We Had To Pass The China Trade Deal To Find Out What Was In It

President Trump and Chinese Vice Premier Liu He signed the “phase one” trade agreement today to much fanfare. The 86-page agreement was trumpeted by the president as a “big, beautiful monster,” but details of the deal were uncharacteristically absent prior to the signing.

The US Trade Representative published a two-page fact sheet about the deal more than a month ago after the agreement was announced, but the link was broken when I tried to retrieve it for this article. Nevertheless, the site does give some broad details such as, “The United States will be maintaining 25 percent tariffs on approximately $250 billion of Chinese imports, along with 7.5 percent tariffs on approximately $120 billion of Chinese imports.”

New fact sheets and the text of the entire agreement are now on the Trade Representative site. You can access those documents here. Among the items in the agreement are:

• Intellectual Property concerns regarding pirated and counterfeit goods
• Protection against unfair technology transfers
• Increasing China’s purchases of US goods by $200 billion over 2017 levels
• Commitments by China to refrain from devaluing its currency

Other, more difficult issues, such as Chinese industrial subsidies, are slated to be addressed in subsequent agreements. President Trump has hinted that there may be as many as three phases to the China deal.

Under the new deal, Mr. Trump’s tariffs are here to stay, at least for the foreseeable future, but at least new rounds of tax increases have been staved off. The executive agreement does not have to be ratified by Congress.

As late as this morning, even Fox News had conflicting information from each side. US sources told Fox that Chinese purchases of US goods would “total $205 billion to $210 billion over two years while Chinese sources indicate the buys would be between $215 billion and $220 billion.” These figures include purchases of US agricultural products, manufactured goods, energy, and services. As noted above, the number cited by the US Trade Representative fact sheet is actually $200 billion.

Treasury Secretary Steven Mnuchin told Fox, “There’s a very detailed dispute-resolution process. This is an enforceable agreement just as the president dictated it would be.”

The Washington Post reports that the enforcement provisions a “process of consultations” to resolve disputes. The consultations will be backed up by the threat of – you guessed it – more tariffs.

Regardless of the details, markets have cheered the agreement. The most important detail may be simply that, at least for the time being, no new trade taxes will be applied to Chinese imports and exports. Even though the trade taxes remain higher than before the onset of the trade war, which has offset much of tax reform’s boost, the prospect of avoiding looming tax increases is a boon to beleaguered US agricultural and manufacturing sectors.

President Trump declared victory after the signing, saying, “Today we take a momentous step, one that has never been taken before with China, towards a future of fair and reciprocal trade.”

Now that the deal is signed and the agreement is public, economists and business groups can finally determine just how momentous that first step really is. Regardless of the details, avoiding more tariff escalations (i.e. tax increases) is a win for American business.

Originally published on The Resurgent

The Trade War Heats Up Again

President Trump provoked a stock market selloff yesterday when he told reporters that a China trade deal might not be completed until after next year’s election. There are also possible new tariffs on France as well as renewed import taxes on Brazilian and Argentinian steel. The combined announcements of disappointing trade news on multiple fronts show that the trade war is still going strong.

The president sent stocks tumbling yesterday when he told reporters at the NATO conference in London, “A China trade deal is dependent on one thing — do I want to make it.”

Mr. Trump added, “In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right.”

Back in October, President Trump announced the deal with China, but a firm agreement has so far failed to materialize. Last spring, a near-agreement with China on trade fell apart when Mr. Trump, the self-proclaimed “tariff man,” balked at removing the taxes on Chinese imports.

Now negotiators are racing a Dec. 15 deadline imposed by the President last summer. At the end of next week, $300 billion in Chinese products are scheduled for a 15 percent import tax increase. The December 15 tax increase includes consumer goods not previously subjected to tariffs. These include technology products such as cellphones and computers that will be in high demand in the weeks before Christmas.

Today, Trump Administration officials are working to undo the damage of what they call an “off the cuff” remark. Officials cited by Bloomberg downplayed the notion that trade talks were at an impasse and were hopeful for a resolution before the scheduled tax increase next week.

Agriculture Secretary Sonny Perdue told CNBC, “ Trump wants to conclude a deal that can be enforceable, that can be reliable and be consistent with what the deal says.”

“We in agriculture are optimistically hopeful we can conclude this,” Perdue said, adding, “Every farmer in America would rather have trade than aid.”

The prospect of increased tariffs on Chinese imports comes days after the president announced that he is restoring steel and aluminum tariffs on Brazil and Argentina. In a tweet on Monday, President Trump accused the two countries of devaluing their currencies, which he said was “not good for our farmers.” Mr. Trump’s response was to restore the steel and aluminum tariffs that were originally imposed in May 2018.

https://twitter.com/realDonaldTrump/status/1201455858636472320?s=20

However, a devalued currency is a byproduct of a tariff war. In an undated article on American Express, Frances Coppola explained that, when the US places a tariff on imports, companies in the targeted country receive fewer US dollars. Those dollars would often be traded on monetary exchanges for the local currency. Since fewer dollars are being traded for Brazilian reals or Argentinian pesos, the demand for those currencies drops and their value goes down.

In reality, America’s farmers are suffering because China retaliated to President Trump’s tariffs with retaliatory taxes on American exports. These taxes hit American agriculture hard, but they benefitted countries like Brazil. Where American farmers used to export to China, the trade war has shifted Chinese agricultural purchases to countries that compete with the US. Brazilian farm products have helped to replace American products in China.

Finally, there is also the prospect of new tariffs on France. Also on Monday, President Trump threatened 100 percent tariffs on a long list of French products that includes wine, cheese, beauty products, and handbags in retaliation for a French tax on digital services that impacts American social media companies such as Facebook and Google. The new US tariffs would be in addition to tariffs on $7.5 billion in European goods that the Administration imposed in October.

“If anyone is going to take advantage of the American companies, it's going to be us, it's not going to be France,” Trump told CNN.

