Category Archives: Economics

Much More Than A Trade War, by Daniel Lacalle

China doesn’t bring as many weapons to the trade war as many people think. From Daniel Lacalle at dlacalle.com:

In these weeks we have read a lot about the so-called trade war.  However, this is better described as a negotiation between the largest consumer and the largest supplier with important political and even moral ramifications. This is also a dispute between two economic models.

Nobody wins in a trade war, and tariffs are always a bad idea, but let’s not forget that they are just a weapon.

Why right now?

For many years China has been allowed to maintain a mercantilist dictatorship and protectionist model under the excuse that its high growth made it attractive.

Shortly before the US launched its set of tariffs, the Chinese government accelerated two dangerous policies that we cannot ignore: intensifying capital controls , limiting the outflow of dollars from the country, and increasing the list of banned companies and sites, two measures that proved that the Chinese government was unlikely to open  its economy, rather the opposite. These measures intensified in the last year and a half. Two other factors show China’s decision to halt the opening of its system. The “Made In China 2025 Plan” and the removal of the two-term limit on the presidency, effectively allowing Xi Jinping to remain in power for life.

Between 2004 and 2018, the United States filed 41 complaints against China at the World Trade Organization, focused on 27 different areas. The vast majority of these WTO resolutions are not enforced (“Paper Compliance: How China Implements WTO Decisions.” The previous strategy of looking the other way and expecting the Chinese economy to open up little by little met the reality of increased interventionism.

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Doug Casey on Trump and the Trade War

Like all wars, once the first shots are fired in a trade war the battleground is enveloped in confusion and unintended consequences. From Doug Casey at caseyresearch.com:

Justin’s note: The trade war is spiraling out of control.

If you’ve been reading the Dispatch, you already know what I mean. In short, Trump’s taken his tough stance on trade to new heights.

He hit China with more tariffs last month. He also threatened to impose tariffs on Mexico. This is a huge deal. After all, we’re talking about two of America’s biggest trading partners.

Unfortunately, this is likely just a taste of what’s to come.

Doug Casey explains why in today’s brand-new Conversations With Casey. Doug also tells me why Trump absolutely cannot win the trade war…


Justin: Doug, Trump’s really been living up to the “Tariff Man” nickname lately. Why can’t he stop it with the tariffs?

Doug: This really brings us to a discussion of Trump himself. I admit to kind of liking Trump when he was running in 2016, despite the numerous philosophical and psychological problems that I pointed out – accurately – in 2011 when he was toying with a run. And I did make a gentleman’s bet for 100 ounces of silver with Marin Katusa that Trump would win – but that’s a different matter. The main reason I hoped Trump would win was because he wasn’t Hillary, who would have been a total and complete disaster.

Although it was clear Trump didn’t know anything about economics, he at least had a business background, unlike Hillary or most politicians. He also said he was going to end all the pointless wars the U.S. either started or aggravated.

Unfortunately, what little mettle Trump had has apparently been corrupted by living in Mordor for the past two years. The Deep State is a very real thing.

He hasn’t pulled troops out of Afghanistan, Syria, or a dozen other countries where the U.S. has varying levels of actual combat troops. Instead, he’s made the already bloated military bigger. He’s letting his warmongering advisors play chicken with China, Russia, and Iran. So, he’s failed from that point of view.

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Elizabeth Warren’s Plan to Bamboozle American Voters, by MN Gordon

Beware politicians bearing plans. From MN Gordon at economicprism.com:

The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants.  Then they distill it down to hollow bumper stickers.  After that, they pump their fists and reflect it back with mindless repetition.

Change We Can Believe In.  Feel the Bern.  Make America Great Again.  Sí Se Puede.  Fighting for Us.  Compassionate Conservatism.  A Stronger America.  Ross for Boss.  Morning in America.  Not Just Peanuts.  Nixon’s the One.  Dean Scream.  And much, much, more…

The mantras are both idiotic and comical.  They provide political lemmings with something to believe in.  They also provide incisive observers with a unique prism into the menaces of tomorrow.

