The End of Globalization: Forecast Calls for Pain

He who has the commodities rules the world

The first great wave of globalization ended with World War I, and was followed by trade wars and deep depressions throughout the interwar period. Although trade integration resumed after World War II – facilitating the reconstruction of Western Europe and Japan – its scope remained limited. It was not until the late 1980s and early 1990s that the next great wave of globalization began. (Project Syndicate, ‘The Dangerous Retreat Into Protectionism’, May 21, 2024)

Globalization is a polarizing issue. Some see it as America’s strength, drawing on the country’s history of free trade. US living standards have risen, and the United States has been economically dominant for decades.

Others blame globalization for America’s problems, because it has exposed domestic workers to increased foreign competition. Donald Trump rose to power in 2016 partly on the basis of discontent over globalization, particularly in the “Rust Belt” states that were hurting due to lost jobs and factory closures. He promised to “re-shore” jobs back to America, end the rule of liberal elites, and “drain the swamp” of corruption in Washington.

Economist and Nobel laureate Joseph Stieglitz says there is a grain of truth in some of the criticisms of globalization: The deals were largely shaped by corporate interests, the potential gains were exaggerated, and insufficient attention was paid to the impact on America’s growing inequality.

Inequality: trends and implications: Richard Mills

Stieglitz maintains that most economists still see globalization with its free movement of goods, money and information, as the key to growth and prosperity. Globalization is not only more efficient, it allows for education and scientific breakthroughs. The US is especially good at the latter. This is the country that evolved space travel, pioneered computerization, and came up with the first electric vehicle: Tesla.

However, Stieglitz notes we have seen a resurgence of economic nationalism, which he blames on large segments of the populations of many advanced countries including the US not doing very well lately: While citizens at the top have seen their incomes soar, those in the middle have largely seen stagnation, and those at the bottom have fared even worse. A middle-class life seems to be growing out of reach for many families…

At the end of the Cold War, there was a hope that all countries would converge to be liberal democracies with free-market economies, and that in doing so everyone would prosper. Those hopes have now been dashed.

The right-leaning Cato Institute concurs that

The stubbornly persistent pandemic, events in Ukraine, and simmering U.S.-China tensions have led numerous commentators — and not just the usual skeptics —to boldly proclaim that we’re entering a new era of “deglobalization.” Factories are reshoring, economies are decoupling, and everyone has given up on “free trade.” Influential investors are now openly wondering, as the New York Times reports ominously, whether we’re seeing the “End of Globalization.”

The question is whether tariffs — President-elect Trump has pledged a 10-20% blanket tariff on all imports, 60% on Chinese imports, 100% on Chinese EVs, and a 25% tariff on goods from Mexico and Canada, despite a free-trade agreement — are the answer. Stieglitz says no:

Closing ourselves off from others through tariffs and other trade barriers will not provide the solutions that discontented people are looking for. It will not restore manufacturing jobs or coal-mining jobs. The trade war with China won’t even bring manufacturing back to the US: if tariffs placed on Chinese goods make them significantly more expensive here, corporations will simply move their factories to other developing countries. To the extent that any “onshoring” occurs, production may largely be robotized.

Despite this, in May 2024 the Biden administration imposed new tariffs on China — having kept most of the tariffs implemented by the previous Trump administration (2016-20) this was an escalation — including quadrupling the tariff on Chinese electric vehicles to 100%, doubling the tariff on solar cells to 50% and more than tripling the tariff on lithium-ion batteries to 25%.

Carl Bildt, the former prime minister of Sweden, wrote in May 2024 that the latest round of US tariffs against China is part of an increasingly disturbing and dangerous trend.

Whereas US restrictions on China until recently had been justified on national-security grounds i.e. to prevent the Chinese military from acquiring sensitive technologies, according to Bildt, these latest protectionist measures have nothing to do with China’s military capabilities. Instead, they aim solely to prevent cheaper, often better, green technologies from reaching US consumers.

Bildt notes that tariffs impose higher costs on consumers, reduce competitive pressures and innovation.

Bildt writes that the rapid expansion of trade and investment flows over three decades since the 1990s would prove spectacularly successful across every macroeconomic metric. But in the last 10 years, The new emphasis is on economic security, “de-risking,” and supporting domestic industries through massive industrial-policy subsidies. We seem to be going backwards, raising the risk of a return to the trade wars of earlier, darker times.

