You’ve seen how markets responded positively since President Trump’s confirmed victory in the US election.
Global stocks and cryptos staged a solid rally. Meanwhile gold and most commodities dipped.
Investors are positioning themselves for the upcoming Trump administration, and they believe the future is bright.
Some things are known well ahead of time – an ‘America First’ policy that will help restore the US domestically through fighting crime, securing the US border, reviving the fossil fuel industry, ending identity politics and cutting down bureaucracy. In foreign policy, the US will seek to reduce military presence overseas, reduce funding to international organisations and requiring other countries to actively manage stability in their region.
A lot of these policies go back to basic principles, before the world started embracing pie-in-the-sky ideals of globalism, postmodern ideology and centralised planning.
One aspect that remains particularly contentious is President Trump’s plans to impose tariffs on imports into US.
There’s much division over this issue. It threatens the interests of entrenched political and business leaders. From an academic viewpoint, economic theory doesn’t regard tariffs highly either.
However, I’m going to discuss today why the conventional argument is wrong. Not only that, imposing tariffs may even benefit global trade.
The key lies in the petrodollar system, central banking and the continual offshoring of industries to countries with the cheapest labour.
What I’ll show you is how flipping currently accepted views on its head may deliver the desired outcome. So brace yourself!
What are tariffs and how do they work?
In economic theory, market efficiency alludes to the ideal situation where economic activity delivers the optimal outcome. It assumes participants make decisions without constraints or disturbances and there are no barriers or restrictions that causes waste or misallocated resources.
Reality is much less ideal than that. Inefficiencies can arise from various political, legal, financial, societal factors, or from variations in the natural environment.
To address certain imperfections in the economy, governments or institutions may implement measures including price control, subsidies, restrictions or tariffs, among many things.
In economic theory, there are certain schools that argue such measures may benefit some parties but deliver overall losses to the economy. This is because interventions impact the supply, demand, pricing or distribution of goods and services. Someone may benefit but more end up losing.
Tariffs are an example. Let me illustrate.
In a free trade economy, two countries buy and sell goods between each other. The amount and price they exchange depends on supply and demand.
Country A imposes a tariff on Country B, meaning Country A will charge Country B to export goods to it. The producers from Country B pay the government of Country A.
What’ll result is Country B’s producers will produce and export less to Country A because it’s incurring an additional cost to do so. Part of that cost goes to Country A’s government. The population of Country A may partly benefit from this, depending on what happens to the funds. Country B is the net loser from the tariffs.
Country A’s government is the net winner of this tariff as it receives more funds, which it may choose to deploy for the country.
In theory, there’s inefficiency. This is because resources shift from productive parties to one that oversees distribution. Basically, there are middle men involved and they collect their dues, reallocating them.
That’s just the start of it. You can imagine what happens next.
Country B retaliates and imposes tariffs. This tit-for-tat results in net loss for the two countries’ manufacturers and population, even though the governments receive the tariffs.
So that’s the theory. Yes, tariffs can result in an overall loss to the economy.
A distorted system
That’s the theory, now for our system. We have many institutions responsible for redistribution and reallocation of resources. Beyond governments there are central banks, supernational organisations (UN, IMF, World Bank, etc.) non-government think tanks, etc.
The central banks lend to the government and controls the economy via monetary policy, among other things. Meanwhile, governments no longer issue their own currency, borrowing from central banks instead and taxing their citizens and businesses to repay the loan with interest.
This convention has existed for over a century worldwide. The result is the growth of currency supply far exceeding the growth of goods and services (real productivity).
This is what causes inflation, where the price of goods, services and assets rise over time. Things aren’t necessarily becoming more expensive. It’s the currency losing purchasing power.
Countries that allocate their resources efficiently and generate enough real productivity won’t suffer from inflation as much. But like quicksand, every nation eventually sinks.
Over time, the more prosperous nations enjoy a higher standard of living, leading to rising cost of labour. Companies operating in these nations will search elsewhere to do business, as benefits of relocating and operating somewhere else outweigh the cost of exporting back home.
That’s why we’ve seen over the past four decades the offshoring of manufacturing from the West to the East. Companies sought to do business where it could maximise profits.
The consequences to the West have been devastating. Many woke up to this after the subprime crisis when many companies moved out of the West and into China, South Asia, South-East Asia and Latin America. Households that used to rely on a single income earner from a stable job in a factory or manufacturing plant lost their livelihood.
At the same time, many near-retirees saw their retirement savings evaporate and decided to remain in the workforce. They often competed with young high school and university students to work part-time in low-skill jobs.
Not everyone could upskill or change their occupation. This created a major bottleneck in the workforce. In time, this festered into dissatisfaction and anger for certain proportion of the population. That’s why we’ve seen so much civil tensions in the Western nations and a rise of populist movements to counter the ruling class.
A win-win situation for global trade
So how may tariffs address this problem?
The disparity between labour costs in the West and the East is phenomenal. Many of you have travelled to Asia, Latin America and Africa and noticed how much cheaper local goods are over there. That’s because living standards are much lower.
We may enjoy cheaper goods but there are tradeoffs.
The first is lowering the quality of goods. When companies offshore their products, they operate in countries that aren’t the original developers of the technology or product. Sometimes these companies operate where quality control protocols might not be present. These result in goods that are less durable and of poorer quality.
Secondly, offshoring makes the supply chain more fragile. We’ve seen this during the Wuhan virus outbreak and the outbreak of the Russia-Ukraine conflict. Countries can use trade as a weapon against each other, to the detriment of the economy and the broader population.
Thirdly, there’s intellectual property theft and security issues. Companies operating in other countries are giving away their commercial secrets, either to the government or local employees. There’s also compromised security, especially if these secrets are sensitive.
Now, many proponents for offshoring state it’s helped less developed countries raise their living standards. We’ve seen countries like China, Taiwan, South Korea, India, Vietnam, etc. enjoy a growing middle class as their industries grew from Western businesses relocating there.
Given this, can you not see how the West charging tariffs isn’t at all unfair? That might create a win-win situation.
But I’ll go beyond this, by returning to the key weaknesses of offshoring.
For the sake of a more robust supply chain, nations should consider returning to self-sufficiency in the coming years. This is where tariffs can help, especially for Western nations.
Perhaps that’s where President Trump and his incoming administration will demonstrate to the world. They’re putting an end to globalism and the existing global order where the US dominates and many nations hang on its coattails.
Instead, the US could lead nations to focus on their domestic economy first and neighbouring regions, second. This might end unbridled corporate profiteering and jumping from nation to nation searching for the lowest costs. Nations raise up their own brand name and strengthen their manufacturing base.
Could this bring more prosperity to the world?
We might just be watching how conventional economics turned on its head deliver what many economic and political experts sought for so long, and failed to find.
Brace yourself for a new dawn.
God bless,
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Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report
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