The China Tariff: An Assessment of the Trump Policy

With the president’s recent trip to Asia and upcoming meetings scheduled with President Xi of China, voters hear many expressions of concern in the popular press about recent tariffs and a potential “trade war.” Legitimately, they wonder what possible effects these tariffs, which depart from long standing policy, might have.

We are told that tariffs are a regressive and deleterious “tax.” We hear expressions of worry about lost “exports.” We might well, as concerned citizens, ask, “How might import tariffs and Chinese reprisals affect the economy, GDP and me? Will this stall recent economic progress and affect momentum?” Voters may ask, “Is this an opening for the Democrat Party and a threat to the President’s re-election chances in 2020?” As businesspeople, and as voters, how should readers assess the policy?

The purpose of this article is to provide, from the point of view of an international banker and business person, with more than 30 years’ experience in Asia (a great deal of that time spent in China) an easy-to-understand analysis upon which to appraise the current policies. ?We will look at the tariffs in the light of their historical context and according to rational principles of international trade and conventional economic theory. To facilitate understanding, the article begins with a simple analogy to set the stage for the discussion and help to orient readers who may be unfamiliar with some aspects of basic economic theory underlying this analysis. ?From there, it proceeds to address the historical context within which the question of the bilateral trade relationship between China and the US is situated. This assessment argues that the China visited by Nixon in 1972 was an economic disaster and a failed state. It argues that US policy makers, at the time, were either only dimly aware, or completely unaware, of two significant realities. The first was the extent to which the rot had spread within the Chinese economy, and that economy’s proximity, to utter collapse. The second was that the ensuing transition, and US policy, contributed together to entrench within China its single party system that was no longer ideologically socialist, but rather, essentially fascist and mercantilistic, and that the primary? purpose of decision makers within the resulting oligarchy became nothing more than the survival of that oligarchy and the institutional power structure which supported it.

This oligarchy essentially was in the process of defanging the society’s most ardent Maoist elements, and had, by 1976, left the “Chairman” himself fundamentally little more than a figure head. ??The seeming “miraculous” success of this fascistic oligarchic power coup over the ensuing 40 plus years ultimately has revived Chinese imperial ambitions for dominance in the Western Pacific and led the way for the autocracy of the Xi regime.? Xi’s power base, in the view of this author, nurses an aspiration that extends beyond the traditional hegemonic ambitions of China’s leaders, and has given way to a vision for global hegemony. These latter aspirations are reflected in the country’s Belt and Road Initiative, which has been used to absorb much of the nation’s hyper–surpluses in short term money supply and in excess productive capacity. It is also reflected in actions which have raised international concern in South Asia, the South China Sea, the Sea of Japan and in the Western Pacific, over the past 50 plus years. ?This article further holds that China’s intermediate and longer term ambitions are overtly articulated in the current leadership’s policy statements, and in Xi Jinping’s China 25/China 49 initiatives. The part of this discussion which reviews this history concludes that, while China has been playing a long game of resurgence, whose trade policies are tightly coordinated with geopolitical objectives in the region and globally, US administrations and policymakers, in both political parties, since Nixon, have misunderstood the commitment of the Chinese to the oligarchy’s self-interest and China First intentions. Instead, US administrations have acted on so-called “liberal” policies, positioning the US in the role of benign hegemon, believing that bilateral trade should be used as a tool to cajole the Chinese oligarchs, in order longer term to promote Western values of free and “fair” trade. The hope, expressed repeatedly in the formulation and execution of trade policy, from Gerald Ford to Barack Obama, has been that, as “free and open” trade would change China’s economy, Beijing’s politburo would relax political and social conditions within the country, and address persistent, glaring human rights abuses. China would become, in the words of cold warrior Ronald Reagan, a full-fledged member of the “community of nations.”

In the author’s opinion, this misunderstanding has led to complacency, which has contributed:

A. To China’s reluctance to play by the rules agreed, first, under application of Most Favored Nation status, accorded during the Carter administration, and, later, under the agreements involved in China’s accession to the World Trade Organization, in 2001;

B. To China’s willingness to flout UN, IMF, World Bank, WTO, US and other international resolutions about its trade and human rights abuses and military buildup in the South China Sea and Western Pacific, occasioning national security concerns which have loomed ever larger, without being seriously challenged by US or international policy makers;

C. To significant vulnerabilities in the US role in intermediate-to-long-term economic and military leadership, the country’s national security and its independence, largely caused by gross deficits in trade and the US current account, in balance of payments distortions accumulated over decades, and in military preparedness.

***

To present a prism of understanding to the reader regarding these issues and the current administration’s tariff policy with China, after the above contextual and historical discussion, this paper proceeds to an examination of currency movements, the role of interest rates and the potential impact of tariffs as a tool for advancing US interests and improving trade and financial balances. The paper takes up conventional objections to the imposition of tariffs as distortionary, creating artificial impediments to trade, as a regressive tax upon communities in the host country, as an inflationary measure, and as ultimately deflationary, with potential depressive effects. Contrary to the conventional wisdom expressed by many progressive economists and the popular press, an argument is advanced that the president’s instincts on the subject are correct. Properly applied, tariffs can be effective as a tool for promoting the interests of the US, and to address long standing trade imbalances, especially in strategically important sectors such as agriculture, high technology and defense, and as an expedient to address long term stresses and attacks on the currency.

This is especially important at this juncture, in the shadow of an accumulated overhang of long standing bilateral financial ledger imbalances which, in their own right, present potentially serious threats to the interests of the US. These are, rightly, very worrying to the administration, whose America First policy is adamant about the need to protect US long-term interests. In this respect, despite the departure they represent from long standing policies, timed as they are for the current moment, trade sanctions, most overtly expressed as tariffs, prove ultimately to be?in concert?with the hopes of successive US presidents beginning with the progressive administration of Woodrow Wilson, whose stated goals are ultimately ?to promote world peace and harmonious trade by redressing gross inequities internationally.? In this sense, ironically the Trump policies in fact may be seen to redound to the best interest not only of the US, but also of China and the rest of the world trading community. The paper concludes that, by applying these unexpected measures, Trump is, indeed, acting in the current of long standing US strategy. His policy ultimately promotes the role of the US as a "benign hegemon," and the president is, in the final analysis, acting in the tradition of Teddy Roosevelt (“speak softly, but carry a big stick”), FDR, Lyndon Johnson and even Ronald Reagan. These presidents all expressed commitments to keeping the peace and fostering an international regime based on agreed premises of multilateral trade conventions (so-called “international law”) articulated even during GAO testimony related to the petition of China to join the WTO in the first place: ensuring, as was stated at the time, that nations “…abide by a set of rules and obligations that promote trade and increase transparency and fairness in the world trading system.”

Finally, In making these arguments, this article adds a short analysis of possible real world effects on the trading partners.? I suggest that the US can effectively assert its advantages both to accomplish short-term goals, and to address longer-term structural inefficiencies in its own interests. The resort to these powers, in the opinion of this author, suggests that the Trump administration tariffs, as part of an America First Agenda, represent a welcome and long overdue policy shift. They present an important check to the unbridled pursuit, by China, of its hegemonic objectives, while establishing a bulwark from which to defend, and pursue, the long-term institutional and international interest of the US and of its allied trading partners who may be less well positioned to challenge what China’s aggressive actions on their own.

****

#?Money and the Balance of Payments

Let’s start with a brief, very simple and common analogy in the study of elementary economics and money. ??Rather than use Adam Smith’s analogy of the pin factory, we would ask the reader to imagine the world as something like a large “local” community. On one side of this community there is, say, a shoe maker.? On the other side, is a family which needs shoes. Logically, if the parents want their children to have warm feet, they have either to make the shoes themselves, or buy them from the cobbler. This simple transaction essentially can e used to illustrate the rudiments of international trade. In the aggregate, all bilateral trade transactions, netted against one another, can be represented conceptually as similar to a buy-sell arrangement between our imaginary shoemaker and a local family.? ?One country exchanges “money,” in the form of currency or specie (gold or silver), in return for net increases in goods and services it requires. ?Just as, when the family surrenders “money” to buy shoes, the family’s stock of this commodity, money, is reduced in exchange for something of value which the family needs: shoes.? Not surprisingly therefore, bilateral trade results, most often, in the surrender, by one country, of monetary resources, of one kind or another. Simply put, as the family’s money account goes down, in exchange, its “shoe” account goes up. Similarly, as international trading transactions and currency flows proceed, at a basic level, some counties’ “money” accounts are ?reduced in exchange for net increases in goods and services consumed. Without complicating the issue overmuch, or yet entering into complex discussions of “free trade,” competition and “advantage,” for the purposes of this discussion, at this point, it is most important to see that the family’s money is something the cobbler wants and needs, while the cobbler’s shoes are something that the family wants and needs. As ridiculously simple as this illustration is, it provides profound insights for understanding what is happening in the global macro-economy, between and among nations, and specifically between bilateral trading partners, like the US and China. In the aggregate, when one country manufactures and sells more goods and services whose values exceeds those sold to it by its trading partner, a so-called bilateral “trade account” is established. The “money” account of the net exporter increases, while the “money” account of the net importer decreases. In its very simple form, we call this a “balance of payments.”

Now, think of the profound implications when there are significant imbalances in this process. What happens, for example, if our imaginary mom and dad do not have sufficient “money” to purchase needed goods for the kids? Either the family foregoes the enjoyment of those goods, or it borrows, to obtain needed funds.? These borrowings might be either from lending institutions in its market, or, perhaps, in the form of a credit account directly with the supplier.?

Now, if credit is not available in the market, or extended by the supplier, and the needed goods are a matter of life and death, panic can ensue, and the family either resorts to extreme measures or it may suffer dire consequences. The same can be true of trade relations between and among nation states. When a nation’s aggregate resources are insufficient to cover necessities, it will run a deficit against which it too must borrow. When the state of a nation’s finances become so out of balance that creditors begin to believe there is diminishing hope of receiving returns on extended credit, funding markets can dry up and dire consequences can ensue. Orderly international trading can break down, and a vicious cycle of high interest rates, devaluations, and episodes of inflation can result. Weimar Germany and Zimbabwe more recently, are classic, if extreme, examples adduced to illustrate what can happen. In the case of the former, Germany’s imbalances, and the pressures generated by the need to pay WWI war reparations, in the absence of gold reserves required to do so, eventually occasioned default internationally, which ultimately led domestically to hyperinflation.

The US does not appear, at the moment, at risk of suffering the fate of Weimar Germany or of Zimbabwe. Nevertheless, a long history of trade and current account imbalances, and a persistent and growing debt, make the need for careful management of financial accounts all the more important, and highlight the wisdom of addressing, whenever possible, long-standing structural imbalances which will, eventually, lead to future problems. The avoidance of such consequences appears to be a fundamental goal of Trump’s America First policies. Persistent dislocations occasioned by America’s “generous” and self-abnegating trading policies over many decades, are perceived by supporters of the administration to be the cause of secular (long-term) trade underperformance, and ensuing consequences for US labor markets, since at least the early 1990’s (and probably since the G.W.H. Bush administration). Trump and his advisors seem to believe that the movement of capital stock outside of the US, the loss of manufacturing infrastructure, job losses, recurring high levels of unemployment, under-employment, low labor participation rates, stagnant real wages, and the reduction of capital deployment to improvement in machinery and equipment are, in significant measure, due to poor trade policy.

The tariffs on China are intended as one measure in an effort to address these imbalances. After reviewing important historical context, needed to understand why we have arrived at the current state of affairs, we will return to the question of how these tariffs have become an important tool aimed at ameliorating these negatives.