The International Monetary Fund and the World Trade Organization have both published extensive studies showing that deeper economic fragmentation would reduce global GDP by 5-7%, with a disproportionately large share of the burden falling on less developed countries.

One can easily imagine a better, more sensible scenario in which the United States returns to defending the rules-based global economic order; China rebuilds its credibility by adhering to the rules of the game; and the European Union lives up to its ambition to be a global champion of free trade. In doing so, each would advance its own interests, as well as benefiting the rest of the world.

Yet the trend is moving in the other direction. While Biden and Trump vie to establish their protectionist bona fides, Europe, too, has started to regard Chinese EVs as a threat, rather than as an opportunity to accelerate its green transition. Add to this China’s own talk about creating a self-sufficient “dual circulation” economy, and India’s ongoing subsidies and resistance to trade, and you have the makings of a more radically fragmented global economy.

Source: IMF

Trade wars — a brief history

Investopedia defines a trade war as when one country retaliates against another by raising import tariffs or placing other restrictions (like quotas) on the opposing country’s imports.

Trade wars can commence if one country perceives that a competitor nation has unfair trading practices.

While most of the recent literature on the subject focuses on the US-China trade war, it may surprise some to learn that they are not an invention of modern society.

Colonial powers, says Investopedia, fought with each other over the right to trade exclusively with overseas colonies in the 17^th century.

The British Empire has a long history of trade battles. One of the most well-known are the opium wars of the 19^th century. The First Opium War, fought between 1839 and 1842, was triggered by China’s attempts to enforce its ban on opium. The British responded by sending a naval expedition to force China to pay reparations and allow the opium trade.

The second Opium War, 1856 to 1860, was between Britain and France. It was prompted by the execution of a French missionary by Chinese authorities. France joined the British in their efforts against China.

Ultimately the British Navy prevailed, and according to Wikipedia, China was forced to sign treaties that granted Western powers favorable tariffs, trade concessions, reparations and territory. The island of Hong Kong for instance was ceded to Great Britain after the First Opium War.

The Smoot-Hawley Tariff Act was enacted in 1930. It was designed to protect American farmers from European agricultural products. This act, says Investopedia, increased the already hefty import duties to almost 40%. In response, several nations retaliated against the United States by imposing their own higher tariffs, and global trade declined worldwide. As America entered the Great Depression, aided greatly by disastrous trade policies, President Roosevelt began to pass several acts to reduce trade barriers, including the Reciprocal Trade Agreements Act.

US-China trade war

While the trade war that erupted between the US and China in 2018 is often thought of in terms of Trump’s attempt to reduce the trade deficit with China (the US importing more goods from China than it was exporting to the country), in fact trade retaliation was signaled while Trump was campaigning for president in 2016.

Source: Investopedia

One source notes it was the theft of intellectual property of American corporations that infuriated Trump more than the trade deficit:

Trump stated that according to the Chinese law, foreign companies could only enter the Chinese market by establishing a joint venture with local counterparties. This requirement enables Chinese companies to easily access the technologies of their US partners. As a result, the US was losing US$300 billion a year.

By January 2018, Trump ran out of patience. He launched his first attack on solar panels and washing machines, imposing a 30% and 20% tariff respectively.

The second attack was in March 2018, when Trump raised import tariffs on steel and aluminum by 25% and 10% respectively. “Our steel and aluminum industries have been destroyed for decades by bad policies and unfair trade with countries around the world,” he claimed.

The European Commission, the EU’s executive branch, retaliated with a 25% tariff on American goods totaling 2.8 billion euros: jeans, bourbon, motorcycles, orange juice, peanut butter, etc.

Canada responded by imposing a series of temporary duties on American steel and other products.

Dissent from within the country coalesced around Harley Davidson’s plan to move its manufacturing base outside of the US; a plant was opened in Thailand. The iconic motorcycle maker wanted to avoid retaliatory tariffs that were going to be eventually paid for by its European buyers. The move was a blow to Trump, who had promised to force big companies to move back to the US.

Other companies affected by the trade war included Monsanto, Nike, Wal-Mart, Apple, Boeing, Tesla, General Motors and Ford.