France has pledged to “retaliate strongly” if the proposed tariffs go into effect. So far, the Trump Administration has not released an implementation date for the new tariffs.

With an impeachment already in process and presidential approval underwater, the economy has been one of the few bright spots in President Trump’s reelection campaign. Despite the risks of meddling with the economy, Mr. Trump cannot help himself when it comes to tariffs.

For months, there have been signs that the economy is slowing even though the stock market has continued to climb and unemployment remains low. US manufacturing has contracted for four straight months and the farm economy is being propped up by government handouts. Businesses are hesitant to make plans and investments when the president might tweet a drastic regulatory change at any moment. Many of these warning signs can be traced to Mr. Trump’s arbitrary trade policies. If he chooses to ignore them and is damaged in the 2020 elections by a weak economy, he will have only himself to blame.   

Originally published on The Resurgent

Trump Announces Partial Trade Deal With China

Amid a slowing economy, an unpopular foreign policy move, and an abuse of power scandal that has brought the specter of impeachment, President Trump needed a victory. Now, it appears that the president is claiming at least a partial victory in the trade war with China.

Markets are certain to cheer Mr. Trump’s announcement that the US and China have reached a “substantial phase one deal.” Treasury Secretary Mnuchin also said that the US would delay implementation of the next round of tariffs, scheduled to go into effect next week.

The details of the deal are not yet known. Trump said that phase one will be written over the next three weeks and will address intellectual property and financial services concerns as well as the purchase of $40-50 billion in US agricultural products by China.

China’s Vice Premier Liu He appeared with President Trump in the Oval Office for the announcement of the deal. The fact that the Chinese representative was present when Trump announced the deal may mean that a true breakthrough has been achieved. Previous deals trumpeted by the president have proven ephemeral.

When asked what changed since talks broke down in May, Trump said the new deal was “bigger,” per CNBC. The vice premier described the difference as “cooperation,” which may mean that the Trump Administration eased its demands.

A final deal may still be weeks away. Mnuchin said, “We have a fundamental understanding of the key issues, but there is more work to do.”

Like President Obama’s nuclear deal with Iran, President Trump’s China trade deal will reportedly not require congressional approval. Trump tweeted this morning that he would sign the deal “fast and clean.”

https://twitter.com/realdonaldtrump/status/1182661081849835520?s=21

David Dollar, a senior fellow at the Brookings Institution, told CNBC that “the two sides are not discussing a trade treaty that requires congressional approval.”

“It is a more informal agreement in which China will undertake to do certain things such as buy U.S. agricultural products and the administration will undertake not to follow through with the next rounds of tariffs. Since those tariffs do not require congressional approval, the administration can postpone or cancel without that approval,” Dollar said.

“Phase two [negotiations] will start almost immediately” after the first phase is signed, Trump said.

Regardless of the details of the deal, any delay in the upcoming implementation of tariffs will be a good thing for the economy.

August Jobs Report Yields Disappointing Numbers

The Bureau of Labor Statistics has released the monthly jobs report for August and the hiring numbers for last month are further evidence that the economy is slowing.

In raw numbers, the BLS reported that the economy added 130,000 jobs to nonfarm payrolls and the unemployment rate was unchanged at 3.7 percent. The report notes that 25,000 of the new jobs were temporary census workers hired by the federal government.

Job creation in August was short of expectations and below average for the current year. Economists had predicted a gain of about 158,000 jobs. The August numbers, especially when the temporary census jobs are subtracted, was the worst month for job creation since last February.

Job creation was offset by the loss of 11,000 jobs in retail and 5,000 jobs in the mining industry. There was little change in construction, manufacturing, transportation and warehousing, and leisure and hospitality, industries in which the report notes “job growth in these industries has moderated thus far in 2019 compared with 2018.” Some of the job loss in retail could be attributed to the rise of internet retailers such as Amazon.

In the same report, the BLS revised down the job creation numbers from June and July. In June, businesses created 15,000 fewer jobs than previously reported while July numbers were downgraded by 5,000.

The stock market reacted to report by pulling back a surge that resulted from the news that the US and China will resume trade talks next month. As of this writing, the Dow is up about 82 points for the day.

The primary change in the economy over the last year has been the escalation of the trade war with China. As reported last week in The Resurgent, manufacturing output has decreased to its lowest point since 2009, putting the manufacturing sector in a recession already. This is largely due to decreased demand.

Despite the manufacturing slowdown and declining jobs in retail, consumer confidence remains relatively high. Confidence is above 2016 levels, but it has fallen sharply since the onset of the trade war last year. The addition of President Trump’s new tariffs, with one round of taxes on consumer goods effective Sept. 1 and another due in December, may further erode confidence.

“Household consumption right now is propping up the U.S. economy,” Joe Brusuelas, chief economist for the audit and consulting firm RSM, told NPR. “We’ll see if the uncertainty tax that’s been placed on the economy by trade policy begins to adversely influence consumer attitudes.”

The Wall Street Journal points out that, while the contraction in manufacturing due to the trade war is problematic, the bigger concern is the services sector that includes retail. If hiring slows enough to raise the unemployment rate, consumers could slow their spending and the economy could slow further as a result. Trade uncertainty and the possibility that businesses could slow their investments is yet another threat.

President Trump has pressed the Fed to decrease interest rates and the August jobs report will likely support the need for an interest rate cut, but a lower interest rate is not the answer to what ails the economy. It is the trade war that has led to what seems to be a global manufacturing slowdown and things are likely to continue to get worse until the trade uncertainty is resolved.

Originally published on The Resurgent

Which Is The True Workers’ Party?

Labor Day is typically considered to be the end-of-summer holiday by many Americans, but the holiday originated in the late 1800s as a day to celebrate America’s labor movement. As such, it was closely identified with labor unions for much of its history. On this Labor Day, with elections more than a year away already heating up, it’s appropriate to consider the relationship of both parties to workers.