**

#?Nature and Imbalances

Let us begin to consider that context. In an ideal situation, to make markets work well, everyone would strive to be “fair,” and trade would move to “equitable” balance.

If by “balance,” in this context, is meant “fair and open trade,” free markets and prosperity for all market participants, then the reality is that, in recorded history, markets have, never yet, been balanced. Rather, in the “real” world, which we experience every day, international trade efforts trend to something more like approaching “equilibrium,” to use be a better term. ?The resultant global reality might be construed analogically as something like the operation of the Second Law of Thermodynamics in a closed pneumatic system. As in such a system, the forces governing bilateral trade operate according to the principle that, as imbalances build (pressure in one part of the system increases), they must always, at some point, return to some kind of equilibrium. Stresses in the market, sooner or later, will always be resolved – by market forces, by negotiation or by conflict. As markets depart from hoped for ideals, and as participants pursue their respective self-interests, imbalances and stresses ensue. Managers of trade policy? can attempt to stave off “negative” immediate consequences of these stresses by resort to “artificial” measures, manipulating economic factors by fiat, rather than allowing market forces to resolve of their own accord.? They often do, and, as so-called Austrian School economists (such as von Mises and Hayak) might predict, these measures will invariably lead to imbalance and stress in other areas of the system (not unlike a closed pneumatic system in which exercises of increased or decreased pressures will instantaneously result in changes in the aggregate pressure of the system as a whole).? In an economy like China’s which, to use a technical term, is mercantile, and command oriented, severe imbalances can accumulate for many years before an earthquake occurs. But stresses are almost always resolved, and one never can precisely predict when a crack may occur.

As suggested, ideals (in this case, the ideal of a “free and fair” international trading system) don’t really manifest in the real world. ?Paradigms or models of such ideals might sometimes be understood to exist simply to show how far off practitioners are from the mark. That does not mean that people and governments should not strive to achieve improvements. Indeed, as Jordan Peterson has remarked, the overcoming of chaos in any society is an achievement for which we should be profoundly grateful.[1] This was, of course, the hope of many 18th century theoreticians and later students of , many of political economy, who may be said to reflect the aspirations to which many of the US founding fathers ascribed, as witnessed in Madison’s discussion of the system of checks and balances, itself an echo of Montesquieu:? ?“It might be a reflection on human nature that such devices should be necessary to control the abuses of government.[2] In a reflection upon this there are important insights when it comes to thoughts on economics and trade policies:

a)????? A fundamental reality of all economic systems is that people and markets are never fully “fair.” Economic players at all levels always seek their own self-interest – that is the impetus of the requirement for “checks and balances.” The consequence is that, international trade as a matter of reality, despite platitudes of the UN, the WTO, the IMF and others, is not always governed by the rule of law, or of “fair” play.

b)????? Participants will always “game the system” to accomplish their own interests and the interests of their constituencies - especially when the “trading system” involves unequal geopolitical regimes, disparate societal circumstances, and differing values; and

c)????? For very many reasons (differing demographics, for example, or differing historical, social, economic and political realities), productive capacity and the capacity to trade for it, are seldom “balanced” among trading partners.

As in nature itself, imbalances, therefore, do prevail, and that is where problems arise. It is necessary, if trading partners and international organizations wish to come to grips with, and correct, these imbalances, that anyone who tries to ameliorate them, and make trading more “fair” and transparent (the ostensible object of the WTO), should be well advised to understand the reasons they exist in the first place. This is true also of the student of such matters, and, for the purposes of this article, for its readers.? This is because these imbalances are, more likely than not, the key drivers of dissatisfaction among players and of many a so-called, “trade war.” An understanding of this context in the US-China bilateral trade relationship, therefore, is essential.

**

#?The Benign Hegemon

Let’s look at little more closely t this context.? World governments, in the aftermath both of WWI and WWII, set for themselves the task of managing trade in a ?fashion that they hoped would be more “civilized” (as Wilson would have hoped un the proposed “League of Nations”), and in an effort to avoid the perils of more open conflict.

At its base, this has been the object not only of the post WWI world alignment, but of all post WWII trading regimes of all forms: GATT, and its successor WTO, as well as multilateral agreements such as the EU, ASEAN or the NAFTA). Indeed, the intellectual underpinnings of these efforts belong to an unbridled faith in a “humanist” creed foregrounding a faith in the goodness and so-called “brotherhood of man.” ?At the risk of digressing too far afield in constructing context for the discussion which follows, I hope the reader will forgive a fairly quick digression.? I suggest it is important to see in this multilateral aspiration not only a sane and salutary effort to avoid hot wars, but also a recent, post 19th century, phenomenon grounded in scientific positivism, naturalism and materialistic atheism (think Wilsonian Progressivism, Marxist, Leninist and Maoist utopianism– all of which share a belief in the perfectibility of man – in contrast to Montesquieu’s and the founding fathers’ perhaps more realistic assessment of a need for practical measures of checks and balances due to humanity’s concupiscence and never ending pursuit of self-interest[3]).

In that vein, and in its pursuit of an anti-Marxist political world order, the US, especially since fully donning the mantle of world’s preeminent hegemon in the aftermath of WWII, has, on balance, taken leadership in the pursuit of policies promoting orderly world trade. The country, in this capacity, has subsidized, to the tune of hundreds of billions of dollars, multilateral, supranational trade, regulatory bodies and defense pacts, while eschewing (for the most part) temptations to exert what might otherwise be considered its prerogatives of imperial power.[4]

In contrast to much naysaying by critics in the academy, who espouse revisionist, post-modernist, or Marxist interpretations of history, the reality of the US’s serious assumption of the role of benign hegemon is more than substantiated by a balanced reading of the record. This reality is very important in order to understand what has happened in the bilateral relationship between the US and China.? A grasp of this reality is critical for any assessment of the historical, economic and philosophical underpinnings of the current state of trade relations, or in order to appraise the urgent need to review policy more than 45 years after Nixon’s historic visit to China. I think this will help the reader best to understand what is happening in the Trump “America First” doctrine, and in the administration’s trade stance vis à vis China.

**

#?The Hundred Years of Humiliation and China’s Revolutions

To see this most clearly, it is necessary to dig deeply into the historical context. Despite popular denials among certain academics, examples of the US role of “benevolent hegemon” abound. They are far too numerous to cite in their entirety. However, adducing here several examoles should help to orient the discussion. To cite a few:

·???????? The forgiveness of a great portion of the debt of belligerents after WWI;

·???????? The underwriting of the Marshall Plan after WWII;

·???????? The reconstruction of Japan under MacArthur;

·???????? The hundreds of billions of dollars of foreign aid and disaster relief over decades since WWI;

·???????? The creation of, and financial support for, an alphabet soup of supra-national agencies of international, regional and global trade management and governance.

All these initiatives, and many others, have been secured by the largesse of the US. This is evinced in the underwriting of the World Bank, the IMF, NATO, the UN, the OAS, ASEAN and the WTO among others, and, extremely important in the context of this discussion, the underwriting and management of Bretton Woods, and successor arrangements which have established a more or less stable, if imperfect, system of currency exchange.? US bilateral relations with China over the past 85 years fit snugly into this complexus. This may seem counterintuitive at first, but a bit of historical reflection will help to place the matter in historical relief.

The finances of China came out of WWII, and the subsequent fight for dominance between the communists and the Kuomintang, in a very difficult state. Chiang Kai-Shek had fled to Taiwan with nearly all the country’s gold. Meanwhile, silver reserves were exhausted by huge military expenditures in the existential fight with the Japanese, and, by Chiang’s effort against Mao. The difficulties facing China’s fiscal condition were exacerbated by a nearly 2 decades’ long episode of global monetary turmoil, as countries around the world abandoned the gold standard in the early 30’s. The final blow was administered inadvertently when US policy whipsawed the silver-based Chinese currency precisely when Nationalist policymakers were frantically asserting measures to stabilize, and counter the effects of nearly worldwide demonetization of gold. FDR and the Democrat dominated Congress forced through efforts artificially to “do something about silver,” to appease voters and senators in Western mining states. Meanwhile, domestically, war, mismanagement, incompetence, bad harvests, and just plain bad luck, left starving populations exhausted and ready to receive the Communists with open arms.[5]

Enter another key player in this saga, the Russians. After the victory of the Bolsheviks, the Stalinist tyranny rose to ascendancy in the so-called Soviet Union. (A “union” in name only, of course.? For younger readers, in reality this state was really a dominant Russia bolstered by client states administered by Soviet puppets.) With the Nazi’s dispatched, and despite his earlier alliance with the Axis powers, Stalin saw a chance to extend the influence of the Soviet empire by wheedling territorial concessions from the victorious Allies. In the aftermath of war, and under the pretext of offering temporary succor to vanquished foes, whole countries were ceded by the Western alliance to Stalin and his minions. East Germany, Latvia, Lithuania, Estonia, Hungary, Czechoslovakia, Albania, Bulgaria and Poland were annexed. Meanwhile, countries which were too large, too expensive or simply too intransigent (Yugoslvia, for example) were given the benefit of Russia’s “protection.” China, and later North Korea, were among these. Mao, once the Nationalists were thrown out, was only too happy to accept this “protection,” in order to solidify a hold on new found power, and under its auspices, and, in view of a host of political blunders by Western diplomats and bureaucrats, he and the Chinese Communist Party were able to consolidate control and entrench their rule.

The Cold War made China almost entirely inaccessible to the West. It was not until Nixon’s visit in 1972 that an aperture was attained and “open dialog” commenced. In intervening decades since, despite protestations of a will to “reform,” the Chinese, first a “client” state of the Soviets, and later an independent “dragon,” have pursued aggressive policies hostile to the West. This hostility was engendered, not least perhaps, because of the annoyance on the part of the CCP aimed at Chiang’s and the Kuomintang’s absconding, with all of China’s gold, into Taiwan; and equally annoying, until 1978, because Taiwan, not the People’s Republic, was a recognized member of the UN, under the protection of the US.

To summarize a very long story, for 20 bloody years, first under the flag of the Comintern (a union of various national “communist” parties), and later as an actor in its own right, China, despite crushing misery, poverty and starvation at home, pursued an active external policy of adventurism and interventionism. In the name of the glorious and inevitable Marxist Global Revolution, and despite appalling costs in blood and treasure, The People’s Republic was in reality hemorrhaging resources in support of instability, war, strife and insurrection throughout South Asia and beyond. North Korea, Vietnam, Cambodia, Laos, Burma, Philippines, all were largely financed by China and often involved Chinese military personnel and aid, which further depleted Red Chinese coffers. Mao’s commitment to the spread of world Communism (first in support of the Comintern’s aims – and largely under the protection of the USSR, and, after Mao, for the CCP’s naked self-interest), and the leadership’s obsession with Taiwan, were so intense that Beijing, and Mao personally, took an active role, directing military operations for millions of its own troops during the North Korean struggle and in Vietnam and Cambodia. Meanwhile, leadership ruthlessly oppressed, murdered and enslaved the Chinese population domestically, losing an estimated 45 million people to mass death by starvation during the “Great Leap Forward,” and millions more during the purges of the Cultural Revolution.[6]

At the dawn of the 1970’s, financial chaos and social rot spread throughout the mainland. Protracted foreign adventurism, combined with the ravages of the Great Leap and the Cultural Revolution, left the economy in a state later described by “reformist” leader Deng Xiaoping himself as “pauperism.”[7]

**

#?“Only Nixon could Go to China”

It is unclear if the dimensions of the staggering ruin prevailing in China at the dawn of the 1970’s were fully understood in Washington or by anyone in the West. In the late 60’s, Johnson, and later Nixon, had enough troubles prosecuting an increasingly unpopular war in Vietnam, and dealing with domestic convulsions of their own.[8]

What is clear is that Mao and his associates were ready to take a less confrontational role by 1971, and the “Great Leader” himself took a keen personal interest in orchestrating the details of an eventual summit between himself and the US president in 1972. ?Of course, this was not solely due to the economic situation. (From all evidence, it appears Mao saw death and abnegation as necessary expedients in the accomplishment of the goals of the Revolution[9]). Mao and associates were also now in competition with the Russians and were fighting border wars with them.? They were of course seeking any advantage they could find, and were pragmatic enough even to seek help by pursuing suggested in overtures from the West, and especially from the theretofore dreaded US. So, when pragmatic realities asserted themselves, Mao and the Party did what they felt necessary.