For example, presidential candidate Elizabeth Warren’s slogan is: “Warren Has a Plan for That.”  An official t-shirt, adorned with this slogan, will set you back just $30 bucks.  And you can pick up a slogan emblazoned tote bag for $35.  What a bargain!

To any onlooker with their wits about them this mantra is utterly absurd.  But to Warren, it’s as serious as a heart attack.  She does, indeed, have a plan for everything – even if it means instant death.  In fact, her official website includes the following sales copy:

“Child care unaffordable?  Big corporations and billionaires not paying their fair share?  Want more economic and political power in the hands of the people?  Don’t worry, Warren has a plan for that.”

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Amazon Gets Booted by FedEx, by Wolf Richter

Like Walmart, Amazon’s sales are usually at ultra-thin margins, and suppliers and other vendors are often pressured for rock-bottom rates. That’s not playing too well with FedEx. From Wolf Richter at wolfstreet.com:

Ecommerce is drawing up new battle lines – in the transportation sector.

Amazon is aggressively butting in on freight carriers with its own planes, trucks, and delivery infrastructure, and is at the same time aggressively pushing for faster and cheaper service from freight carriers such as FedEx, UPS, and the US Postal Service. And FedEx has had it with Amazon, announcing today that it was dumping Amazon as customer of its Express division.

“FedEx has made the strategic decision to not renew the FedEx Express U.S. domestic contract with Amazon.com, Inc. as we focus on serving the broader e-commerce market,” it said in a surprise statement. The current contract ends June 30.

Its other units that do business with Amazon and its international services with Amazon are not impacted by this decision, FedEx said.

FedEx is not overly dependent on Amazon – unlike some other freight companies that now have come to grief under Amazon’s boots, including New England Motor Freight, a less-than-truckload carrier that “stunned” the transportation world when it filed for bankruptcy in February.

Interestingly, FedEx chose to address this point explicitly in the statement:

Amazon.com is not FedEx’s largest customer. The percentage of total FedEx revenue attributable to Amazon.com represented less than 1.3 percent of total FedEx revenue for the 12-month period ended December 31, 2018.

Amazon is trying desperately to speed up shipping and keep its shipping costs low. Being so immense, it is able to throw its weight around and negotiate very demanding contracts – that can be too demanding, as New England Motor Freight found out.

NEMF was ranked No. 18 by revenue in the less-than-truckload sector in 2017, with FedEx being ranked No. 1, YRC Worldwide No. 2, and UPS No. 5. When it filed for bankruptcy in February and said that it would go out of business, it blamed a host of reasons.

Industry insiders at the time added a reason: Amazon’s demanding contracts. Amazon accounted for less than 6% of the company’s revenues, according to these estimates, but was low-margin business that required a lot of company resources and was expensive to deal with.

“Multiple industry insiders pointed to NEMF’s over-exposure to a very large online retailer, where volumes may have been high but margins very thin,” Seaport Global Securities analysts wrote in a note, alluding to Amazon. During holiday season, the analyst wrote, “surges in volumes can disrupt current operations, customer service levels, and therefore margins.”

A few weeks after the end of the last holiday period, MEMF was done and threw in the towel.

And so FedEx said it is going to “focus on serving the broader e-commerce market” — more profitable customers that don’t eat up so much of its resources:

There is significant demand and opportunity for growth in e-commerce which is expected to grow from 50 million to 100 million packages a day in the U.S. by 2026. FedEx has already built out the network and capacity to serve thousands of retailers in the e-commerce space. We are excited about the future of e-commerce and our role as a leader in it.

This “opportunity for growth” would be less gigantic shippers that don’t have the margin-crushing power of Amazon.

In addition, there is the issue of growth for FedEx, with regards to Amazon. Amazon is aggressively building up its own delivery capabilities, from cargo planes to last-mile delivery services, and in the process has become a logistics giant in its own right, as it is trying to get control of its shipping costs and move business away from FedEx and others.

So for FedEx, Amazon is no longer a growth opportunity. It’s just a low-margin cost-intensive and perhaps shrinking business.

We can only imagine what happened during the negotiations between Amazon and FedEx as they were trying to renew the contract that will expire on June 30.

Amazon must have tried to cut its cost further and speed up deliveries further, at the expense of FedEx. And FedEx must have done the math that it would be better off chasing after less costly business. Ecommerce is growing in leaps and bounds, powered by countless large and small players – and Amazon is not the only one.

 

The America That Was — The Good and the Bad, by Richard M. Ebeling

Almost nobody in America really knows what it’s like to live in a free society. From Richard M. Ebeling at fff.org:

We live in a time when an understanding and an appreciation of what a free society can or should be like is being slowly lost. Or so it seems, often, to a friend of human liberty. Political interventionism and a revived interest in “democratic socialism” dominate public discourse in almost every corner of life.

Calls are constantly being made for government to do more. Remaining areas of personal life are to be invaded by increased government regulation, redistribution, control, command, and constraint. The idea of the independent and self-responsible individual diminishes in the number of its supporters, or so it appears, with every passing day.

Public-policy debates concern not whether something should be overseen and managed by government, but merely how far the interventionist welfare state should go, and who is going to pay for it.

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Opinion: America is in denial about the trade deficit — it’s not China, it’s us, by Stephen S. Roach

If you consume more than you produce, you have to either draw down savings or borrow money from those who produce more than they consume. The former is the US, the latter is China. From Stephen S. Roach at marketwatch.com:

U.S. trade deficit is made at home with appalling low savings rate

MARK SCHIEFELBEIN/AFP/Getty Images
Clueless U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu meet in Beijing in February.

NEW HAVEN, Conn. (Project Syndicate) — “When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” So said President Ronald Reagan, commenting on Japan after the Plaza Accord was concluded in September 1985.

Today resembles, in many respects, a remake of this 1980s movie, but with a reality-television star replacing a Hollywood film star in the presidential leading role — and with a new villain in place of Japan.

Back in the 1980s, Japan was portrayed as America’s greatest economic threat — not only because of allegations of intellectual-property theft, but also because of concerns about currency manipulation, state-sponsored industrial policy, a hollowing out of U.S. manufacturing, and an outsize bilateral trade deficit.

In its standoff with the U.S., Japan ultimately blinked, but it paid a steep price for doing so — nearly three “lost” decades of economic stagnation and deflation. Today, the same plot features China.

Notwithstanding both countries’ objectionable mercantilism, Japan and China had something else in common: They became victims of America’s unfortunate habit of making others the scapegoat for its own economic problems.

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Workers of the World, Unite! by MN Gordon

The real cause of the US’s massive trade imbalance with China is the US’s depreciation of the dollar. From MN Gordon at economicprism.com:

The dawn of war is a time of simple clarity and purpose.  Good guys vs. bad guys.  Cowboys vs. Indians.  Confederates vs. Yankees.  Coppers vs. robbers.  It’s a time when lines are drawn, songs are sang, and drums are beaten with gaiety and confidence.

Indeed, calls for ‘a jolly little war’ are always greeted with merriment and optimism.  This also goes for the dawn of a trade war.  Regardless of whether you’re from Scranton or Suzhou, the escalating  Trump vs. Xi standoff all seems so virtuous.  “We’re right, they’re wrong,” and vice versa.

Here in the USA, the perspective is crystal clear.  America’s rightful bounty is within reach.  After several Presidents that were light in the loafers, there’s finally a leader of the free world with the brass fortitude to reach out and grab it for his fellow countrymen.  And why not?

Several decades of getting spanked by Chinese grunt laborers have American workers longing for reprisal.  This ain’t their granddaddy’s economy.  They’ve been repurposed from well-paying manufacturing jobs to low-level service workers.  The relentless progression has been demoralizing.  Given a fair shake, American workers just know they’ll kick tail and take names.

Yet, as far as we can tell, Trump’s fight is a day late and a dollar short.  The time to stand up for the American worker came and went while Ray Dalio was busy getting absurdly rich from the financialization of the economy.  What’s more, the means to stand up for the American worker had – and still has – little to do with slapping tariffs on Chinese made doohickeys.

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