This is the third part of an ongoing macro coverage of the Trump Trade war, a war that is slowly bearing fruit for President Trump.
Part one and part two of this series can be seen here:
Almost two months after my last article a lot has happened on the trade war front, and the macro numbers can be recalculated.
The main purpose of the other two articles was to show that while the trade war dominated headlines, the macro impact of international trade on all the major players is very small regarding the percentage of GDP.
The whole trade war episode is a headline-grabbing sideline that enables neoliberal forces to quietly dismantle environmental, social and business regulations, socializing losses and privatizing profits to the ruling class.
The major combatants and their share of international trade as a percentage of GDP are shown in the table below in the next section.
Trade as a Percentage of GDP
The table below shows the current account as a percentage of GDP for each major "combatant" in the trade war. As one can see, the largest exposure is in Japan at just over 4%; however, none has a large exposure overall. The domestic economy of each land is so large and diversified that over 96% of GDP of the economy exists outside of international trade. If each country closed its borders and withdrew from international trade the largest impact would be felt in Japan at 4% on GDP.
All those resources that are used to produce goods and services for foreigners could be redeployed to provide goods and services for citizens instead and bolster domestic demand and consumption and material wealth levels.
(Source: Trading Economics dot com)
Putting the Trade War in Perspective
The chart below is an update of the chart presented in the last article and now shows the change in tariff trade threats between America's major trading partners. Mexico and Europe have been updated with the latest results of trade negotiations.
(Source: Trading Economics dot com plus author calculations for 2017)
Mexico and the USA have agreed to renew the NAFTA agreement which means new tariffs are now off the table and business class elites in both countries can enjoy the fruits of enlarging the earnings and profits share of GDP while the wages share of GDP falls.
Canada could soon follow Mexico into a renewal of the NAFTA agreement and there could be a reduction in tariffs and a return to business as normal with no new tariffs.
Similarly, in Europe, the trade war has been put on hold while a new agreement is ratified between the parties where tariffs overall could be reduced. The European Union [EU] has offered to drop all tariffs on cars (10% for the USA and 2.5% for them) and other goods if the USA does the same.
When compared to the last report the sum of the tariffs both imposed and threatened has fallen. The table from the last report is reproduced below.
(Source: Trading Economics dot com plus author calculations for 2017)
Actual and threatened tariffs have now fallen by $30 Billion across both parties. This is really good news, however, it is still more than before the trade war was started. It remains to be seen how tariffs overall are reduced from the original start position as opposed to simply reducing the more recent new ones.
The new trade agreements will hopefully result in lower tariffs overall and more importantly lower than before the trade war was started.
What this means from a balance of national accounting viewpoint is that national governments that are monetary sovereign are not deleting currency in the form of tariff taxation. Money that is left in the economy grows the economy. The national government debt and deficit are the private sector savings and income.
A “trade war” is different from a military war. In a military war, the enemy shoots at you, and you shoot at the enemy.
In a trade war, the enemy shoots at you and at itself, while you shoot at the enemy and yourself. You shoot at yourself in the sense that you make imported goods and services more expensive for your citizens through the tariffs that go to the national government where the money is deleted.
One can understand why the Europeans wish to hold onto their tariffs because the nation states in the EU are like individual states in the USA. They cannot issue currency because they are users of the euro that is issued by the EU via the European Central Bank at interest. Tax dollars there do go to reducing government debt and deficits. These countries do not have monetary sovereignty.
With every nation shooting at other nations and its people, how do you “win” a trade war? You don’t. All trade wars are lost because the cost base is made higher. Each nation has higher internal nominal costs and receives less real benefits in the form of goods and services.
A general reduction in tariffs all around is a win for everyone as it means the general taxation and money deletion is lower.
President Trump will want the good news from the successful new trade agreements that lower tariffs and open more markets to US businesses, in place to help the Republican party do well in the November 2018 midterm elections. This plan is on track to work as these early successes show. This is the time pressure point, and one can expect the trade war to be over in late September early October 2018 with some runs on the scoreboard for the USA.
What the mainstream in the USA is missing is the following point about America's foreign trade:
Many of America's foreign ....transactions do not involve payments abroad. U.S. foreign aid is extended “in kind” (e.g., food dumping and military “aid” in the form of weapons), or loans to governments to pay their debts to U.S. banks. The payment never leaves the United States. So what seems at first glance to be an outflow (grants and advances to foreign governments) generates an offsetting credit – and indeed a dollar inflow for the United States as foreign countries pay back their “aid” debts.....Since 1971 (the end of the gold standard), U.S. deficits have been settled by a run-up of Treasury debt to foreign central banks. For most other nations, the typical payments imbalance is foreign debt service, leading to a loss of international reserves (formerly gold, now mainly U.S. Treasury IOUs). The United States is almost alone in being able to settle its payments imbalances on military, trade and investment accounts in government IOUs denominated in its own fiat currency – U.S. Treasury bonds payable in dollars – without constraint.
(Source: Hudson, Michael. J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception (Kindle Locations 948-952). ISLET/Verlag. Kindle Edition.)
By seeking to lessen the current account deficit, President Trump is undoing this carefully established system created by Washington for the benefit of America whereby America obtains imports essentially for free. The mistake, of course, is that because of the mainstream obsession with Federal government debt and deficits the largesse is not shared out by matching the import cash drain with matching Federal government spending on the public purpose that would benefit all Americans in the form of first-class healthcare, education, and infrastructure.
While trade is a popular issue at present, I am more concerned about bigger issues that bring on recessions and stock market panics such as:
1. Fed rate rises.
2. Oil price rises.
3. Expiration of Federal tax exemptions in late 2018.
4. Falling forward earnings expectations in the latter half of 2018.
5. The impact of central banks across the world reducing their balance sheets all at once by selling their stocks, bonds, and other securities at the same time.
This was brought to my attention by Seeking Alpha Marketplace Contributor Mr. Robert P Balan and his PAM team. Mr. Balan's latest public article on this subject is located here. And this very important chart is reproduced from it below:
The following chart is one that Mr. Balan produced for this article and provides a clear picture of the falling world GDP and Central Bank bank balances. Asset markets will follow this downward trend, and due to the lag between flow increases and asset market response, the decline is now baked in even if the flows were to reverse now.
The simple takeaway is that when the Monetary Base of the big global Central Banks falls, so does the stock market as system liquidity declines.
The decline in system liquidity begins this week and bottoms towards the middle of the month and rises again. Markets should soften in this time and then recover into the end of the year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.