As reported by CNN, China’s tariffs on commodities including soybeans, corn and wheat made American agricultural products more expensive. Private buyers nearly stopped purchasing US soybeans, leaving a record amount sitting in storage at the end of 2018. In mid-2019, the Trump administration started paying $14.5 billion to farmers, on top of $10 billion in aid they received in 2018.

According to the Quarterly Journal of Economics, import tariffs increased from 2.6% to 16.6% on 12,043 products covering $303 billion or 12.7% of US imports.

Countermeasures from US trading partners increased tariffs from 7.3% to 20.4% on 8,073 products covering $127 billion of US exports.

A study published in the journal showed that US consumers bore most of the costs from the 2018-19 tariff increases:

The resulting losses to U.S. consumers and firms that buy imports was $51 billion, or 0.27% of GDP. We embed the estimated trade elasticities in a general-equilibrium model of the U.S. economy. After accounting for tariff revenue and gains to domestic producers, the aggregate real income loss was $7.2 billion, or 0.04% of GDP. Import tariffs favored sectors concentrated in politically competitive counties, and the model implies that tradeable-sector workers in heavily Republican counties were the most negatively affected due to the retaliatory tariffs.

Under a so-called “phase one” trade deal signed in January 2020, China pledged to boost US imports by $200 billion above 2017 levels and strengthen intellectual property rules.

The US agreed to halve some of the new tariffs it had imposed on China.

The White House said it would tackle additional issues in a “phase two” deal, which never happened. (The BBC, Jan. 15, 2020)

According to the Peterson Institute for International Economics, China bought none of the extra $200B of US exports in Trump’s trade deal.

The Biden administration kept most of Trump’s tariffs and added its own, in May of this year quadrupling the tariff on imports of Chinese-made electric vehicles from 25% to 100%.

The Guardian reports the White House also said it was imposing more stringent curbs on Chinese goods worth $18 billion. Levies would rise from 7.5% to 25% on lithium-ion batteries, from zero to 25% on critical minerals, from 25% to 50% on solar cells, and from 25% to 50% on semiconductors.

Tariffs on steel, aluminum and personal protective equipment — which now range from zero to 7.5% — would climb to 25%.

President-elect Trump has repeatedly proposed increased tariffs, including a 10-20% across-the-board tariff on all trading partners, as well as a 60% tariff on Chinese imports. This week he threatened 25% tariffs on Canada and Mexico.

Trump has vowed to impose a 200% tariff on Chinese cars manufactured in Mexico, along with a range of other protectionist measures affecting steel, solar panels, semiconductors and batteries.

In addition to higher tariffs, Trump has also called for an extension of the individual tax cuts he imposed in 2017, and further tax reductions on the corporate side.

Income tax vs tariffs: Who wins? Who loses? — Richard Mills

Research by the Tax Foundation found that Biden’s China tariffs amount to a tax increase of $3.6 billion, and that the Biden-Trump tariffs will reduce long-run GDP by 0.2% and cut employment by 142,000 jobs.

Altogether, the $79 billion in tariffs equate to an annual tax increase of $625 on US households

If Trump’s new tariffs are imposed, they would add another $524 billion in taxes annually, shrink GDP by 0.8%, and reduce employment by 684,000 jobs. These numbers do not account for the effects of retaliation.

As of March 2024, the trade war tariffs have generated more than $233 billion of higher taxes collected for the US government from US consumers. Of that total, $89 billion, or about 38% was collected during the Trump administration, while the remaining $144 billion, or about 62%, has been collected during the Biden administration.

The cost of EV tariffs

In August 2023 China announced export restrictions on gallium and germanium, followed in December by a ban on the export of technologies used to extract and separate rare earths. The ban also included technologies used to make rare earth magnets and rare earth alloy materials. Export restrictions on graphite were also imposed in December 2023.

It didn’t take long for China to retaliate over the Biden administration’s 100% tariff on Chinese EV imports. Beijing launched an anti-dumping probe into chemical imports from the United States, the EU, Japan and Taiwan.

In May 2024 Project Syndicate reported that US-China trade relations had reached the point of no return, and that the two countries were now in a “full-blown economic war” which will have “far-reaching geopolitical consequences."

The multi-authored ‘Big Picture’ piece noted that the Biden tariffs on Chinese EVs amount to an admission that past measures have failed to prevent China from “galloping ahead” and by targeting EVs, they “undermine the broader climate-change agenda.”