Democrats have traditionally tried to coopt Labor Day due to their close association with the unions. Today’s Democratic Party, with its newly popular contingent of democratic-socialists, is no different. The Democrats pay lip service to workers, but many of their policies are proven job-killers and ultimately hurt the very people that they try to help. Higher taxes, business-strangling regulations, and mandates that add to the cost of doing business all serve to slow the economy and prevent job creation.

That the Democrats have alienated their blue-collar base is apparent from the fact that Donald Trump is sitting in the White House instead of Hillary Clinton. Trump’s victory was clinched in the Rust Belt states that were traditionally assumed to be safely tucked behind a Blue Wall.

Many of the proposals from the 2020 Democrats aren’t much better – or different - than what Hillary tried in 2016. There are proposals for rolling back the 2017 tax reform, raising the minimum wage, and nationalizing healthcare. None of this bodes well for the economy or for workers.

But if Democrats have disregarded their blue-collar base so have Republicans. Although the Trump Administration got off to a good economic start with tax reform and deregulation, it went off the rails in 2018 with the trade war. Although the tariff war was pitched as strategy to help workers and strengthen US industry, the opposite has turned out to be true.

The trade war was originally launched to help the US steel and aluminum industries, but American steel companies are shutting down mills and laying off workers. Why? Because overproduction paired with declining demand from other industries led to a sharp decline in steel prices despite Trump’s attempt at protectionism.

It isn’t only steelworkers who are suffering from the trade war. The agricultural and manufacturing sectors have both been hard hit as well. Despite the president’s farm subsidies, US farm income has fallen precipitously, leading to higher rates of farm bankruptcies and suicides by frustrated farmers. A boom in manufacturing jobs in Trump’s first two years has already turned flat as manufacturing declined for two straight quarters in the first half of 2019, putting the industry in a recession even before the most recent rounds of tariff increases.

The month of September ushered in one of those rounds of tax increases. President Trump’s new 15 percent tax on 40 percent of consumer products imported from China will be borne heavily by blue-collar workers and their families. JP Morgan Chase notes that the new tax will cost the typical American household more than $1,000 annually. Previous rounds of tariffs had almost totally erased the benefits of tax reform per Accounting Today so the September tariffs will put taxpayers firmly in the red. And there is yet another round of US tariffs scheduled to go into effect just in time for Christmas.

The new tariffs on Chinese goods will have an outsize effect on lower and middle-class consumers because lower-income Americans are more dependent on cheap imports from China. The poor are also least able to afford the 15 percent tax on everyday items such as clothes, shoes, electronics, plastic items, computers, and furniture.

At this point, it probably seems to most voters that both parties are bad for workers. The Democrats are intent on milking businesses for every cent that they can get while Republicans are oblivious to the collateral damage of their Quixotic trade war. Both are too focused on their own priorities to pay attention to the fact that neither party is popular with average Americans.

Rather than telling workers what is best for them and informing taxpayers that they should be grateful for the chance to “invest” more of their hard-earned money in the priorities of the party base, maybe politicians of both parties should listen to the concerns of the workers they are supposed to serve.

Originally published on The Resurgent

August 29th, 2019 The Trump Economy Is Starting To Make Republicans Nervous

“The economy is doing GREAT,” President Trump gushed on Twitter this morning, adding that there was “tremendous upside potential” if only “the Fed would do what they should.” However, an increasing number of Republicans are seeing Trump’s bullish tweets as an attempt to whistle past the graveyard.

https://twitter.com/realDonaldTrump/status/1167060675480473600?s=20

“There’s no question that trade uncertainty is contributing to the slowdown,” Sen. Pat Toomey (R-Pa.) said, quoted in Politico. “We’re in a very good place. The danger is: Where are we going to be a year from now if concerns about trade continue to be an irritant to growth?”

“The biggest risk to the economy is the whole trade situation,” agreed Sen. Ron Johnson (R-Wis.) in an interview. “I think the president did a great job, we stopped doing the regulatory burden, we have a fairer tax system ... and the whole trade war has injected a huge dose of uncertainty and instability.”

“I don’t think [White House economic advisor] Peter Navarro understands the instability of what he promotes, [what] his trade war is injecting into the economy,” Johnson added.

At least one Republican, Sen. Chuck Grassley (R-Iowa), has announced his intention to introduce a bill to curb the president’s power to impose national security tariffs this fall. Nevertheless, Grassley stopped short of attacking Trump’s tariffs earlier this month.

One reason that swing state Republicans are concerned is that the bond yield curve inverted again yesterday after flirting with inversions in recent weeks. When the yield on long-term (10-year) bonds is lower than that of shorter-term (2-year) bonds, it is typically seen as a leading indicator for a recession.

The disturbance in the bond and stock markets can be traced directly to the president’s tariff war with China. Over the past few weeks, both sides have launched new rounds of increased trade taxes and the Chinese have suspended purchases of American agricultural products, a direct assault on a core part of Trump’s base that has already been hit hard by the trade war. Even the Trump Administration’s farm subsidies and a new trade agreement in principle with Japan, which may be signed into a formal treaty in September, are unlikely to offset the loss of one of America’s largest agricultural export markets.

Farmers aren’t the only segment of the US economy that is reeling from the trade war. US manufacturing has also been flashing caution lights for several months now. Federal Reserve data from June showed that US manufacturing had already declined for two straight quarters, putting the sector in a recession. Last week, Fortune reported that the situation had gotten even worse with US factory activity contracting for the first time since September 2009. Other countries were also seeing their manufacturing activity decline as the world economy experienced decreased demand, which naturally follows the higher prices of goods traded internationally or built with imported components or materials.  

A further disturbing fact is this morning’s report from White House sources that Trump’s claim of calls from China asking to resume trade talks “didn't happen the way he said they did.” Per CNN, the officials said Trump was “eager to project optimism that might boost markets, and conflated comments from China's vice premier with direct communication from the Chinese.”

“What does Pat Toomey want me to do?” Trump reportedly responded this morning to Toomey’s comments. “Does he want me to say 'Let me put my hands up, China...continue to rip us off? Let me give up right now, China, even though we're winning?’”

https://twitter.com/ddale8/status/1167070164699025409?s=20

What Trump is actually doing is steering more subsidies to his farm base as well as reaching the new agreement in principle with Japan. Prime Minister Abe said, “We believe that there is a need for us to implement emergency support measures for the Japanese private sector to have the early purchase of the American corn” due to “insect pests” but stopped short of committing to the “hundreds of millions of dollars” in agricultural products that Trump requested.

President Trump also said today on Twitter that he is preparing a “giant package” of aid to farmers who were impacted by both the trade war and the Trump Administration’s waivers to 31 refineries that allow them to not blend corn-based ethanol into their fuels. Even before the ethanol aid, Trump subsidies to farmers have reached $28 billion.  

https://twitter.com/realDonaldTrump/status/1167064301565358080?s=20

“The administration has to be prepared to take off the tariffs in order to get a good agreement,” Sen. Rob Portman (R-Ohio), a former U.S. trade representative, recommended. “And there’s been some disagreement about that within the administration. Some are saying they should come off and others are saying we should keep them. I don’t think you’ll get a good agreement if you do that.”

But, to President Trump, removing tariffs without a deal would likely be seen as an admission of defeat and blinking in a moment of confrontation. Back in March, President Trump said that he might not remove tariffs even after a new trade was reached. The president’s only other course of action is “Damn the torpedoes and full speed ahead,” hoping that the faltering Chinese economy causes President Xi to blink before the US election next year.

Not all Republicans are expressing doubts about the trade war, however. Perhaps most surprising among the defenders of Trump’s trade policy is Marco Rubio (R-Fla.), formerly a free trade conservative. Rubio recently argued in support of Trump, saying, “Do I like tariffs as a matter of policy on any given day? No. What other alternatives do you have to rebalance what has now been 30 years of cheating, lying, stealing and unfairness on behalf of the Chinese?”

The difference between Rubio and Toomey, Johnson, and Portman may be in the recent Morning Consult state polls of Trump approval. Trump is breaking even (within the margin of error) in Florida, but deep underwater in Ohio, Pennsylvania, and Wisconsin. None of the four Republicans is up for reelection in 2020, however.

With both the president’s farm-state base and swing state factory workers feeling the pressure of the trade war, Republicans have little choice but to hang on and hope for the best. President Trump’s reelection almost certainly depends on maintaining a stable economy and finding a successful conclusion to the trade war. At this point, both are seeming less and less likely. If the economy takes a turn for the worse, even more Republicans may find themselves in rebellion against Mr. Trump’s trade policy.

Originally published on The Resurgent

The Payroll Tax Is Not The Problem

Fresh from defending the economy against recession fears over the weekend, there are now reports that the White House is considering a payroll tax to stimulate the economy. The fit of mixed messaging comes after a week of erratic stock markets and amid several softening economic indicators.

Yesterday, the Washington Post reported that the Trump Administration was considering a payroll tax cut to avert a possible slowdown as the next round of tariffs takes effect. The new tariffs, which heavily impact consumer electronics products, are slated to become effective on September 1 for some imports and December 15 for others. The tariff increase will apply a 10 percent tax to most of the remaining $300 billion of Chinese imports that have escaped import taxes so far. A report by JP Morgan estimates that new tariffs will increase the cost of the trade war from $600 to $1,000 for the average American household.

In another hint that the White House is concerned about the economy, President Trump has renewed criticism of Federal Reserve Chairman Jerome Powell. On Twitter, the president has pushed Powell for more cuts to interest rates that are already near zero.

https://twitter.com/realDonaldTrump/status/1163472273388576768?s=20

The Post reported that members of the Administration were in preliminary discussions about the possibility of a payroll tax cut to offset the cost of the next round of tariffs to American consumers, but a White House spokesman officially denied the report in a statement to CNBC, saying, “As Larry Kudlow said yesterday, more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time.”

Most working Americans pay a 6.2 percent payroll tax into Social Security that is matched by their employer. Considering a median household income of $61,372 annually, the average family pays about $3,800 in payroll taxes every year.

Cutting the payroll tax to stimulate the economy is not a new idea. President Obama passed a payroll tax holiday in 2010 which exempted qualified employers from paying the tax. The Heritage Foundation pointed out at the time that the tax cut failed to stimulate the job market, arguing that “reducing employer costs and uncertainties will make employers more willing to pursue new opportunities in the economy, which is the key to growth.”

While there are no specifics of any proposal that might be under discussion in the Trump White House, payroll tax cuts typically are intended to make the cost of labor less expensive and leave people and businesses with more money to spend. Such a cut could be targeted at either the employer side of the tax, the worker side, or both. As a change to existing law, Congress would have to approve a payroll tax cut.

A big problem with payroll taxes, aside from their ineffectiveness, is that they reduce revenue to  Social Security and Medicare entitlements that are already in financial distress and contribute to a rising deficit. The Social Security Administration already estimates that the SSI trust fund will be exhausted by 2037, only 18 years from now. The federal deficit is up sharply under Donald Trump and is expected to top $1 trillion this year.

The prospect of a payroll tax cut comes as US Steel announces hundreds of layoffs in the battleground state of Michigan due to the temporary shutdown of two blast furnaces. The news is an unintended consequence of the tariff war, which was originally ostensibly launched to protect American steel and aluminum producers. As tariffs were announced last year, steel companies increased production to meet an expected increase in demand as Resurgent reported at the time. But subsequent tariffs led consumers of steel to cut back, which caused a glut in the steel supply and sent prices tumbling.

Donald Trump’s attempt at central economic planning is generating other problems as a result of the Law of Unintended Consequences as well. The loss of China, one of American agriculture’s largest export markets before the trade war, has necessitated bailouts to keep farmers solvent. The farm bailouts alone have cost the US Treasury more than the sum total of all revenues received from tariffs.

While the US economy is slowing, it is not payroll taxes or interest rates that are the problem. The tax cut that would benefit Americans most is an end to the tariff war. In a perfect world, restoring the tariff taxes the status quo antebellum would be accompanied by President Trump restraining himself from dabbling in the economy. His interference has led to unpredictable and inconsistent rules that make long-term business planning impossible.

As Ayn Rand famously put it in Atlas Shrugged, “Get out of the way.”

Originally posted on The Resurgent

Team Trump Tries To Allay Recession Fears

President Trump and his economic advisors fired back against recession predictions over the weekend. Over the past few weeks, recession fears have mounted as prospects for a trade deal with China have dimmed, sparking an 800-point selloff in the stock market and an inverted yield curve for bonds, which is often a leading indicator for economic downturns.

Two top White House advisors made the Sunday talk show rounds yesterday in an attempt to allay concerns about the trade war. Speaking to Chuck Todd on NBC’s “Meet the Press,” Chief White House Economic Advisor Larry Kudlow said, "No, I don't see a recession. And let me add just one theme ... Just one theme. We're doing pretty darn well, in my judgment. Let's not be afraid of optimism. It's a funny sign of our times. And I think there's a very optimistic economy going on out there.”

After that appearance, Kudlow popped up on “Fox News Sunday” with Dana Perino, where he again touted the Trump economy, saying, “First of all, I don't see a recession at all. Second of all, the Trump pro-growth program, which I believe has been succeeding lower tax rates, bid rollback of regulations, energy opening, trade reform, we're going to stay with that.”

White House Trade Advisor Peter Navarro showed up on CNN’s “State of the Union” with Jake Tapper where he argued that tariffs are “not hurting anybody here” because China was devaluing its currency to a greater degree than the Trump Administration was imposing tariffs.

President Trump also got into the act, telling reporters on Sunday, “We're doing tremendously well. Our consumers are rich.”

“And we're not going to have a recession. But the rest of the world is not doing well as we're doing,” Trump said.

“I think our economy is very, very good,” the president said, but then seemed to acknowledge that the trade war was acting as a brake on the economy, adding, “We can do a lot of things, but if it slowed down it would be because I have to take on China and some other countries. Look, you have other countries that are just as bad as China, the way they treated us.”

When the president had dinner with Apple CEO Tim Cook on Friday, Cook took the opportunity to bend the president’s ear on the upcoming tariffs on consumer electronic products. Cook pointed out that the tariffs would affect Apple more than Korean phone manufacturer Samsung since iPhones are made in China, but Samsung phones are built in several different countries.

“I thought he made a very compelling argument” about the difficulty in competing with Samsung, Trump told Bloomberg. “It’s tough for Apple to pay tariffs if it’s competing with a very good company that’s not.”

This contradicts Trump’s statement to reporters that “In the case of China, China is eating the tariffs. At least so far."

Trump and his advisors crowed over retail sales numbers released last week, which increased for the fifth straight month, but other recent indicators are not so rosy. Job growth was slower than expected in July and housing starts fell by four percent, the third straight month of declines.

Farmers are also showing signs of discontent with the trade war. Gary Wertish, president of the Minnesota Farmers Union, said, “Words and twitters and tweets, that doesn’t pay the farmer’s bills, that doesn’t solve the problem we’re dealing with.

“This would is self-inflicted by our president,” Wertish added. “We definitely agreed with him at the beginning, but it doesn’t appear that there’s a plan B.”

“Short-term, stair-stepped subsidies ... stimulate production but not sales and therefore do little to undo the long-term log jam caused by not selling soybeans to destinations like China, the world’s number one customer.” Lindsay Greiner, the president of the Iowa Soybean Association, said in a statement earlier this year.

The president also addressed concerns about the inverted yield curve, saying, “Also, when you go in and analyze the [bond yield] curve, the curve always means that about two years later, maybe you will go in [to a recession].  That's a long time, two years. But I don't think so. Interest rates are low. I think I could be helped out by the Fed. But the Fed doesn't like helping me too much.”

Navarro denied that there was an inverted yield curve at all, saying, “An inverted yield curve requires a big spread between the short and long. All we have had is a flat curve. It’s a flat curve which is a very weak signal of any possibility.”

Most economists and investors disagree with Navarro. The Wall Street Journal cited uncertainty over the stock market, news that the German economy shrank 0.1 percent in the second quarter, Brexit concerns, and Chinese economic figures as pointing towards a slowing economy and pushing investors towards the more stable bond markets. The Journal noted that the market warning signs are an “omen of the future, not destiny,” however.

The key to averting an economic downturn is for the Trump Administration to find a way to make a trade deal with China and call off the trade war. While some celebrate news of the slowing Chinese economy, the Journal points out, “a Chinese recession would mean a European recession, which would send U.S. growth down too.” As I’ve noted before, the Chinese don’t have to outlast the US economy, they only have to outlast President Trump and, if Trump loses his one unequivocal advantage in the solid economy, his departure in 2021 would be virtually guaranteed.

Unfortunately, the president does not seem ready to declare victory and end the trade war, maintaining that China’s economic pains are “why they want to come to the table,” as well as that “President Xi, I'm sure, likes me very much.”

“Our country is going to be stronger by far than ever before,” Trump insisted. “I mean, if I wanted to make a bad deal and settle on China, the market would go up. But it wouldn't be the right thing to do. I'm just not ready to make a deal yet. China would like to make a deal, I'm not ready."

Originally published on the Resurgent

Trump's Self-Made China Mess

American relations with China, a centerpiece of President Trump’s foreign policy, are unraveling. Trump’s China policy has been erratic, inconsistent, and working towards cross-purposes at various times. After three years, the effect of Mr. Trump’s foreign policy seems to be coming home to roost as China gears up to quell democratic protests in Hong Kong while simultaneously nearing endgame in the trade war against the United States.

Even though China figured prominently as a foil in Donald Trump’s 2016 presidential campaign, the new president initially reached out to the Chinese government for help in dealing with North Korea’s Kim Jong Un, even as China and the US began trade talks. Chinese President Xi Jinping was reluctant to help Trump rein in the Chinese client state. This may be partly because the Chinese see Trump’s overtures to Kim as an attempt to take North Korea out of China’s sphere of influence.

In 2018, as the US and North Korea were experiencing a détente, Trump was beginning the tariff war against China and myriad of other nations. The trade war began with US tariffs on washing machines and solar panels in March and ramped up in April with tariffs on steel and aluminum imports. The first rounds of tariffs did not single out China, but the Chinese government responded with 25 percent tariffs on 128 US goods. Trump fired back with a 25 percent tariff on $50 billion of Chinese imports. The cycle has continued throughout the 16 months since.

Fast forward to August 2019 when pro-democracy activists began protesting Chinese rule in Hong Kong. As the protesters waved American flags and sang the “Star-Spangled Banner,” the Trump Administration seemed to be in disarray. Many members of a party that is making the argument against American socialism a central theme of the 2020 election seemed reluctant to criticize the communist Chinese government’s actions. Commerce Secretary Wilbur Ross called the Hong Kong situation an “internal matter,” while National Security Advisor John Bolton took the opposite tack and warned China that a crackdown similar to the 1989 Tiananmen Square massacre would be a “big mistake.”

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For his part, the president, who had spent the last two years criticizing China, was unusually subdued when he spoke to reporters on Tuesday, saying, “The Hong Kong thing is a very tough situation, very tough. We'll what see what happens. But I'm sure it'll work out. I hope it works out for everybody, including China, by the way.”

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Politico reported on Wednesday that President Trump agreed not to press President XI on human rights abuses prior to the G-20 summit in June. Per three people who were familiar with the telephone conversation between the two leaders, Mr. Trump did not extract a promise from China for his concession.

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Since news of the conversation became public, President Trump cautiously broached the subject of Hong Kong in a tweet that first complimented President Xi and then said that Trump believed that “if President Xi wants to quickly and humanely solve the Hong Kong problem, he can do it.” Trump also offered Xi a “personal meeting.”

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The bottom line is that even though many of President Trump’s supporters maintain that he is playing 4-D chess, it is more and more apparent that he has been outfoxed by both President Xi and Kim Jong Un at every turn. First, Kim won a diplomatic coup in having the president of the United States come to him without making any concessions. Now, Xi seems to have planned ahead to silence Trump as China handled Hong Kong while simultaneously destroying Trump’s chances for re-election.

China’s response to Trump’s latest tariff threat was to allow its currency to be devalued and shutting off Chinese purchases of American agricultural products. The cheaper yuan will make Chinese exports more attractive to other trading partners while shifting Chinese agricultural purchases to Russia will deprive American farmers of one of their largest export markets. The economic attack on American farmers is especially problematic for President Trump since rural white voters are a vital part of his base. Trump’s farm bailouts have already cost more than the combined revenues from his tariffs.

As the US economy teeters on the brink of recession thanks to the trade war and Trump faces increasing pressure to show progress due to the looming elections, China has more weapons ready to fire in the tariff tiff. Last May, the Chinese warned that they would use rare earths as an economic weapon against the United States if the trade war persisted. China controls about 90 percent of the world’s supply of these metals, which are used in the manufacture of electronics from games to smart weapons. If China cuts off the supply of rare earths to the US, the effect on the tech industry would be devastating.

Another weapon that the Chinese might deploy against the US is our own debt. With more than $1 trillion in Treasury notes, bills, and bonds, China is the largest foreign holder of US debt. China could call in this debt and cause the value of the dollar to crash. This is likely a doomsday scenario since the accompanying world financial crash would also be devastating to China.

On the other hand, Trump is running short of leverage to use against the Chinese. Typically, the US would respond to a problem like China’s actions in Hong Kong with economic sanctions, but American trade with China has been hard hit by the trade war. As trade between the two countries declined, so has America’s ability to influence the Chinese government. With heavy taxes on most Chinese goods, there are few arrows left in President Trump’s quiver.

There appear to be few ways out for Donald Trump. His choices are to stay the course and risk a recession or back down and risk his image. Even though the trade war is hurting also China, as I’ve pointed out before, China doesn’t have to outlast the American economy, they just have to outlast Donald Trump.

President Trump is in a very tight spot. If he persists in the trade war then it is almost certain that China will continue to ratchet up the reprisals on the American economy. More and more economists see the likelihood of a recession before the election, which would be devastating to Trump’s chances of re-election. Yesterday’s stock market sell-off was based on recession fears.

Likewise, if the Chinese decide to crack down on Hong Kong’s democracy demonstrators, people who are appealing directly to the United States, Trump would have very few tools to influence the Chinese government on behalf of the protesters. As a result, the US would lose face around the world while China flexed its muscles.

In either case, Trump would look bad at home. His strongest area has been the economy so, if the US enters a downturn, the president loses his best argument for re-election. Further, Trump’s base has long relished his reputation as a fighter. If he is seen as ineffective against a brutal Chinese action against Hong Kong, his tough-guy image could shatter and cost him support.

Trump’s current situation is almost unwinnable and the president has no one to blame but himself.

Originally published on The Resurgent

Trump Delays Tariffs Due To Christmas

What if they gave a tariff war and nobody came? That, unfortunately, isn’t what happened when President Trump launched his tariff war last year, which seems to have involved pretty much all of America’s trading partners, but at least American consumers have a reprieve from the president’s next round of tax increases.

Yesterday the Trump Administration suddenly delayed plans to implement some new tariffs on an additional $300 billion in Chinese goods that were slated to go into effect on September 1. The new tax would have added a 10 percent duty to items such as smartphones, laptops, toys, and videogames imported from China. Tariffs on some items such as tools, apparel items, and some footwear will still go into effect on September 1 while tariffs on other items, including Bibles and shipping containers, will be removed from tariff lists entirely.

“We’re doing this for Christmas season, just in case some of the tariffs would have an impact on U.S. customers,” Mr. Trump told the Wall Street Journal on Tuesday.

Trump’s statement flies in the face of months of claims that his tariffs do not affect American consumers and businesses. The president has maintained since the onset of the tariff war last year that tariffs were filling US “coffers” and were being paid directly by China at no expense to Americans.

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The president’s statement that the delay for the tariffs was due to Christmas undercuts his previous claims that the tariffs only affected the Chinese. Although some Chinese celebrate Christmas, the birth of Christ does not warrant an official holiday in communist China. Christmas does, however, represent the major retail season in the United States. Both businesses and consumers would not be happy to find gifts from China to be 10 percent more expensive as the holiday approaches.

Despite claims of revenue being generated by the tariffs, the US government is losing money from the trade war. The Council on Foreign Relations points out that the Treasury collected $19 billion in tariff taxes from US importers, but is slated to pay out more than $25 billion to farmers hurt by the president’s trade policies.

Other sources in the Trump Administration say that there were other reasons for the delay. The announcement of the tariffs and disappointing news from the trade talks had prompted a loss of more than 1,000 points in the Dow since late July. The US reportedly took into consideration that businesses had already locked in prices for seasonal goods and would be forced to either absorb the cost of the tariffs or pass them along to consumers.

US officials warned that the move should not be seen as an olive branch to China, despite the fact that the US did not obtain any concessions for the delay. After the president announced the new tariffs in early August, China allowed its currency to depreciate and announced that it would suspend purchases of US agricultural products. So far, there has been no reversal of these policies.

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Even if the delay is only temporary, the news was welcomed by the stock market. The Dow surged on the news, closing with a gain of 372 points.

Over the past few months, a clear pattern has emerged in financial markets. When the president announces tariffs or bad trade news, markets tank. On the other hand, when trade talks look promising or tariffs are delayed, the markets surge.

Perhaps Mr. Trump should take note.

Originally published on The Resurgent

Deficits Soar To Obama-like Levels

Once upon a time, there was a country that spent too much. This country had the largest economy on the planet and took in trillions of dollars from its citizens in taxes, but every year it went deeper into debt because it always spent more than it took in. The overspending created a monster called “the national debt.” This went on for years and years and both of the ruling groups pretended to care about the overspending, but no one ever did anything about it.

For years, the federal budget deficit was relatively small and only caused the national debt to grow a little every year. Even then people worried about both. Then, about 40 years ago, the deficit got bigger and the national debt started growing by leaps and bounds.

Things really got bad after an enemy attacked the country. The government had to borrow money to fight the evil people that had murdered thousands of its citizens. The war lasted a long time and the national debt had doubled in short order.

As the threat of war receded, the country went into a financial crisis. The country’s new leader decided that the answer was to throw money at the problem. His spending increases caused the largest deficits that anyone had ever seen and pretty soon the national debt had doubled again.

After the financial crisis, a brave knight came to the king and said that spending was at dangerous levels. When the knight confronted the king, they finally were able to come to an agreement that cut spending for the first time in the reigns of many, many leaders.

But, alas, the spending cuts didn’t last long. And the knights never slayed the deficit. They only made it smaller for a little while. Pretty soon, both the deficit and the debt started growing again.

A new king soon came to power and, despite the fact that there was no war or financial crisis, the new king quickly grew the deficit back to levels that it had only seen during national emergencies under the old kings. The national debt looked like it might double again during the new king’s reign but this time no one was worried. In fact, one of the knights who had fought the deficit years before now said that no one had ever really worried about the deficit at all!

I wish I could say that this story has a happy ending where “they all lived happily ever after,” but obviously this is not true. This story doesn’t have an ending yet and this year the deficit monster is going to be as big as ever, feeding the national debt to levels that are unprecedented during peacetime with a good economy.

The sad truth for Americans is that the Republicans who valiantly fought the deficit during the Obama years, now don’t seem to care about it. While most Republicans are merely silent about the deficit, which will exceed $1 trillion this year, the highest point since 2012, none other than Rush Limbaugh has now embraced the once-liberal position that deficits don’t matter.

Responding to a caller last month who argued that President Trump was not a “fiscal conservative,” Rush responded, “Nobody is a fiscal conservative anymore. All this talk about concern for the deficit and the budget has been bogus for as long as it’s been around.”

Rush is wrong. There are many of us who are still fiscal conservatives and whose concerns about the deficit were genuine from the beginning. We may not hold office, but we do vote.

The unpleasant truth for Republicans is that Donald Trump is worse on the deficit than either Barack Obama or George W. Bush or any prior president. Trump’s deficit is going to rival the worst years of Barack Obama and be worse than that of any other president. This is without the excuse of a war or the Keynesian excuse of needing deficit spending to overcome a financial crisis. In the US today, deficit spending is the rule regardless of what is happening in the economy or the rest of the world.

To be fair, Donald Trump did inherit much of the mess. The largest part of the deficit is driven by mandatory spending on entitlements that Congress and the president don’t control on an annual basis. In the 2019 federal budget, Social Security, Medicare, unemployment, and health spending account for more than 60 percent of federal spending. In contrast, defense spending (including veteran’s benefits) makes up only 20 percent. Interest on the federal debt accounts for almost six percent by itself.

But Trump has made the problem worse. Under President Trump, federal spending reached a record high. This is partly due to increases in mandatory entitlement spending, but it is also due to increases in discretionary spending championed by Mr. Trump. Earlier this year, the president proposed a record $4.7 trillion budget, which would increase federal spending by almost a trillion dollars over the current year. The proposed budget cuts some programs but includes a big increase in military spending.

The Trump Administration has also hurt the income side of the deficit equation. Tax reform slashed corporate income tax rates, but, despite this, tax revenues are at a record high. They are not, however, as high as they would be in a growing economy if the tax rates had been left unchanged.

The theory is that the lower tax rates would help to grow the economy and to some extent that has been true. The theory did not account for President Trump’s tariff war, however. President Trump’s increases to tariff taxes have offset the benefits of tax reform for millions of American individuals and businesses. The higher the tariffs go, the more they are a drag on the economy.

Mr. Trump’s economy has not yet achieved his target growth rate of three percent per year. Despite achieving three percent growth in several quarters, Donald Trump’s annual growth rates average worse than Barack Obama’s. This is due in large part to his tariffs.

The best news for Republicans is that Democrats would probably be worse on deficits and the debt. With a number of Democrats proposing giveaway programs like free college tuition and Medicare-for-all, there is no political home for deficit hawks. Neither party really wants to cut spending. They just want to cut spending on the other side’s priorities so that they can shift tax dollars to their own programs. Meanwhile, politicians on both sides of the put on an Alfred E. Neuman grin and say, “What? Me Worry?”

The bad news for us all is that the overspending, particularly that of Barack Obama and Donald Trump, have boosted to the national debt to 104 percent of GDP. No one knows how such a high debt level will affect the world’s largest economy and the holder of the world’s reserve currency.

What we do know is that the high debt level restricts the number of tools that the Fed has to deal with future recessions and economic problems. For example, with interest rates at near-zero, there is little room to reduce them further to goose the economy. If the Fed raises interest rates, the deficit will go up as the government’s interest payments on the debt increase. The flip side is that low interest rates come at the cost of discouraging saving and investment.

Do deficits matter? We are about to find out.

Originally published on The Resurgent

Trade, Not Guns, Will Decide The Election

The battle over gun control is heating up after President Trump endorsed the idea of red flag laws in the wake of two mass shootings last weekend. Even though gun control inflames passions on both sides, another story that is being all but ignored is far more likely to determine the outcome of next year’s elections.

At the same time that Donald Trump was making his pitch for new gun regulations, China was launching new salvos in the trade war. On Monday, China allowed its currency to devalue and simultaneously announced that it was halt purchases of US agricultural products. China’s move confirms that a solution to the trade dispute with China remains far off despite previous claims by the Trump Administration that a deal was near.

President Trump has essentially been painted into a corner on trade. If Trump doesn’t give in and make a deal with China, there is the increasing chance of economic fallout from his trade policies. If he does make a deal, he looks weak to his base.

While the debate over the trade war isn’t as sexy as the gun control debate, it does have more far-reaching effects. While about 30 percent of Americans own a gun, virtually every American is affected by the economy. For a president whose Electoral College victory was based on about 100,000 votes in strategic states, even a small deterioration in support could be devastating.

One of the sectors of the economy hardest hit by the trade war is agriculture. The Chinese, who are no doubt acutely aware of this fact as well as the fact that rural white men form the core of Donald Trump’s base, specifically targeted farmers in their most recent trade moves. While some polling shows that support for President Trump is still at high levels among farmers, the tariff war may help to explain why Trump’s support is abnormally low in traditionally red farm states such as Iowa, Kansas, Nebraska, North Dakota and Texas.

The Rust Belt states that swung into the Republican column in 2016 also seem to be swinging back the other way. This may be partly due to the trade war as well. Manufacturing jobs are still be added, as they have since 2010, but new job growth in the sector has slowed since the onset of the trade war in the spring of 2018.

While gun rights is a hot button issue, it may impact the election less than many would expect. Battle lines have been drawn on the Second Amendment for decades with most Second Amendment supporters aligned with Republicans. However, the red flag law proposed by Donald Trump has split the Republican Party. FiveThirtyEight recently noted that majorities of Republican voters support red flag laws as well as gun licensing and expanded background checks, but a large minority of Republican is staunchly opposed to any new gun laws. With almost two-thirds of voters in support of new gun controls in the wake of the recent spate of mass shootings, it is questionable whether the pro-gun platform of the GOP will attract many new voters unless Democrats overplay their hand.

On the other hand, the economy has long been rated as Donald Trump’s strongest point. In July, Fox News found that 52 percent approved of the president’s handling of the economy. It was the only area in which Trump received majority approval. If the trade wars sink the economy, Trump will have little to fall back on in his quest for a second term.

But there are signs that the Trump Administration has underestimated Chinese resolve. As China has resisted his demands, the president has upped the ante by increasing tariffs repeatedly in the hopes that China can be pressured into making a deal as Mexico did. The problem is not only that China is a much larger economy than Mexico but that China is much more stable than our south-of-the-border neighbor. Where the Mexican government is weak and at times barely seems to be hanging on to control of the country, the China is an authoritarian police state that is much less vulnerable to public opinion and anger.

Even after their moves from this week, there are several ways that the Chinese could rachet up the pain for American businesses before the election. In May, China threatened to cut off the supply of rare earths, minerals used in the construction of many smart devices and weapons, to the US. China also holds more than $1 trillion in US debt. A rare earths embargo would wreak havoc on US manufacturing while a Chinese decision to dump its US Treasuries would likely trigger a panic in bond markets around the world.

So far, President Trump is standing resolute. Speaking Wednesday in Dayton, the president said, “Somebody had to do this with China because they are taking hundreds of billions of dollars a year out of the United States and somebody had to make a stand."

Trump added, "And I think our country is doing very well."

Nevertheless, it looks as though the trade war may be a long one if the president doesn’t back down. More news from this week showed that Chinese exports actually increased in July despite the previous round of tariffs. China is also shifting its agriculture purchases to Russia while President Trump considers more bailouts for American farmers.

While China has been damaged by the trade war, so has the United States. Both countries may be heading for recessions due to the trade tiff, but the Chinese government has an advantage in that they don’t have to outlast the American economy, they only have to outlast Donald Trump.

Originally published on The Resurgent