To be sure, by this time, though Mao was an icon, he was now, in the view of many in the Central committee, an exhausted resource. He could not be destroyed, to be sure, but he could be used. By 1972, the emerging new “communist” leadership had vivid memories of societal stresses consequent to the expenditures of the Korean War, and were deeply concerned about unsustainable costs associated with the country’s continuous commitments to Vietnam. They had little appetite for another all-out proxy war with the US. To them it was abundantly clear that it would be counterproductive to expend more of its already scarce resources to honor promises made earlier to Ho Chi Minh. Indeed, by the time of the Christmas bombings of Hanoi, in the same year as Nixon’s Beijing visit, as Kissinger recalled, the Vietnamese, without more generous involvement from China, were now “on their knees.”[10]

China’s readiness to meet, was also motivated by their aforementioned break with the Soviets. In addition to the border conflict, the Chinese were livid that Moscow had backed their enemy in its conflict with India. Matters had only deteriorated through the rest of the decade of the sixties, until, as reported by MacMillan.[11] the Soviets were preparing for all out war.[12] In any case, Beijing had ample reasons to seek?rapprochement?with the US, and Mao, despite grave illness, was extremely content with the results of his meeting with Nixon , as reported by his personal physician in a 2010 biography[13].? In this context, Kissinger’s overtures to Beijing to allow a state visit by Nixon were accepted readily, and with the virtual collapse of support from Beijing in the offing, Le Duc Tho, Vietnam’s chief “negotiator” was willing to sign the Paris Peace Accords the following year.[14]

“Reform” minded leaders, if by reform one means willingness to sacrifice the goals of the movement for the expediency of the moment, especially Zhou Enlai and Deng Xiaoping, took advantage of the situation. More ideological elements in the Central Committee, despite their hatred of Zhou, capitulated or were quietly purged.? Nixon’s visit, and later, the shocking resolution of the Tiananmen Square incident (1989), are pivotal in this story, and to understanding the historical underpinnings of the current bilateral trade relationship.

Nixon had two big geopolitical goals. One was to create a wedge between Moscow and Beijing that would allow Washington Cold War leverage in Moscow. The other was to strike at the head of the serpent coiling around Southeast Asia by pacifying leadership in Beijing. Historical hindsight has shown that, had Watergate not intervened, his efforts on both fronts may have been spectacularly impressive.[15] For China’s leaders, meanwhile, the?rapprochement?was a much-needed breath of fresh air, a face-saving lifeline for a failed state. As mentioned, Mao, at the time, was debilitated by poor health.[16] ?He was only four years away from an ignoble death and was a leader in name only.[17] The “reformers”, like Zhou, Mao’s on-again-off-again comrade in arms, and Deng, exercised the real control (albeit, for a time, quite tenuous – it wasn’t until approximately 1978 that the “reform” program really began) in the wake of more than 20 post-revolutionary years of mind numbing bloodshed, disease, starvation, death and failure. They did not waste much intellectual energy worrying about the implications for “socialism” of what came next.[18] It is difficult to overstate what this historic event meant in terms of the modern-day economic history of China - and of its resonances, in terms of present day US-China bilateral trade relations. It is, I believe, extremely important to learn the lessons it teaches.

China began to emerge from a century-and-a-half-long death march, including the protracted and miserable period the Chinese today call the “Century of Humiliation,” from the Opium wars to the expulsion of Chiang, followed by the bloody episodes under Mao just described. Zhou, who died suddenly in 1976, and Deng, began plotting a new course for the country. Both were possessed of a vision, for which the Chinese have become notorious, that transcended the immediate, and looked to a future, decades thence. Short term gratification (except perhaps for the oligarchic elite) was to be subordinated to long term goals which would eventually, they foresaw, situate China as the resurgent head of the Asian economic order. To accomplish this, Deng and his allies had to reassess China’s commitment to socialist ideals. Deng famously articulated this strategy in his famous speech in 1984:

"…by Marxism we mean Marxism that is integrated with Chinese conditions, and by socialism we mean a socialism that is tailored to Chinese conditions and has a specifically Chinese character… Socialism means eliminating poverty. Pauperism is not socialism, still less communism. We have opened 14 large and medium-sized coastal cities. We welcome foreign investment and advanced techniques. Management is also a technique. Will they undermine our socialism? Not likely, because the socialist sector is the mainstay of our economy. Our socialist economic base is so huge that it can absorb tens and hundreds of billions of dollars' worth of foreign funds without being shaken. Foreign investment will doubtless serve as a major supplement in the building of socialism in our country. And as things stand now, that supplement is indispensable. Naturally, some problems will arise in the wake of foreign investment. But its negative impact will be far less significant than the positive use we can make of it to accelerate our development. It may entail a slight risk, but not much." (https://academics.wellesley.edu/Polisci/wj/China/Deng/Building.htm, accessed May 30, 2019)

Many liberal observers in the West have accepted these pronouncements to mean that, without abandoning the rhetoric, and while still lauding the legacy of “Comrade Mao,” Deng was essentially saying that China was on a pragmatic road toward integration of the country into a liberal, global trading order, dominated by principles of free and fair trade.

Then came the ensuing realities of the PNTR, MFN and the WTO...

**

#?The Dream of an “Open China”

A more “liberal” China is an elegant dream. But such hopes are dashed when confronted by the reality. For evidence from a political and human rights point of view, one need only witness Tiananmen Square and the subsequent deposition of General Secretary Zhao Zi Yang, in 1989, who later died under in-house arrest and in domestic exile. Witness as well the legacy of repression and human rights abuses which have persisted in China since then.[19]

The reality is clear that the Chinese Communist Party?never?has abandoned despotism, and has, in reality, always pursued economic policies of?realpolitik, which eventually have revealed themselves to be more mercantilist and fascist than Socialist.[20] ?After Nixon, and over the course of 40 years of convoluted “realpolitík”, the country which started as a socialist/communist ideological oligarchy, under Mao, saw the Revolution cynically betrayed, beginning with the so-called “reformers” of the 1970’s. Despite fits and starts which led some observers to believe that the regime was headed for collapse,[21] this has proven a very successful path for the sustenance of the elite in the CCP.? The pragmatic path of the leadership has progressively adapted, causing the country to morph into its current iteration as a fascist dictatorship, with core ambitions for world hegemonic dominion.

The scary prospect is evidenced, from a policy point of view in the goals articulated in the Belt and Road Initiative and in Xi Jinping’s China 25/China 49 initiatives.[22] It is manifested, perhaps more ominously, in the buildup of its military presence in the South China Sea, its disputes over the Senkaku Islands, the EP-3/Hainan Island incident and continued adventurism abroad, as witnessed, for example, in its support of North Korea, its defiance of the Iran sanctions, its activities in Africa, and more recently in South America, in the Panama Canal and elsewhere.

Meanwhile, the abuses of China in trade are the stuff of legend. The leadership in China has a consistent record of dissimulation on issues of trade since the time of Nixon’s visit. In negotiations with the Carter administration, the US granted Most Favored Nation (MFN) status. Under Reagan, this policy was continued, and, stunningly, from hindsight, Reagan’s team advocated for a more robust and “liberal” trading regime with respect to China, including the limitation of provision of advanced military and spy technology to Taiwan, to appease the CCP (see below). The foreign policy rationale for these decisions has been the belief, expressed by Democrat and Republican administrations including Obama’s, that more open trade with China would result in fairer trade with China, and it would yield a major dividend in political liberalization and improvement in China’s internal behavior with regard to politics and human rights abuses. This mantra was repeated by Hillary Clinton’s husband, as he triumphantly announced the US intention to support China’s admission to the WTO. And this thinking has characterized every facet of official American trade policy, repeated in one form or another by administrations of both political parties in the US. It has also been echoed by academic researchers, public and international policy think tanks, and serious journals, such as?Foreign Affairs Magazine; and echoed by the popular press from the?NY Times?to the?Economist Magazine. The message has been, and, in many quarters outside the Trump administration, appears to continue to be, the hope, expressed by Ronald Reagan (the same President who told Premier Gorbachev, “trust but verify…,” while his administration pursued a policy, inaugurated by Carter, of reductions of arms and technology sales to defend Taiwan, with no guarantees of CCP compliance with agreements): "I hope that when history looks back upon this new chapter in our relationship, these will be remembered as days when America and China accepted the challenge to strengthen the ties that bind us, to cooperate for greater prosperity among our people, and to strive for a more secure and just peace."[23]?? China would become, summarizing Carter’s, Reagan’s and subsequent administrations’ agendas, integrated into the global “community of nations.” ?Liberalized trade, and a fresh opening to the “outside world,” would cause the Chinese to liberalize their own domestic economy and even, eventually, improve their human rights record, a hope essentially squashed in Tiananmen Square.

Before leaving this topic, let us consider one more illustration. ?Perhaps the most humorous anecdote illustrating this approach goes back to 1973. The Chinese economy was a shambles, on the brink of disintegration.[24] Nevertheless, that year, David Rockefeller, President of Chase Manhattan Bank, wrote this, in an op-ed in the NY Times[25]:

"One is impressed immediately by the sense of national harmony. From the loud patriotic music at the border onward, there is very real and pervasive dedication to Chairman Mao and Maoist principles. Whatever the price of the Chinese Revolution, it has obviously succeeded not only in producing more efficient and dedicated administration, but also in fostering high morale and community of purpose. ... General economic and social progress is no less impressive. Only 25 years ago, starvation and abject poverty are said to have been more the rule than the exception in China. Today, almost everyone seems to enjoy adequate, if Spartan, food, clothing and housing. Streets and homes are spotlessly clean, and medical care greatly improved. Crime, drug addiction, prostitution and venereal disease have been virtually eliminated…"

Rockefeller goes on to admit, “Each step of the trip was choreographed precisely by our hosts and, though virtually all our requests were granted, we clearly saw what they wanted us to.” But he still concludes: “The social experiment in China under. (sic) Chairman Mao's leadership is one of the most important and successful in human history.”[26]

This astonishing naiveté about the Chinese – indeed about any economic player with respect to its counterparties in trade – must boggle the mind – especially when one considers that this is the Chairman? of the Board of America’s largest and most influential bank at the time. Nevertheless, until the current administration, US policy has fundamentally been guided by this “Rockefeller” kind of thinking.[27]

Of course, political intrigue, corruption and possible violations of the Foreign Corrupt Practices Act may play a very real role in these matters, even to the present day, but heir investigation goes well beyond the intentions of this article. However, if Joe Biden is selected as his party's standard bearer in 2020, we can expect to hear a complete airing of some troubling matters, dealing with conduct of officials, and related parties, in the Obama administration. This matter is already headline news and will not go away easily.[28]

?

**

#?What’s really going on?

Now we are come full circle, back to the principle of “enlightened self-interest” mentioned by Adam Smith. ?Why, one might ask, would presidents of both political parties be inclined to pursue a policy which, on its face, is essentially inimical to the aims of its own citizens? Why, if one thinks about it just a little, support an actor so truly contrary to the interests of the long run welfare of one’s nation, of one’s trading partners and, indeed, given the threat an unchecked China poses to the entire world?

Reagan’s aforementioned 1984 speech elaborates: “I would like to tell you something about us, and also share something of my own values…. We are a fair minded people.”[29] He continues to enumerate core principles of his understanding of US history. Earlier, Lynden Johnson, following in the steps of that “great” academic Woodrow Wilson, the promotor of ?the League of Nations, whose policies portended what would become those of the country post-Nixon. ?Johnson massively increased US involvement in Vietnam; and, as the pace of body bags returning from Southeast Asia continued to accelerate, the father of the “Great Society,” in his famous 1966 speech to the Woodrow Wilson School at Princeton, said:

"As I look upon America this morning from this great platform – this platform of one of her greatest universities – I see … a nation whose might is not her master, but her servant." ?

He goes on to reference the effort in Vietnam,

?“ …there, as elsewhere, our great power is also tempered by great restraint… What nation has … announced such willingness to remove its military presence once … objectives are secured and achieved?”

The US, say both Presidents, is a nation of peace, benevolence and a responsibility to shoulder the mantle of global hegemony:

“Because peace,” says Johnson, “ …will take the best work of [all] the world’s best men and women.”[30]

Meanwhile the Chinese have silently, continuously, and in the words of Trump, who has expressed admiration for their accomplishments, “logically,” pursued policies of China First, in domestic economics, with oligarchic fascism, and a consistently protectionist, mercantile international trade policy. All the while, that country, with antagonistic goals, has been building its military, and expanding the seeds of what looks to become, in the short term, a new mercantilist empire in the Western Pacific, and, over the long term, a hyper-powered international hegemon.

A concerned observer in the West must open his or her eyes and ask… Have nearly 50 years of policy since?rapprochement?accomplished any of those stated objectives? A close look at the facts, as laid out in the Trade Representative’s Report, and in the chorus of complaints from business and human rights advocates around the world, leads one to wonder if this has not been anything more than an abject failure.[31]

Nonetheless, in an unrelenting stream of column after column,?NY Times?columnist, Paul Krugman, speaking it would seem in the very voice of Rockefeller, has characterized Donald ?Trump’s efforts as an existential threat to a supposed "consensus" view of a “Pax Americana” (a point of view which, in its own right, makes me wonder about its chauvinistic and imperial presuppositions). ??A chorus of other commentators, from so many other sources, appears to agree.

According to this view, the sooner we get rid of the Trump administration, the better. Krugman asserts that Trump simply does not “understand” world trade. Moreover, he states,

“…where the Europeans are weak, Trump is malign. He’s working actively to make the world a more dangerous, less democratic place, with trade war just one manifestation of that drive. And the eventual negative consequences for America and the world will be much bigger than anything we can capture with economic modeling of the effects of tariffs.”[32]

Krugman does not say what the motives of this “malignity” might be. He simply asserts it.? So much for the academic integrity and intellectual honesty of a Nobel Prize laureate in Economics.

Meanwhile, back on planet Earth, one need only read the Trade Representative’s reports year after year, from the Bush administration onward, to see how China has flouted US generosity, WTO regulations and world opinion. The most recent report (op.cit,?passim) provides a laundry list of complaints. These include: China’s non-compliance with the rules of the WTO; its refusal for nearly 20 years, to implement agreed upon structural changes upon which admittance was conditioned; its persistent lack of transparency; its intentional circumvention of rules related to central and sub-central government subsidies; its neglect of the responsibility to execute requirements of WTO arbitration decisions; its implementation of sophisticated and expansive policies and practices that often evade WTO disciplines and cause serious harm to markets, industries and workers in the United States and other WTO Members."[33]

Another complaint, among mountains of accumulated evidence, comes from, of all places, ?the?Obama?years:

"The newer and emerging challenge to U.S. IPR (intellectual property rights) is not a function of China’s lack of political will to crackdown on infringers. Rather, it is a manifestation of a coherent, and government-directed, or at least government-motivated, strategy to lessen China’s perceived reliance on foreign innovations and IP.… The common themes throughout these policies are: 1) undermine and displace foreign IP; 2) leverage China’s large domestic market to develop national champions and promote its own IP, displacing foreign competitors in China; and 3) building on China’s domestic successes by displacing competitors in foreign markets."[34] (Jerome Waterman, “Testimony before the U.S. International Trade Commission,” in?Hearing on China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, June 15, 2010. Cited in Wayne Morrison,?China-US Trade issues, RL33536, Congressional Research Service, Washington, DC, 2018, p. 42)

?

**

#?Reminder of first principles – Currencies and the Flows of Money

To complete our analysis, let’s return for a moment to the family and the need for those shoes. As mentioned early on, when mom or dad buys the shoes, they transfer money to the cobbler. The money stock of the family goes down. The money stock of the cobbler increases.

But, as stated earlier, of course, the situation is not at all as simple as that. Consider 2 key points. First, as any economist will remind us, all money flows to where it can receive the highest return, given the objectives of the investment. Second, money is a “fungible” asset. That means it is convertible into whatever form is necessary at the time one is holding it. For the family in our very simple illustration, it has converted money into shoes for the children. Meanwhile, the cobbler needs to know what to do with the money he has received. As a business person, of course, he or she will want to make a “profit.” That is, the hope is that costs invested in making the product will be less than sum of the money collected in making the sale. With these profits, it is hoped, the cobbler will finance his or her family’s own needs, and have some left over for emergencies. He or she also hopes that there will be more in the income obtained than what is necessary just to cover those costs and the costs of meeting personal requirements. It is hoped that there will be resources for savings (investable capital) above these basic costs. This gives rise to the opportunity, indeed the necessity, to do something with those savings, and the cobbler’s decisions will logically lead to investment in vehicles which optimize benefits of those savings. (If the object is short term liquidity, to provide for contingencies, for example, perhaps the highest and best use of funds might be in a well yielding demand depository vehicle; if the objective is the highest rate of return consistent with the need for safety then, corporate or government bonds might be right; if capital gains, then stocks or more speculative assets, and so forth. Or, he or she might reinvest in the business, or in another income producing asset to expand create additional productive capacity – a new “capital” allocation.)

Back to the family. If they are lucky and wise, their expenditures will be less than their income, and the cost of shoes will be deducted from surpluses. On the other hand, if the need for the shoes is very urgent, and resources are not immediately available, the family may need to borrow from another family member or friend, or ask the cobbler to extend credit, until it can make full payment. If they resort to the latter, and the cobbler is willing, the loan becomes a debit entry into the “accounts receivable” ledger of the cobbler, and a credit to an “accounts payable” entry for the family. Of course, the cobbler, who is losing the use of the funds for the time being, will want to be compensated for this and will ask for some form of premium. This premium we call “interest.” It is the “price” of money, and represents both the opportunity cost of the money not received (including the price paid for the privilege of credit extended) and the time value of the money deferred.

**

#?Capital flows

What does all this have to do with China and the US, and tariffs?

Well, everything.

This ridiculously simple illustration has a powerful analog in the real world of global trade. Countries which produce more than they spend, will naturally want to invest surpluses in places which provide returns which meet their requirements consistent with objectives not at all unlike those enumerated concerning the cobbler’s investment. This could mean (and very often does) in the safest vehicles, like money market instruments and government bonds. Meanwhile, countries which consume more than they produce in goods and services trade (like the present-day US) will need to borrow in order to defray costs of net imports. To do this, they issue bonds and money market instruments. They sell these to their own populations – individuals, businesses, government agencies –, or to foreign interests – individuals, business and government entities.? The importance of this relationship, and its ramifications, in terms of the issue of trade and tariffs will become apparent as we delve a bit deeper. The questions we will be trying to answer as we move forward will be:

1. How do tariffs fit into the story about money and debt?

2. Why would they be needed now? How can they help?

We have seen what popular commentators and a Nobel laureate have had to say. Austan Goolsbee, head of the White House Council of Economic Advisors under President Obama, adds this opinion: Trump’s tariff is like “burning down the back of the house” when you have a dispute with the cable company."[35] Is he right?? Indeed, then, we may well ask, is Trump the malignant, foolish bumpkin caricatured by Krugman in the NY Times and by others in the popular press?? Let’s take a deeper look at how wall this really works…

**

?

#?Money and Currency, Foreign Exchange.

Before discussing tariffs,?per se, let’s take a brief detour to better understand “money” in the international trade context. The word most often used, rather than “money,” in discussion of the economics of trade, is “currency.”

In common, day to day, parlance, this word is used synonymously with the word “money.” But for professionals in international banking, and, indeed, for the international businessman, or traveler, it soon becomes obvious that “money” and “currency” have very specific and technical meanings. We will apply these now. “Money” for an economist is understood to mean whatever vehicle of exchange is agreed upon and used to transact exchange. It is a “store of value” upon which users will draw when they wish to make exchanges for goods and services.[36] ?The idea of “money in circulation,” as such, refers to amounts and “flows” of “money.” These are measured in order to understand general levels of wealth in an economy and to measure what is happening with capital within a given economy.

There are different measures of kinds of money in a domestic economy. These have rather boring sounding names, but represent rather fascinating realities.? “M1” equals “currency” or “cash,” meaning what is in our pockets, in our mattresses, under the sofa cushions from day to day, as well as any checking and demand deposits at banks, plus travelers checks and certain fungible money market instruments; “M2,” is a categorization which adds to M1, time deposits, and retail and smaller commercial money market instruments which mature in less than a year.? Finally, the broadest measure, “M3,” includes institutional money market instruments and very large retail money market accounts (also maturing in less than a year).

In practice, M2 and M3 have become almost indistinguishable, to the extent that the Federal Reserve actually made the decision in 2006 to discontinue reporting these separately. One will find substantially all information one needs on the domestic money supply and flows in periodic reports of the Fed regarding measurements of M1 and M2.[37]

“Currency,” in an international trade context, generally means the official, and universally accepted unitary denomination of the “money” of any given nation, or, as in the case of the Euro, of a trading bloc. Units of “currency” in one denomination rarely equal the same store of value as units of “currency” in another denomination. This is important to understand. The value disparity arises for myriad reasons, far too numerous to even begin to discuss here. But, for the purposes of this discussion, the distinct names of disparate currencies, and the definition of the relative stores of value communicated by each unit denomination, allow traders and financiers to develop systems of exchange which help facilitate trade. Thus, we speak of a unit of the Euro being equal to USD1.12; or equal to JPY[Japanese Yen]120.88, as of the time of this writing.

For other than historic reasons, there is no intrinsic rationale for which one unitary value should be numerically higher or lower then another, and there is no qualitative advantage imparted simply by the agreed upon numerical equivalencies which, for the purpose of terms of art, we call “parities.” All things being equal, at parities as of the date of this writing, a Japanesen? person with JPY120,880 is no better off theoretically than an American with USD1,120 or a European with EUR1000. The enumeration of these amounts, and their comparison, is what we call the “exchange rate.”

It will be immediately apparent that, once everyone agrees what each unit of “currency” is worth, anytime that relationship changes, significant consequences ensue.

What is “Foreign Exchange”?

We call the holdings of money denominated in currencies of countries other than their own by market participants in a nation or trading block, “Foreign Exchange.” Foreign exchange constitutes the aggregate value of all assets on a nation’s balance sheet denominated in currencies other than the domestic money.

?

**

#?Interest rates, the value of “currency” and foreign exchange

Of course, we noted before, with respect to all things being fair, that they never are. Likewise, all academic references to the contrary notwithstanding, “all other things” are never “equal,” economically speaking, either. Like the atoms bouncing around in the analogical pneumatic system we referenced before, there are myriad factors active in any economic system at any time.? As soon as a “scientist” tries to “isolate” one factor, everything else in the system is subject to change.? Though Economics tries very hard to be a “science”, frankly, being an anthropological study, with billions of human economic subjects, it is impossible – even for the most talented utopian Marxists -, to isolate variables and establish meaningful “scientific” controls.? It is fundamentally stochastic in nature, and understandable only in the broadest aggregates.? (Perhaps the best analogy in this sense might be that of a quantum phenomenon…?)

National economies are subject to all sorts of vagaries. These can affect the relationship of currencies to one another. On the positive side, changes in the perceived value of the stock of assets of a country, as might happen with a large discovery of precious minerals or oil, the development of new technologies, or improvements in productivity relative to competitive economies, might logically be expected to strengthen the perceived store of value of that country’s particular currency. This may make it seem advantageous for international players to maintain relatively greater holdings denominated in that currency of that country. ?Meanwhile, on the negative side, a country’s experience of war, natural disasters, or persistent incompetent fiscal or monetary management or economic shocks (exogenous or domestic) will likely cause international players to look less favorably on storing value denominated in that particular nation’s currency. Finally, the relative amount of bilateral trade among different countries, and expectations of market participants for favorable or unfavorable news, or perceptions in differing markets of the relative safety of instruments denominated in differing currencies, will also affect day-to-day perceptions of the wisdom of foreign exchange holdings. As circumstances continually change in our world, the relationships among currencies are concomitantly subject to change. As perceptions and economic realities fluctuate, so will the relative values of currencies to one another.

Of course, foreign exchange markets, like all financial markets, function through intermediaries and are subject to domestic and foreign taxation and regulation. Financial Intermediaries, like any agency players, require premiums over the value of the stated parities. Governments exact taxes and other costs to legally “move” funds, and to issue money (a system with the fancy name, “seigneurage” – really just another word for a tax). Additionally, as one might expect, differing national economies, for a host of reasons, will be subject to widely varying expectations as to the future value of their currencies, and will maintain interest rate regimes in line with these domestic expectations. Most often, the differences among national interest rates in countries at similar stages of economic development and sophistication, will be relatively small. But, under certain other circumstances, these differences can be very large indeed.

Regardless, even a slight change in interest rate expectations for money denominated in one currency compared to money denominated in another currency can open a profit opportunity for market players. This is the definition of what financial market participants call “arbitrage.” ?If I can hold assets in one currency which accrues, or is expected to accrue at some point, interest faster than if I held them in another currency whose interest rate regime may not be as competitive, all other things being equal, it is logical to hold them in the higher interest rate environment. If the value of the interest rate advantage exceeds the cost incurred to make the exchange from one currency to another, an arbitrage will be effected. Of course, in the very short term, such opportunities, in an efficient market, are immediately perceived by most market participants. So, almost as soon as the opportunities appear, they are annulled by a change in exchange rates to accommodate the difference, which returns parity regimes to equilibrium. This effect is a major driver of daily changes in rates.

However, the interest rate effect becomes especially important when the change envisioned is not immediate but rather longer term. Now, market participants will make guesses as to what the impact of a change or addition of an economic factor will be, over the longer term.? As such, players will adjust holdings in accordance with their best expectations. Institutions and certain savvy players, who are needed to ensure the efficiency of markets, and to provide liquidity, will, on the basis of experience, econometric models and well-known factors influencing interest rate regimes, make bets on future movements of currencies against each other and will facilitate market transactions by taking large positions in various issues around the world. If their positions are profitable more often than not, they remain in business and provide a valuable service to markets. Interest rates are hugely important for relationships of currencies among each other.

Now, interest rates are defined economically as the "price” of money; more broadly, as in the case of the afore mentioned cobbler, what it “costs” to defer enjoyment of present value. And to bring that idea into this discussion, very simply put, the relationships among currencies are always going to be understood essentially as the relationships among the costs of holding each currency, and those costs ultimately are expressed in terms of interest rates. It is vitally important to understand that ANYTHING that can cause a change in the relative store of value of one currency vis à vis other currencies, eventually will be “priced “into the market for that currency in terms of interest rate arbitrage. Therefore, changes in any economic factor (whether it be domestic inflation, political instability, any of an infinite number of potential, unforeseen market or societal contingencies, or changes affecting the level of trade between and among participants in trade, such as a tariff, will have corresponding interest rate implications. And, when interest rate changes occur, relative foreign exchange rates. And therefore, the cost of money and of doing business internationally, will change.

?

**

#?Arbitrage, Tariffs, Interest Rates, Currencies and International Trade

Now we have defined a common locus for determining the measurement of the price of holding value in one currency versus others, interest rates. We can understand that, in a perfectly efficient market, as the different costs of holding different currencies expressed in interest rates vary, then the units of exchange of one currency must also vary. This relationship might be represented by a simple equation:

ΔRcurrency A/Rcurrency B ≈ ΔUcurrency A/Ucurrency B

Where “R” is a snap shot (set of differentials) of points on the market yield curve of real returns for any named currency, from short rates to the expected demand for longer range capital returns. All other things being equal, by evaluating marginal changes in?R?in one market, caused by the addition of, or change to, any economic factor, “f”, we can, fairly quickly, estimate resultant fluctuations in the exchange relationship of a currency to others as markets adjust to new parities. As this relates to tariffs, we can understand, using this lens, how conventional economic appraisal anticipates effects on short-term and long-term capital, capital flows, capital formation, the level of interest rates and ultimately output, employment and social wellbeing because of distortions caused by factors like a tariff. This is because “money” always moves to the highest return possible given the intentions of an investment. This, therefore, also provides deep insight into why additions of, or marginal changes to, economic factors can become a powerful tool in the hands of policy makers. And explains why manipulation of this reality might have important consequences in helping policy makers address long perceived grievances, like those articulated by the Trade Representative referenced above, in the recent report on China’s compliance with WTO.

?

**

#?Tariffs as an economic factor

Understanding the above allows us to present a simple set of questions with respect to what will really happen when tariffs are introduced or, indeed, if any of a myriad of other economic system factors are changed. This understanding will also provide insight to help us understand why the simple expectations of members of the popular press – and even of academics and pundits-, on the face of the matter, often do not pan out.

Let’s take a closer look at tariffs and their role in international trade. The simple answers always adduce “basic principles” related to the macroeconomics of trade.[38]

“Everyone knows” that tariffs “artificially” distort the market function. They are, according to this logic, inefficient. They are a “tax” imposed upon consumers in the importing country. Moreover, according to this line of thinking, they are a regressive tax.? This is because they impact poorer members of society to a proportionately greater degree than they do the wealthy. Per capita costs, as a percentage of per capita resources, are higher for less wealthy than for wealthier market participants. Basic theory states that the profit motive requires that, as costs imposed per unit of product sold increase, these additional costs will eventually be passed along to all buyers until price elasticities are exhausted. This effect, in the short run, is, of course – “ALL OTHER FACTORS BEING EQUAL” -, inflationary. As firms continue to pass along price increases, and as long as consumers continue to buy, higher prices prevail. Meanwhile, in the mid-to-longer term, these inflationary expectations and higher prices tend to cause interest rates increases.? ?Investors will demand higher returns on invested capital to offset the diminished future value of their money. Typically commencing in the money markets, this phenomenon causes short rates to increase, flattens the yield curve, tightens money, and reduces capital formation, cutting off growth. Theoretically, these inflationary forces result ultimately in longer-term deflationary effects, and, sometimes tragically to depression.? ?Regardless, left to their own, ostensibly these forces will lead to the market’s again reaching equilibrium, and the creation of a new trading regime. Generally, so goes the thinking, this equilibrium will be achieved at much lower levels of output, with impaired real GDP growth, and very negative societal effects.? ?So, the standard view holds, tariffs are essentially inefficient and dangerous.?

Considered exclusively from this point of view, and especially as seen from the short-term vantage point of market participants in the import country, this analysis makes sense. The goal of policy makers, and an explicit long-term objective of the WTO, is, therefore, to eliminate, as much as is possible, all tariffs. Theoretically, this will allow global market participants to operate in an environment of freer and more open trade, exploiting, to their maximum, the efficiencies of comparative advantage, raising the general level of economic activity globally.

Unfortunately, as those of us who with experience in the “real world”, as entrepreneurs or businesspersons will readily agree, reality is quite different than theory. Plan as one might for contingencies, experience teaches that the unexpected may, and frequently does, happen. Donald Trump was not a politician before becoming President, and, as an entrepreneur and builder, he, we can be sure, like all of us, has had many scrapes with reality when circumstances did not conform to anticipated or imagined expectations or to “theory.”

**

# The Reality of?Tariff’s as seen from the exporter’s perspective and from the perspective of a trading partner

For the exporter, existing tariffs are an ineluctable reality, a factor, part of the market, with which exporters will have to deal. Markets are a?gestalt. They are what they are, and, for individual companies, market entry decisions must be made with this in mind. There is no sense in resisting these facts. Nation states contemplating bilateral and multilateral arrangements have to deal with this reality as well. In negotiating a trading regime such as NAFTA or APEC, or in setting up a supranational regulatory organ, like WTO, negotiators for the contemplated trading partners must understand the realities of the existing regimes. How do the respective countries handle things as they are now, prior to the implementation of a new trading accord? What are the existing market entry rules? How open and transparent are the countries? What are existing tariff and non-tariff barriers to trade between, and among, member states contemplated to be part of the union? What cultural and historical facts should be understood?? How likely are trading partners really to be expected to act in good faith and to keep commitments made?? ?That is why it can take years, even decades, for negotiators to come to an agreement. It is also why, after agreements have been reached, even with the best of intentions, when parties to the agreement begin trading, complaints of sundry nature inevitably arise. It is also why good faith, and fulfillment of a nation’s obligations, are so vitally important for success. Finally, and most important in the context of this discussion, it is why it is impossible to understand a subject such as the effects of the implementation or manipulation of a tariff solely from the point of view of theory, or by only looking at macro-aggregates in a given economy from 30,000 feet.

From the exporting country’s point of view, similar factors as those reviewed with respect to importers prevail. A tariff naturally will make the cost of exporters’ products relatively more expensive in the markets of counter parties. According to conventional wisdom, this means higher prices and an immediate reduction in the export demand function. Seen strictly in terms of bi-lateral trade, this is, in fact deflationary when the price elasticity function is broken. Export country suppliers will face the dilemma of having to decide whether to absorb the additional cost factor, sacrificing profits, or to ignore it, rendering their products more expensive and less competitive in the import market. In either case, there will be a concomitant deflationary longer term stress applied in the exporter’s market. In the former case, lower profit means less capital to invest in the exporter’s country. In the latter, lower demand means diminished sales. This diminished demand function therefore also translates to less capital investment in the exporter’s country. Reduced capital investment means lower output. Lower output means lower deployment of human capital, that is, lower wages or job losses. The exporter economy can falter. With the faltering of the economy, downward forces on interest rates, and lower output, market forces, market participants and policy makers are induced almost magically (Adam Smith's invisible hand) to relax rates and expand the supply of money. Of course, as increases of money are felt across an economy, the effects are eventually inflationary, and so forth. Eventually, the market returns to equilibrium, however, as we saw before, at a lower level of economic activity. Tariffs are,?ipso facto, distortionary, artificial and inefficient for the exporting country as well – according to conventional theory.

**

#?“Positive” versus “normative” approaches

Let me be clear. I am not saying there is anything?wrong?with being suspicious of the efficiency of tariffs, or aware of their distortionary nature. “Positive” economics, to use the lens provided by Milton Friedman, provides predictive evidence, which is the empirical basis of this suspicion, according to an assumption,?ceteris paribus (áLL THINGS OTHER BEING EQUAL”). This is what I meant when I referred to looking at the problem from 30,000 feet.[39]

The difficulty arises, on the contrary, when one leaps from “positive” to “normative” analyses, from the world of predictive theory to the messy world of day-to-day human interaction, from?predictive?to?prescriptive. Reality never quite mirrors theory, illustrated brilliantly by Friedman’s and Schwartz’s previously referenced analysis of the impact of monetary policy in the 1930’s.[40]

?

**

#?“The Art of the Deal”

Evidence suggests that the realities of bi-lateral trade between China and the US are skewed from the point of view of predictive economics. This is so because China’s economy is not “free and open.” It is a closed, “mercantilist” economic system, the principles of whose operation are entirely alien to the principles underlying the foundation of trade agreements like WTO. As the trade representative summarizes:

"When compared to the industrial policies of other WTO members, China’s industrial policies are fundamentally different. …adherence to the objectives of China’s industrial policies is effectively mandatory. Chinese companies have little discretion to ignore them, even when market forces would dictate different commercial behavior"[41]

China’s is a command driven economy. As a result, dysfunction is addressed by state support mechanisms. These inevitably distort economic operations and lead:

a) To huge inefficiencies, over capacity and over production, which ultimately is addressed by resorting to “dumping” (the sale of products externally at below common market cost, uncompetitive prices, in direct opposition to the spirit and the letter of trade agreements);

b) A host of tariff and non-tariff barriers to market entry from foreign suppliers; and

c) Financial and credit market distortions and currency manipulation.

China does not float its currency. It simply applies capital controls and other mechanisms to maintain pegged parities and manipulates credit markets to provide resources for otherwise failing industries. As the reader will now understand from our discussion of returns on money and currencies (interest rate and capital returns), under such circumstances, nonfinancial sector debt ballooned to more than 254% of GDP in real terms in 2016. China’s actions before accession to WTO, and during the past 18 years, have allowed it to continue a spectacular trajectory of internal growth, and, admittedly, a major improvement in the social wellbeing of some of its populations. However, these successes have come at a huge cost to the rest of the world, in terms of depressed pricing, capital misallocation and lost production, lower wages, and misery. Moreover, and this may be the worst of the matter, they have come at the cost of the creation of a potential economic and geopolitical time bomb in several arenas.

a. In the financial sector, and across credit markets, it is questionable whether the country’s markets can continue to sustain these irregularities without major correction or implosion;

b. As accumulated effects of industry distortions and China's commitment to high tech, defense and telecommunications, the history of China’s actions has led to concern about the country’s intentions and the potential threat to the national security interests of the US and Europe;

c. Finally, these trade policies and continued pursuit of mercantilist economics have led to dangerous imbalances in the economies of trading partners, especially the US, where artificially low prices and market manipulation have led to serious, persistent trade deficits, current account deficits, and a huge buildup of external debt.

If one were to plot a normal distribution of the score of adherence to the ideal set of “economic values” prescribed by signatory countries of the WTO (Friedman’s hypothetical “normative”), values upon which the assumptions for expected behaviors of attestants are based, I speculate that the US would fall within a very tiny fraction of the limit on the positive abscissa, ≥+2σ?from the mean. China, meanwhile, would fall very far along on the opposite tail, generously at ≤-1 or 2σ. ?Admittedly, this speculation represents an educated guess for the purposes of illustration. But no one can doubt the validity of its underlying premise. China’s economic policies and its actions place the country as an extreme outlier on the negative tail, far from practices required as normative for members under WTO protocols.

**

#?Trump administration “realpolitik”

In taking a new policy approach, one which admits of the imposition of what have been called “punitive” tariff measures, the Trump administration might well be seen as more pragmatic, more realistic, perhaps even more “common-sensical” (if the kind reader will permit such a neologism) than previous administrations.

Geopolitics and the macroeconomics of nations, and their expression in trade policy, are intimately interwoven. The evidence seems to bear out the understanding that the Chinese understand this link very well. The Americans, in theory, understand it also. However, Americans have always addressed these issues with a mindset and historical lens which are distinctly?Western. What many American policy makers and pundits fail to understand, from my point of view as one who has worked with Chinese counter parties for many years, is that, Americas and Europeans are playing a game aimed at creating a trading order that preserves a uniquely Western concept of peace, one predicated on perhaps ameliorating perceived geopolitical “sins” of imperial 19th and 20th centuries.? Meanwhile, Asians, and especially the Chinese, are playing a game with ancient roots in Asian regional geopolitics and culture. They will use outside forces to press their own advantage or to reduce or eliminate risk.? But, Chinese thinking, and therefore Chinese policy, is essentially based on rivalries that are thousands of years old, pitting local blocs of power against each other in internecine battle. Historically, the Chinese, Japanese, Koreans, South Asians and the Indians have all been involved in struggles for ascendancy which have had nothing to do with Westerners except insofar as the participants saw geopolitical advantage in allying with or scapegoating them. In fact, it is not an exaggeration to say that, in many cases, the presence of the West has been seen as an invasion, an intrusion upon local affairs, engendering, often, deep resentments from all sides of territorial issues.

The consequences of this understanding can be enormous. For example, appreciating this reality leads to a much clearer understanding of Japan’s actions in the Second World War. The country was involved in the “world war” as a consequence of pursuit of primarily regional objectives: asserting control over China and Manchuria, and resisting ambitions of the Soviets in the Sea of Okhotsk. The need to secure supply lines of oil and rubber dragged it into the broader conflict involving Westerners. At that time, China was, as we have noted, in the throes of its Century of Humiliation, so-called, by the way, because it is perceived as humiliation by “forces from the West.”? ?Meanwhile, the Americans as WWII approached were definitely not angling for a fight in Asia – they had enough to worry about with trying to stay out of war in Europe.? Nevertheless, global factors, and especially Japan’s need for oil, ultimately dragged the US into the conflict.? And the Americans were embarrassed, in Korea, and 20 years later, to be found in additional conflicts in Southeast Asia.? (It is ironic that, under Bush and Obama, similar ambiguities returned to the fore in Afghanistan, Iraq and Libya, causing these administrations to abandon the Reagan promise and doctrine of Bush 41 never to enter a fight unless the country was prepared to win.) As Niall Ferguson brilliantly outlines, in a chapter of?Colossus?titled, “The Imperialism of Anti-Imperialism,” the US developed into a reluctant hegemon, in its role as eventual heir to the British. Here he cites Walter Lippman’s perceptive comment, made as early as 1926 as these forces were ineluctably already beginning to manifest themselves:

"We continue to think of ourselves as a kind of great, peaceful Switzerland, whereas we are in fact, a great, expanding power… Our imperialism is more or less unconscious."[42]

Meanwhile, any businessman, with any sensitivity, who loves Asia, and has a deep appreciation for its rich cultural heritage, and who has spent any amount of time in Asia is acutely aware of the underpinning realities forming the world view of leadership in the region.? Now, China is in the process of resurgence, recovering the nostalgic glories of its imperial past, imagined or real. ?This vision of the so-called “Middle Kingdom” and it role in Asia (and, now, by extension, in the world at large) is the underpinning of Xi’s Belt and Road Initiative (BRI) and his “China Dream”? It is the foundation and the real objective of the China 25/China 49 agenda. It is also the reason why China’s actions with respect to WTO and bilateral trade (as referenced earlier) speak volumes more than its words. The Chinese, and now President Trump, if he is allowed to do so, are playing Major League, hardball, geopolitics; while TV pundits, academics and the popular media remain in the Little Leagues.[43]

Kissinger’s “realpolitik” held that the best way to ensure peace was to ensure that everyone knew what were the consequences of its alternative. Geopolitical?détente, equilibrium, is achieved by the players’ awareness of the power positions and weaknesses of their counter parties. In trade, these rules no less apply. If the counter parties are unaware, or misunderstand, the advantages and weaknesses of their respective positions, miscalculations can occur, with disastrous consequences.

**

?

#?Final Thoughts

As discussed, interest rates and capital returns, the real price of capital, have a huge impact on currency parities, and thereby on the financial wellbeing of nations which are trading partners of China. National holdings of domestic money and foreign exchange (currencies in the aggregate) represent a real store of value. This value represents the country’s resources, the ability of a sovereign state to conduct its domestic and external affairs and meet its obligations. As with our analogical family, it is extremely important to manage these resources. Persistent Balance of Payment and Domestic Budgetary deficits deplete asset accounts, increase indebtedness and eventually will wreak havoc with financial and capital markets in the US and Europe.

Meanwhile, China has been spectacularly successful in accomplishing goals it has set for itself, which it articulated internally when negotiating its accession to the WTO, and when it positioned itself in those negotiations as a poor, “emerging” market, in need of special considerations under the deal. Since then, the country has continued in a trajectory which has seen its GDP grow on average 9.6% per annum and continue a process of doubling output at least every 10 years. In the process, it has maintained massive current account surpluses which indicate structural undervaluation of the Reminbi (China’s currency) and which threaten trading economies around the world by their distortive effects. Upon accession to WTO, the Reminbi was valued at 8.27 to the dollar. At that rate, an average Chinese factory worker’s pay was under USD3 per day. Over the now nearly eighteen years of experience as a member, and in response to numerous complaints about “currency manipulation” it has revalued (appreciated), in fits and starts, to 6.91/1, a 16.4% increase versus the dollar. However, as the country’s GDP has grown, labor productivity, expressed as output per hour of work, has been increasingly challenged as wage pressures have driven up the hourly cost of labor at a dizzying pace. From 1990 to 2016, average monthly wages in China have skyrocketed 2300% expressed in US dollar terms. While nominal per capita GDP in China, as of the end of 2017, was USD8583 compared to per capita GDP in nominal dollars in the United States of USD59,495, in purchasing power parity, a measure which attempts to capture living standard effects, the economy of China, according to the IMF, actually surpassed the US in 2014.

China’s current account surpluses are largely expressed in US dollar denominated holdings, treasury instruments of differing maturities, totaling $1.13TT as of end of April 2019. Meanwhile, the China Investment Corporation (CIC) and its State-Owned-Enterprises (SOE’s) also own an increasing share of US capital assets, corporate and real estate investments. According to the latest information from the China Global Investment Tracker, cumulative holdings of US domestic capital assets exceeded USD171 BB in 2017. Worldwide, Chinese Foreign Direct Investment (FDI) holdings exceed USD575 BB. Far and away, the Chinese are the largest holders of US portfolio debt, and are becoming a significant holder of its capital stock.

On the other side of the ledger, US national debt is dangerously high, exceeding USD22 TT. Of this, the public debt, financed through treasury auctions, represents approximately 73%, or in excess of USD16 TT. Foreign investors and governments hold 40% of that, or approximately USD6.4TT. As mentioned, China is the world’s largest single holder of treasuries. Japan, also holds obligations above USD1 TT as a major creditor. This means that fully 1/10th of all portfolio indebtedness, a major component of so-called hot money, is concentrated in two baskets. It is not hard to imagine what might happen if the sudden volatility of at least half of these holding were suddenly open to question. One only need look at the cascading effects of the Lehman Brothers affair in 2008, or the reverberations of 9/11, or of the Thai Baht and Mexican Peso crises in the 90’s to appreciate the destabilizing effects doubts about the US currency could entail.[44]

Since the collapse of Bretton Woods and the abandonment of the gold standard by the US (under Nixon, in 1973) , the US dollar has been the de facto reserve currency of the world. This has provided stability and, very important, predictability and order, in global trading regimes. But as financial and currency markets have adjusted to the rise of China, increasingly calls have been heard for substitutes to the dollar. These voices are loudest among those with a strategic vested interest in seeing the influence of the US in world markets diminish (e.g., Russia, certain Middle Eastern national and non-state actors). China has contributed its thoughts on this debate as long ago as 2009, as Zhou Xiaochuan, the central bank’s governor, openly jawboned the idea of creation of an alternative “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”[45]

Such realities vividly illustrate two things.

-First, the effectiveness of Western policy in supporting and assisting the Chinese in their program of emergence from third world status in the wake of the convulsions of the revolutionary years and their aftermath; and,

-Second, the laser focus and effectiveness of Chinese leadership as it has pursued policies of self-interest, ultimately to the detriment of Western trading interests and the wellbeing of the peoples of its trading partners.

The referenced trade representative’s report, Morrison’s documentation, commentary by the World Bank and the IMF, and myriad articles in Journals in Europe, the US, and elsewhere, show that leadership in the West is acutely aware of the threats posed by China’s resurgence and the distortions of global markets resulting from its actions. Pundits and commentators in many venues urge restraint and dialog.[46] But it is evident that efforts to address the issue of China’s mercantilist policies and flouting of international trade regimes in the court of public opinion and in arbitrating fora have largely failed.

If nothing else, Trump’s call for tariffs has signaled a departure from business as usual. Obviously they are getting attention. In addition to protests in the public media, in think tanks and among pundits, the Chinese immediately levied countervailing measures, applying tariffs to approximately USD60 BB of US goods the country imports. Meanwhile, General Secretary Xi scheduled a well publicized visit to Moscow at which he and President Putin made a point to express publicly their friendship, Xi actually stating that Putin is his “best friend,” a very interesting development.

The facts remain. China’s policies continue to distort world trade and capital flows, and pose challenges to mid-to-long term strategic and national security considerations. The US has burgeoning trade and current account deficits and major distortions in its balance of trade which threaten its markets, the welfare of its industrial and capital base, its people and the national security. These troubles are compounded by already difficult realities in the budget deficit, which are complicated by 2 years of defense spending adding up to more than USD1.4 TT, and demographic challenges of gargantuan proportions, translating to unfunded liabilities, estimated as approaching or possibly exceeding, USD100 TT.

As the conventional wisdom asserts, tariffs are a blunt instrument creating inefficiencies. However, whatever their effects on the US economy at this stage, their impact in China will be severe. Looking at the analysis of projected economic impacts (as discussed, for example, by the Tax Foundation, a think tank opposed to the tariffs) makes one wonder if the dreaded “costs” are really as deleterious as feared, compared to the staggering implications for the long run security of the US and the West, of continuing along the route of previous administrations. The TF report makes the following estimates about the impact of the sanctions on the US economy:

"If all tariffs announced thus far were fully imposed, U.S. GDP would fall by 0.79 percent ($196.66 billion) in the long run, effectively offsetting about half of the long-run impact of the Tax Cuts and Jobs Act. Wages would fall by 0.51 percent and employment would fall by 609,644 full-time equivalent jobs"[47]

This statement, and similar ones heard in the press all the time, is representative of the kind of thinking that neglects the realities we have discussed in this paper. It is predicated solely on “ceteris paribus,” and the assumption that one economic factor, such as a tariff, operates in a sort of zero-sum vacuum: If X happens, Y will result. This, as I hope I have shown, is fallacious.

Return to two key insights we have discussed about markets:

1) They are entropic, i.e., always seeking equilibrium, at the lowest level of energy and

2) they are messy and multivariate, all things ARE NOT EQUAL. In the real world, when factors are changed or distortions introduced, market participants can adjust behavior or policy makers can intervene with countervailing consequences.

It is to be understood that any economy has a certain limit on productive capacity, and that policy makers ideally aim at optimizing economic performance for the benefit of industry and populations in the markets in which they operate. ?This is why Trump does not “fault” Xi and his team. Rather, he simply asserts American policy makers have been?na?ve, allowing China, and others, to operate without proper checks.

At some point, as we have seen by our description of how China’s distorted state-controlled capital formation and usage, and credit systems work, negative consequences will ensue from an over-heated state of affairs. In China, this has produced grotesque distortions of capacity in productive segments of the economy, and in the credit markets, resulting in the need to “dump.” In America, meanwhile, it is virtually impossible to say what level of output represents the “limit,” or ideally optimized state for the economy. It does not appear, however, that this has been reached yet, thankfully, and the Fed, given recent interest rate hikes, once again has a bit of room to add liquidity. Unsurprisingly, then, in response to the tariff threats, Jerome Powell, the Chairman, has hinted at a willingness to be accommodative. Traders instantly reacted on that news, sending markets to their best weekly performance of the year. In so doing, the market is telling us that dire forecasts of diminished output are either over blown or will be substantially offset, countering any real damage to productivity and output from tariffs.? That is a powerful signal that the tariffs will not be as destructive as feared.

It is difficult to quantify, in any real sense, in terms of dollars, the impact of the proposed sanctions in China because of the opaqueness of China’s reporting and its byzantine internal system of mercantile bureaucracy. However, it is easy to imagine their consequences, given reports of known, and huge, overcapacity, disarray in the credit markets, demographic challenges, and competition from Asian Tiger countries, as the effects of tariffs, which shift competitive balances, and exacerbate an already accelerating exodus of “cheap labor” industrials, take hold. China’s markets, as a result, have very real, and potentially very painful, vulnerabilities. As publicized in many media, the US is expected to report, in 2019, tariff revenue receipts in excess of USD75BB this year, with large increases in this area attributable to the sanctions.[48] Gains here are offset concomitantly by “losses” to the economic base of counter parties. They also serve to cushion, in a sense, some of the negative effects of a tariff in our economy.

Meanwhile, the picture in China is less rosy. Multinationals like Honeywell, HP and others, for example, accustomed to working in ever changing markets, have cultivated multilateral international ties to address contingencies in the event of dramatic developments. They are already prepared for shifts in supply chains and final manufacturing, all of which has negative real effects on the Chinese economy, especially if that demand does not return to the mainland. While no one is panicking yet, everyone is staking out new positions and watching very carefully how bilateral trade relations evolve. As China’s labor costs have risen, it is witnessing increasing numbers of ex pat businesses running for the exits. The tariffs will only exacerbate these patterns. China will want to be very circumspect about prolonging a trade “war,” as it is certain that it has a great deal to lose. Further, Mr. Xi will want to be careful in testing the resolve of Mr. Trump in any battle of staying power. At best, such a battle is certain to result in painful consequences, and redound to suffering across the Chinese economy, representing, if nothing else, losses of economic territory already gained in hard fought battles over the years – and for which Mr. Trump has many times expressed genuine admiration.

Contrary, therefore, to popular press fears and the nostrums of conventional wisdom, and despite the reality that tariffs represent admittedly, and intellectually, “ugly,” inefficiencies, they are a proven tool for bringing recalcitrant players to the table, and given their timing at this stage of history, are important tools in the tool box of policymakers to redress longstanding imbalances.

They may well show the president and his closest advisors to be more sly fox than country bumpkin after all.

?

[1] Jordan Peterson podcast: https://jordanpetersonquotes.com/how-to-be-properly-grateful/.

[2] James Madison, “Federalist 51,” The Federalist Papers, ed. Clinton Rossiter, New American Library, NY, NY, 1999, p290.

[3] This humanist aspiration, in the opinion of this author, an ethos grounded in scientific positivism, ironically flies in the face of one of the most important discoveries of human civilization in the last two hundred and forty-three years, Adam Smith’s concept of “enlightened self-interest.” This idea contrasts markedly with another intellectual outcome of 19th century scientism, Nietzsche’s “will to power” and William James’s, “bath of blood”.? (See, for example: https://www.uky.edu/~eushe2/Pajares/moral.html). As Smith pointed out, and as Tocqueville later elaborated, stabilized international systems which allow unimpeded trade, under more or less orderly rules, and the promotion of the wealth of trading partners tend to be, in the long run, salutary for the economic ambitions of nation states and of trading partners. This principle, according to some, derives from realities inherent in the socio-cultural foundations of Western societies, exemplified in a heritage rooted in principles of so-called “British decency,” and sociologically “Protestant” (Judeo-Christian) values. See, e.g., Max Weber, https://www.marxists.org/reference/archive/weber/protestant-ethic/index.htm; and Niall Ferguson, Niall (8 June 2003). "The World; Why America Outpaces Europe (Clue: The God Factor". The New York Times. Retrieved 2011-09-19.

[4] I believe his case is masterfully presented in Niall Ferguson’s essay, “The Case for Liberal Empire,” in?Colossus,?The Rise and Fall of the American Empire, Penguin, NY, NY, 2005, pp. 169-199,?passim.

[5] For a detailed discussion of this, see the chapter titled, “FDR, Silver and China,” in Milton Friedman’s classic,?Money Mischief,?Harvest, Harcourt Brace & Co., 1994, pp. 157-188.

[6] There is a great deal of documentation to this effect.? To get a brief, bhut very good summary, however, I would direct the reader to the following: Thomas P. Bernstein, “Mao Zedong and the Famine of 1959-1960: A Study in Willfulness,”?The China Quarterly, No. 186, pp. 421-425; or the article in the Washington Post in which the Great Leap Forward is described as a “catastrophe of gargantuan proportions,”?Washington Post, Aug 3, 2016.

[7] See:, for example the article, Deng Xioping, “Build Socialism with Chinese Characteristics.” The English People’s Daily, https://english.peopledaily.com.cn/dengxp/vol3/text/c1220.html, excerpted, in? https://academics.wellesley.edu/Polisci/wj/China/Deng/Building.htm, and accessed May 30, 2019.

[8] See, Henry Kissinger,?On China, Penguin, NY, NY, 2012,?passim, who focuses more on high level interactions than on economic blight; contrast, Margaret MacMillan, “Chou En-Lai,” in?Nixon and Mao, the Week that?Changed the World, NY, NY, 2009, Random House, Chapter 3,?passim.

[9] See: T. Bernstein,?op. cit., pp. 441-445

[10] For background, see the following resources: “North Vietnam, The Christmas Bombing of Hanoi,” BBC News, ?Archive, 12/24/2012 - https://www.bbc.com/news/magazine-20719382; “Richard Nixon, Bombing for Peace,” American Radio Works, Archive, 2018, pp. 1-3, as follows -?https://americanradioworks.publicradio.org/features/prestapes/e1.html; https://americanradioworks.publicradio.org/features/prestapes/e2.html; and https://americanradioworks.publicradio.org/features/prestapes/e3.html.

[11] Op cit. Chap 5,?passim,

[12] See in this regard: A. Osborn and P. Foster, “USSR planned nuclear attack on China in 1969,” in https://historum.com/threads/ussr-nuclear-attack-on-china.14515/.

[13] The Private Life of Chairman Mao, Random House, 2013; https://www.inquirer.com/philly/health/Medical-mystery-foe-that-even-Chairman-Mao-couldnt-defeat.html, accessed on 5/30/2019).

[14] “China Contributed Substantially to Vietnam War Victory, Claims Scholar,” Wilson Center, Insight and Analysis, January, 2001.? Available here:?

https://www.wilsoncenter.org/article/china-contributed-substantially-to-vietnam-war-victory-claims-scholar .

[15] This view is expressed, for example, in L. Schweikart & M Allen,?A Patriot’s History of the United States, Sentinel, NY, NY, 2007, p. 714

[16] He was diagnosed with congestive heart failure, complicated by what was later revealed to be Amyotrophic Lateral Sclerosis, Allan B. Schwartz, MD, “Medical mystery: The foe that even Chairman Mao couldn't defeat,” The Philadelphia Inquirer, Feb. 12, 2017, available here:

https://www.inquirer.com/philly/health/Medical-mystery-foe-that-even-Chairman-Mao-couldnt-defeat.html, accessed on 5/30/2019.

[17] Margaret MacMillan,?op. cit, Chapter 5, “Meeting with Mao,”?passim. She makes this abundantly clear. She points out that Mao dismissed, time and again, any gambit by Nixon to discuss policy. Mao says he does not do so any longer. He discusses only “philosophy.”

[18] David Holley, “Eight ‘Elders’ Weild Power Behind the Scenes in China,” Los Angeles Times, January 12, 1991.? Available here: https://www.latimes.com/archives/la-xpm-1992-01-12-mn-393-story.html.

[19] The evidence is far too abundant to detail with any completeness here.? See the following for reference: Andrew Nathan, “What Lessons Have China’s Leaders learned from Tianamen?”, Perspectives, The Freedom House, May 29,2019, available here: https://freedomhouse.org/report/freedom-world/2019/china; and “NGO Joint Letter: At upcoming session of Human Rights Council, States should pass resolution to address human rights violations in the People’s Republic of China,” Human Rights in China, January 2019, available here: https://www.hrichina.org/en/press-work/joint-statements/ngo-joint-letter-upcoming-session-human-rights-council-states-should. Finally, as is well known, under the Xi regime, it is documented that, since his accession to power in 2012, he and his cronies have imprisoned or murdered hundreds of thousands, while carrying out systematic repression of China’s minority religious and ethnic communities: “China: Events of 2018,” Human Rights Watch, World Report, 2019, available here: https://www.hrw.org/world-report/2019/country-chapters/china-and-tibet.

[20] ?See,?2018 Report to Congress On China’s WTO Compliance, Office of the US Trade Representative, 2018, esp. “China’s Record of Compliance with WTO Rules,” pp 8-11.? Cf., “The Dawn of a Fascist China and What it Means for Us,” iPolitics, October 12, 2017, available here: ?https://ipolitics.ca/2017/10/12/the-dawn-of-a-fascist-china-and-what-it-means-for-us/.

[21] See, for example, Gordon Chang,?China’s Coming Collapse, 2001; or David Shambaugh,?China’s Future, 2015,

[22] See, James McBride, Noah Berman and Andrew Chatzky, “China’s Massive Belt and Road Initiative,” Foreign Affairs, The Council on Foreign Relations, June 2019, available here, https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative .

[23] Ronald Reagan, “Remarks at Fudan University in Shanghai, China,” Archives of the Ronald Reagan Presidential Library and Museum, speech de;ivered April 30, 1984, available here: https://www.reaganlibrary.gov/research/speeches/43084e.

[24] Niall Ferguson asserts, “…income per head was around a fifth of the world average, worse than in many parts of Africa.” Op cit,?Colossus, pp. 258-259.)

[25] David Rockefeller, “From a China Traveler,” Opinion, The New York Times, August 10, 1973, available here: https://www.nytimes.com/1973/08/10/archives/from-a-china-traveler.html.

[26] Ibid.

[27] See also: “A Losing Cina Bet: Presidents Who Gambled and Lost,” Opinion, New York Times, May 16, 2019, available here: ?https://www.nytimes.com/2019/05/16/opinion/china-trade-war-trump.html?rref=collection%2Ftimestopic%2FFreedom%20and%20Human%20Rights%20in%20China&action=click&contentCollection=world&region=stream&module=stream_unit&version=latest&contentPlacement=8&pgtype=collection

[28] Peter Schweizer, “The troubling reason why Biden is so soft on China,” The New York Post, May 11, 2019, available here: https://nypost.com/2019/05/11/the-troubling-reason-why-biden-is-so-soft-on-china/.

[29] Ronald Reagan, op. cit.

[30] Lyndon Johnson: “The Obligations of Power,” Annals of America, Vol. 18,?Encyclopedia Britannica, William Benton, Publisher, 1968,?pp 368-372, passim. Emphasis added. ??Does this remind anyone, other than the author, of Rudyard Kipling’s “burden”? I wonder…

[31] US Trade Representative, 2018 Report to Congress On China’s WTO Compliance, US Trade Representative, Washington, DC, 2019, available here: https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2018.

[32] Paul Krugman, “Killing the Pax Americana,” Opinion, NY Times, May 11, 2019, available here: https://www.nytimes.com/2019/05/11/opinion/killing-the-pax-americana.html.

[33] Trade Representative’s Report,,?op.?cit.,pp. 8 – 11.

[34] Jerome Waterman, “Testimony before the U.S. International Trade Commission,” in?Hearing on China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, June 15, 2010. Cited in Wayne Morrison,?China-US Trade issues, RL33536, Congressional Research Service, Washington, DC, 2018, p. 42.

?

[35] Interview, Fox News with Charles Payne, May 21, 2019.

[36] See, M. Friedman,?op. cit., p. 8.

[37] See “Money, Stock and Debt Measures,” Reports of Federal Reserve Bank of the US, https://www.federalreserve.gov/releases/h6/current/default.htm.

[38] A tragic example for many historians of the importance of the effects I will now describe can be seen in the imposition of the Smoot-Hawley Tariff in 1930. Tragic it was. But perhaps not entirely in the manner in which some historians or economists think. Conventional wisdom holds that Smoot-Hawley, by evoking retaliatory measures, set off a chain of events, which, single handedly, caused dramatic decreases in levels of world trade, exacerbating and prolonging the effects of the Depression. This analysis is far too simplistic. The measure had significant effects both in the US economy and abroad. When the tariff was initially enacted, the initial effect on the domestic economy was, in fact, stimulative. Prices rose marginally. Import substitution manufacturing actually increased and labor participation benefitted. Wages went up. Market expectations caused interest rates to rise. The hope was that this measure would contribute to abbreviate the effects of the recent stock market plunge, which were anticipated to last no more than 18 months or so. Unfortunately, in what can only be seen as a case of regulators asleep at the wheel, as Milton Friedman and Anna Schwartz have shown, as interest rates rose, not simply as a result of Smoot-Hawley, but also because of the demonetization wave we mentioned earlier, the money supply began to contract. A crisis in valuation of the pound sterling, which precipitated Britain’s demonetization, led to fears that the US would drop off the gold standard as well. This, and other domestic factors, exacerbated many of the problems, which the tariff was originally contemplated to address. As banks, both within the Federal Reserve System and outside of it, began to break under the strain, the Fed had the opportunity to exercise its primordial mandate and intervene, acting as lender of last resort, and expanding money. It did not do so. Friedman and Schwartz assert that this is the real reason the deflationary episode deepened to Depression.? See Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960, Princeton: Princeton University Press, 1963, cited by Ben Bernanke, “Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman on the occasion of his 90th Birthday,” University of Chicago, Chicago, Illinois; November 8, 2002:, available here: https://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm; see also, “Trade and China Tariffs, Economic Impact, The Tax Foundation, 2019, available here: https://taxfoundation.org/trade-china-tariffs-economic-impact/#_ftnref2.

[39] See Milton Friedman, "The Methodology of Positive Economics,"?In Essays In Positive Economics. Chicago: Univ. of Chicago Press, 1966, pp. 3-16, 30-43, available here: kimoon.co.kr/gmi/reading/friedman-1966.pdf.

[40] See also, “The?Ceteris Paribus?Assumption vs.?Omnia Mobilis?Assumption” - Mario Arturo Ruiz Estrada Faculty of Economics and Administration, University of Malaya, 50603 Kuala Lumpur, 2009, available here: https://www/researchgate.net/pub-lication/228257933_The_Ceteris_Paribus_Assumption_Vs_Omnia_

Mobilis_Assumption_Economic_Note. I, among others, have sometimes mused over the happy historical coincidence that Ben Bernanke, something of a disciple of Friedman, was Chairman of the Fed in 2008. In the previously referenced speech on the occasion of Friedman’s 90th birthday, he famously promised “we will not do it again,” meaning failing to expand money and act as lender of last resort in a monetary crunch. Whatever one thinks of subsequent Fed actions and the policy jointly pursued with the Treasury, under Geitner, of quantitative easing (Anna Schwartz became an outspoken critic prior to her death), in retrospect, the actions of the Fed after the Lehman Brothers debacle probably staved off another depression from the point of view of predictive economics.

[41] “Trade Representative’s Report, Op. cit., p. 15.

[42] Quoted in Ferguson, op. cit., p. 62.?

[43] Cf. Feng Zheng, “Is China Ready to Resume Its Imperial Glory?” The Strategist, a publication of the ?Australian Strategic Policy Institute, September 15, 2015, available here: https://www.aspistrategist.org.au/is-china-ready-to-resume-its-imperial-glory/.

[44] Figures for the preceding paragraphs are from the US Dept of the Treasury, Treasury Bulletin, March 2019, available at https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/current.html. I have also accessed Bureau of Economic Analysis,?Survey of Current Business, Vol. 99, May 2019, and, for historical wages, price levels and capital stock, reference is made to the previously cited?Congressional Research Bulletin, “China’s Economic Rise: History, Trends, Challenges, and Implications for the United States,” authored by Wayne Morrison. Meanwhile, regarding credit and banking, see also, “Financial System Stability Assessment – Press Release and Statement by the Executive Director for the People’s Republic of China,” IMF Documents, December 2017. This substantially corroborates the information contained in the Trade Representative’s review.

[45] See, “Chiina Calls for New Reserve Currency,” The Financial Times, March 23, 2009, available here: https://www.ft.com/content/7851925a-17a2-11de-8c9d-0000779fd2ac.

?

[46] Recent comments by Bacchus, Lester and Zhu, at the Cato Institute are illustrative (in “Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More Market-Oriented,” November 2017, https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help#full) :

"It will doubtless be insisted by those busy imposing unilateral tariffs that bringing WTO legal claims will require too much time and too much trouble and that, even if the United States prevails, a remedy is at best several years away. While there is some truth here, the current trade war will also require time and trouble and impose considerable economic costs on the United States as China retaliates, and then the United States ups its sanctions, and China responds again, and so on. What other untold and untoward consequences will there be from an abandonment by the United States of reliance on multilateral WTO remedies and thus of the international rule of law? Would not U.S. trade interests be better advanced by taking the time instead to seek and implement a binding and enforceable WTO judgment backed by the lawful threat of significant economic sanctions? ... Despite the repetitions of the Trump administration insisting otherwise, the WTO remains the best hope for disciplining China’s errant trade practices. Rather than abandon the WTO in its trade relations with China, the United States should rely on the WTO more than it has so far. Ideally, in cooperation with other major trading countries, the United States should take action within the WTO to ensure that China complies with its WTO obligations, and in this way push China to fulfill its promise of a transition to a market economy."

In contrast to this view, Trade Representative Lighthizer's documentation, and that of others, on the subject is incontestable. Appeals to the WTO, as well as bilateral and multilateral engagement efforts, and remedies sought in national and international courts of law over decades (since 1983 in fact) are laid out in full detail in his report,?op. cit., pp. 50-56.

?

[47] “Tariffs and Trade,” unsigned article, The Tax Foundation, May 31,2019, available here: ?(https://taxfoundation.org/trade-china-tariffs-economic-impact/.

[48] Figures from ?Dan Kopf, who parrots the conventional view of the effects long term of the tariffs: ?“US tariff revenues are way up, but China isn’t paying for them,” Quartz, May 9, 2019, available here: https://qz.com/1614032/us-tariff-revenues-are-skyrocketing/fox than country bumpkin after all.