Previously cited Carl Bildt of the European Council on Foreign Relations said the new measures can’t be justified on national security grounds as past tariffs were, adding that all they will do is “prevent cheaper, often better green technologies from reaching US consumers.”

Another Project Syndicate article said by slapping massive tariffs on Chinese electric vehicles, America has laid bare its own hypocrisy and economic vulnerabilities.

Pinelopi Goldberg wrote that Biden’s tariffs are significant for two reasons:

• First, the latest tariffs – which include steep increases for several other products, ranging from semiconductors to needles and syringes — are the final nail in the coffin of US-China trade cooperation. Denials of a complete decoupling can be put to rest.

• Second, the tariffs signal defeat. Trailing in the polls as this year’s election approached, Biden and his team felt obliged to join the anti-China, anti-trade fervor that has emerged as one of the very few unifying issues in a polarized country.

These worries come despite earlier tariffs, export restrictions, and the aggressive industrial policy being pursued through the CHIPS and Science Act and the Inflation Reduction Act (IRA). By escalating the trade war, the administration is effectively admitting that these previous policies have not (yet) delivered, and that China is galloping ahead despite facing headwinds. Even if the tariffs are largely symbolic, they are a symbol of weakness.

Moreover, Goldberg argues China is the most price-competitive EV producer due to aggressive consumer subsidies, big investments in charging infrastructure, and content requirements that favor cheaper lithium-iron-phosphate (LFP) batteries from Chinese producers.

While provisions of the IRA and the European Green Deal aim to emulate China’s success, the US and Europe start with a big cost advantage relative to China and the fact remains that its EV industry is more competitive, states Goldberg. She concludes:

In the worst-case scenario, US consumers will simply give up on EVs, repelled by the higher costs associated with manufacturing them in Western countries.

How long could the US-China trade war last? A University of Rochester economist penned an article stating that expectations of a prolonged trade war were low during the last Trump administration, but high during Biden’s term. A model that used historical data predicts there is less than a 20% chance the trade war will be over by 2025.

An Associated Press article published this week quoted a senior China Commerce Ministry official saying that higher tariffs on Chinese exports will backfire, just increasing prices paid by consumers, while China can manage to weather the impact of such “external shocks.”

Bystander effect

It’s easy to think of the US-China trade war in a vacuum, but the fact is it’s had a significant impact on other so-called “bystander” countries.

A 2023 paper by the Center for Economic Policy Research (CEPR) examined the export responses of the largest 48 exporters to three destinations: the US, China, and the rest of the world.

The research found that the trade war generally enhanced opportunities for most countries, rather than just causing shifts in trade patterns. Many countries boosted their exports to the US in products targeted by the tariffs. More surprising is that these countries also increased their exports to the rest of the world, while their exports to China were largely unaffected.

Overall, bystander countries increased their exports of tariffed items an average of 6.7% during the period studied.

In markets where US-Chinese trade declined, Vietnam, Thailand, Korea and Mexico emerged as major export winners. Other countries including Ukraine, Egypt, Israel and Colombia saw a decline in exports.

Successful exporters tended to ship goods that were substitutes for Chinese imports. They were also able to scale up production and achieve economies of scale so that the unit costs of their goods fell.

The other countries cited in the paragraph above failed because their exports complemented rather than substituted goods hit by the tariffs.

Vietnam was one of the biggest winners from the trade war, increasing its exports of tires, sweatshirts and vacuum cleaners to both the US and the rest of the world. 

A recent Project Syndicate article found the countries affected by Western protectionism can be divided into two groups: those integrated into the Chinese supply chain, such as Vietnam, Thailand, Indonesia, Malaysia, and South Korea, and those less dependent on it, like Mexico, India, Turkey, Brazil, Poland, and Hungary. The second group stands to gain more from US trade policies.

India offers a prime example. It has successfully attracted several Western firms exiting China since launching its “China Plus One” strategy in 2014. Notably, Apple has significantly expanded its iPhone manufacturing operations in India, and Tesla reportedly may follow suit…

I recently visited an American-owned factory just outside of Chennai that produces solar panels for export to the US. This operation owes its success to Trump’s tariffs on imported solar panels from China, which the Biden administration has maintained. