series of 40 tweets (It's his style of presentation)
He explains how tariffs have been used (and abused) since WW-2, and how OUR POTUS is the only guy big enough and brave enough to remedy the present imbalance.
It is pretty excellent as a an explanation of how this is a fine weapon for the trade wars with China and Europe.
So:
"Attention WalMart Shoppers"
Your EBT card will buy almost as much stuff as it did before. (It's quite OK to thank Your President)
Just click on the source link to go to the string of tweets
Tariffs = pressure or leverage
Here is the text of the thread:
1) If China doesn’t pay the tariffs, then why does China attempt to evade tariffs through transnational shipping?
2) Of course China (or EU, or anyone else) pays the tariffs. That’s how the process works.
If you want to deliver $1 million in exported goods with a 25% tariff, you pay $250,000 as a U.S. duty.
YOU, the exporter, pay the duty upon arrival at port.
3) The question accurately framed then becomes: does the exporter then pass on that additional cost to the importer (the U.S. company)?
Right now, the answer is no. China is not transferring the vast majority of the tariff cost to the arrival price of the product.
4) If the arrival price did increase, then yes it is possible that importer (distributing the product) may pass along the price increase to the wholesaler or ultimately retail consumer.
But that’s not happening.
5) Fox News (Goldman Sachs) graphic actually proves that point.
Notice they use an *index. Not an actual price % increase. But regardless, the graphic shows a 103% index on tariff goods. Or in simpler terms a 2% increase in price.
[*On indexes 101 is even]
6) Steel (25%) and Aluminum (10%) tariffs have been in place since 2017. 25% tariffs on $250 billion in Chinese imported goods has been in place since June 2018 (over a year).
Yet the prices on those specific tariff goods has only gone up in the USA by 2% net upon arrival.
7) Overall U.S. inflation (consumer price index) is 1.5%
The tariff goods are 2% realized, and non tariff goods are defationary (actually lower prices) by approximately 1%. [We are also importing deflation]
8) The difference between 25% tariff being paid by the exporter (china), and only 2% increase in price felt by the importer (U.S.) is the amount being offset by the exporter (China).
In this example China is paying a 25% tariff and absorbing 23% to keep prices low.
9) So you can clearly see that China is paying the tariff, AND not passing that along to the importer.
Why and How would they do this?...
10) The Chinese government absorbs the tariff in two ways.
First, by directly subsidizing the industry affected by the tariff. The CCP or Bank of China literally pays or underwrites the export cost to the corporation.
11) The second way is by devaluing their currency... which makes their stuff cheaper when pegged against the Yuan.
Dollars, with higher value, buy more stuff backed by Yuan.
It costs the importer in the U.S. less dollars to buy the same amount of stuff from China.
12) Devaluing local currency, which naturally inflates the value of the dollar, is a way for export dependent nations to offset tariffs and keep prices static.
Note: The EU is now doing the same thing; for the same reason.
13) The trade is done in dollars, therefore the same dollars buy more product. It’s not difficult to see.
However, as an outcome of the devaluing, the non-tariff exported product also costs less. It takes less dollars to buy the non tariff goods also.
14) The import of non tariff goods at lower prices, due to a stronger dollar, is how we are importing deflation.
As long as there is a trade deficit with the country doing the devaluation, we will import deflation on non tariff products.
15) Because this financial trade process is outside the reach of the U.S. Federal Reserve; meaning the trade exchange is external to the U.S. domestic economy; the Fed is unable to influence imported deflation/inflation by raising or lowering lending rates (interest rates).
16) It is this dynamic that is causing the International Monetary Fund to increase its projections of the growth of the U.S. economy, and downgrade the projections of those global manufacturing nations who are dependent on the U.S. Market.
17) When anyone says U.S. Consumers pay for tariffs, it’s just a flat out lie.
The exporter pays the tariff upon arrival in order to be allowed to offload product into the U.S. market.
In the current situation China is absorbing 23% of that 25% tariff and NOT raising the price.
18) China and EU have devalued their currency in an effort to block the impacts from President Trump & the ‘America First’ trade policy.
Because those currencies are pegged against the dollar, the resulting effect is a rising dollar. IMF not happy.
19) In essence, the globalist IMF is now blaming President Trump for having a strong economy that forces international competition to devalue their currency.
20) That’s the stupid hypocrisy of global banking outlooks. They make a decision to devalue their currency, which causes the dollar value to rise, and then turn around and blame the U.S. dollar for being overvalued.
21) In the bigger picture this is why President Trump is the most transformative economic President in the last 75 years. The post-WWII Marshall Plan was set up to allow Europe and Asia to place tariffs on exported American industrial products.
22) Those tariffs were used by the EU and Japan to rebuild their infrastructure after a devastating war. However, there was never a built in mechanism to end the tariffs…. until President Trump came along and said: “it’s over”!
23) After about 20 years (+/-), say 1970 to be fair, the EU and Japan received enough money to rebuild. But instead of ending the one-way payment system, Asia and the EU sought to keep going and build their economies even larger than the U.S.
24) Additionally, the U.S. was carrying the cost of protecting the EU (via NATO) & Japan w/ our military. The EU/Japan didn’t need to spend on defense because the U.S. essentially took over that role. That military role, just like the tariffs, never ended. Again, until Trump.
25) The U.S. economy was the host for around 50 years of parasitic wealth exfiltration, or as most would say “distribution”.
[Note I use the term *exfiltration* because it better highlights that American mfr corporations paid tariffs to access EU and Asia markets]
26) President Trump is the first and only president who said: “enough”, and prior politicians who didn’t stop the process were “stupid” etc. etc.
Obviously, he is 100% correct.
27) For the past 35 years the U.S. was a sucker to keep letting the process remain in place while we lost our manufacturing base to overseas incentives.
28) The investment process from Wall Street (removal of Glass-Stegal) only made the process much more severe and faster. Wall Street was now investing in companies whose best bet (higher profit return) was to pour money overseas.
29) This process created the “Rust Belt”, and damn near destroyed the aggregate manufacturing industry.
30) Fast forward 2017 through today, and POTUS Trump is now engaged in a massive and multidimensional effort to re-balance the global wealth dynamic.
By putting tariffs on imports he has counterbalanced the never-ending Marshal Plan trade program and demanded renegotiation(s).
31) Trump’s goal is reciprocity; however, the EU and Asia, specifically China, don’t want to give up a decades-long multi-generational advantage. This is part of the fight.
32) One could reasonably argue that China’s economic rise happened inside this period, and as a consequence they have no comprehension of an economic history without the institutional advantages.
——End——
Although I support tariffs on China for strategic and economic reasons, I believe there are some errors in his argument - but that the essence of it is correct, and a great insight. The Post-WWII trading system was designed to allow other countries to develop, based on systematic trade advantages over US producers, and that has long outlived its appropriateness.
Importers are the ones who pay at the port, not exporters. Large Chinese businesses receive their goods at the port, and pay the tariffs, but others are shipping directly to US customers, not shipping to their own US subsidiary. So it is mixed, as who actually cuts the check. His point that consumer inflation (actual passing on of costs to consumers) has been negligible so far. A big reason for that is that the Chinese companies have largely been discounting the cost of the tariffs to their US customers - in effect paying the tariffs, even when shipping directly to a US customer.
25% tariffs on $250 billion of Chinese imports have nor been in effect since June of 2018, only since June of this year 2019. So we have not seen their full effects play out yet.
It takes seconds of research to show that this isn't true.
The US International Trade Administration says to companies wanting to export:
"The tariff, along with the other assessments, is collected at the time of customs clearance in the foreign port. Tariffs and taxes increase the cost of your product to the foreign buyer and may affect your competitiveness in the market."
Is the author lazy or dishonest?
Steel (25%) and Aluminum (10%) tariffs have been in place since 2017. 25% tariffs on $250 billion in Chinese imported goods has been in place since June 2018 (over a year). Yet the prices on those specific tariff goods has only gone up in the USA by 2% net upon arrival.
By the Administration's own admission the tariffs levied to date have been designed to not directly hit consumer goods. The costs are being borne by manufacturers and passed along to consumers, but the tariffed raw materials usually represent a small percentage of the total cost of the end consumer product.
The next round, however, is going to directly hit consumer goods which is why you see the market reaction that you do.
The difference between 25% tariff being paid by the exporter (china), and only 2% increase in price felt by the importer (U.S.) is the amount being offset by the exporter (China). In this example China is paying a 25% tariff and absorbing 23% to keep prices low.
Simplistic and wrong.
Some of the increase is being offset by a weaker yuan and some by Chinese exporters, but a lot is being absorbed by US manufacturers. Just look at the earning statements from Caterpillar, Deere, etc. Their costs for raw materials have gone up and they haven't been able to pass all of it along to consumers, hence lower earnings.
Trump’s goal is reciprocity; however, the EU and Asia, specifically China, don’t want to give up a decades-long multi-generational advantage.
So why kill TPP which made huge strides towards reciprocity for the participating members?
The analysis also completely ignores the billions in costs and disruption caused to US producers by China's retaliatory tariffs.
So far, China and Chinese businesses have absorbed the great bulk of the tariffs.
However we are just two months into the really serious tariffs , so we have yet to see for sure how they will work out in practice.
As you point out, this last big batch of tariffs (June 2019) were on intermediate goods, so there were more links in the chain to eat the added costs, before the final price to the consumer (although the numbers so far do show the Chinese side absorbing the great bulk). The next batch, starting in September, is going to be much more on finished goods for consumers, where costs would be expected to be passed more directly to consumers. Computer tablets and smartphones are expected to be hardest hit.
These new tariffs are expected to be more inflationary - but the other tariffs were widely expected to be more inflationary, than they have turned out to be so far. The Government can see in detail the data from the first two months of the quarter. The facts that Fed then cut rates, and the Administration went ahead with new tariffs, strongly indicates that the reports showed very little negative impact on US prices. Certainly the June reports, which have been publicized already, showed negligible inflation, below targets.
The inflationary effect of these new tariffs on consumer end goods however, should be strongly dampened by the fact that their level (10%), matches the recent devaluation of the Chinese currency. So largely, they should balance.
Another factor, is that these products have had a longer warning time, that tariffs were really coming. There has been a scramble to find alternate suppliers, and for suppliers to ramp up outside of China in preparation. It will have to be tested, to find out just how agile and prepared they are, overall.
I still expect that this new package of tariffs will be increased again around January, so that tariffs on China will be 25% across the board. I also think it likely that China will devalue its currency again to absorb most of it, probably going to eight to the dollar.
The relocation of production out of China should seriously pick up steam through the second half of this year. With that withdrawal will come increasing financial pressure throughout the Chinese economy and Government. The risk of things starting to break will grow. Next year, with 25% across the board tariffs, I expect to see some breaks, unless the communists cry uncle, and agree to a deal (which of course, they will intend to break as soon as possible, in every way possible). Knowing who he is dealing with, I doubt that the President really expects a fair deal, and is prepared to break the communist’s economy.
One serious risk, is that an implosion of the Chinese economy could drag down the global economy next year. That would particularly hurt their Asian neighbors, and would drag our growth rate down somewhat as well (but our Fed has more room to cut or inject liquidity than our major competitors do).
Foxconn’s cancellation this week, of the largest investment (almost $9 billion) in production facilities in the history of Guangdong Province (where the Shenzhen Special Economic Zone is located), indicates that the really major moves are beginning. There is a big supply chain associated with just that facility, which was supposed to open in just a few months.
Like moving production facilities out of China, preparing for a financial crisis in China is something that professionals have been discussing for years, as their imbalances have grown. So it will be far from a total surprise.
I think the risks to China's economy are overstated.
Overall, exports account for about 9% of China's GDP (US exports account for about 8% of ours), and less than 20% of those exports are to the US.
Tariffs can certainly inflict pain but don't pose an existential threat to China.
Now if we had a coordinated trading bloc, like the TPP members working together, we might have some real leverage.
I'm afraid we've miscalculated the pressure we can bring to bear. As someone said this morning om CNBC, China isn't some concrete supplier from Queens that Trump can just squeeze until he gets what he wants. They have the world's largest economy in terms of purchasing power parity, 1.4B people, a much higher growth rate than the US and they're a proud sovereign country with time on their side.
The problem is the pain isn't limited to China. That's why the Dow is down 750 points right now.
China's a problem and hasn't played fair on trade, but I keep going back to my main question; what's the goal of the tariffs and are they effective?
“I think the risks to China’s economy are overstated. Overall, exports account for about 9% of China’s GDP”
It is certainly possible that they can manage/manipulate things within these margins. It became almost conventional thinking, that because of China’s centralized control over the levers of the economy, they were effectively immune to the business cycle, or even any practical limit on their ability to simply endlessly print money and accumulate debt.
Part of the current equation, is that China has already driven such tools to historically dangerous levels. So they are going into this in a precarious situation. They are carrying very high debt loads, combined with the fact that there is extensive fraud and mal-investment behind that debt. They are primed for a world class debt crisis/bank failures (they are unlikely to allow widespread domestic bank failures - they would likely just fiat money into them, but foreign debts could be defaulted).
By the numbers, they are also at high risk of a housing crisis.
Their ability to stimulate their economy by injecting more liquidity into the banks, or by Government spending on infrastructure (which they have relied on to a massive degree), have steadily declined over the years. They have been getting less and less of a response for every dollar spent. Those primary tools of their steady expansion are increasingly less effective, and both are under a massive and growing overhang from past abuse.
Devaluing their currency risks reigniting the capital flight of a couple of years back, which could further devalue their currency. When currency and stock market collapses were occurring a couple of years ago, the Government stepped in to manipulate those major markets, using their large reserves of foreign reserves. Although large, they are not unlimited. Hitting those limits would take events out of Government control in a fundamental way.
China also needs foreign reserves to pay for their imports. They need about a half trillion in foreign reserve accounts, just to keep the wheels turning for port clearance of shipments at current levels. On a net basis, they run a trade deficit with the rest of the world combined, excluding the USA. They are highly dependent on energy imports.
Without a big enough trade surplus with the USA, they will likely be on a downward trend on their foreign reserve balances. They have about $3 trillion, giving them roughly $2.5 to fight with. The external debt of the Federal Government is about $2 trillion overall. Local Governments and businesses have extensive foreign debts as well.
If the economy simply loses a few hundred billion per year on the trade balance, with no other shocks, they should be able to manage for years, until circumstances change. Should multiple major demands on foreign reserve (like supporting collapses in the currency and stock markets) hit at the same time however, they are within striking distance of some major economic failures.
Another factor, is the supply chain behind the exports. There is some multiplier of the export value, to determine the total contribution to the economy. Even down to the level of the noodle shop near the factory, when exports contract, supply and support chain activity contracts as well. The Chinese economy, compared to global norms, is highly dependent on export of manufactured goods.
During boom times, many Chinese firms were able to grow rapidly, through the equivalent of juggling a lot of credit cards to pay each other off. If the torrent of real earnings dries up, many of those firms could collapse.
“what’s the goal of the tariffs and are they effective?”
I believe the real goal of the tariffs, is to fundamentally restructure the huge and complex relationship between the USA and China. There are several things I think the Administration hopes to achieve (multiple goals)
In summary, it would be to reroute the cash and technology flows structurally, to strengthen the USA and weaken China.
An economic divorce is a main goal, simply to reduce (eliminate) our growing dependency on China, and to develop a more reliable supply chain, in the event of a conflict.
I think there is also a goal to reduce the funding flow that is expanding the military power of the communists, who explicitly identify us as their main military target, in their internal doctrine. They have been specifically growing a military tailored to confront the USA.
Even if they manage the loss of exports to the USA (a reasonably likely outcome), at least they will have less money to go around, and their rivals (such as India or Vietnam - and the USA) will have somewhat more.
Although we don’t have a TPP, we do have a regional consensus on the threat from China, and most are more than willing to cooperateto take business from China.
P.S. Looks like China devalued today, to crack 7 to the dollar, and will halt agricultural purchases. Maybe we will get an earlier interest rate cut than expected. We are in the real trade war now - the major moves.
Yeah, and we'll see how the American people feel about the pain we're about to feel when the goal is just to hurt China.
“Yeah, and we’ll see how the American people feel about the pain”
That (and buying off key American powerbrokers) is what China’s strategy relies on, to make this country their vassal, and take our wealth for their Party elites.
If we are unwilling to pay any price at all to maintain our independence and freedoms, then they will be able to buy them cheaply. They had been making great progress - would have likely matched our real economy after four years of a Hillary Presidency. Now the trend has reversed.
Man, you guys are GOOD!
Thanks for the amplification of the original string
(I think the writer was summarizing one of the Sunday talk show episodes)
“Man, you guys are GOOD!”
Yeah, Semimojo has been great about reasoned and civil exchange of ideas - a real treat after some of the other folks.
Thanks, Semimojo.
Fun, isn't it?
“Fun, isn’t it?”
We are going to have some awesome real world excitement as grist for our mill. Plenty to keep armchair analysts engaged.
The economic equivalent of a Godzilla fight.
I did not expect it to speed up as quickly as it seems to have recently. I think that some folks in Beijing are really feeling some heat.
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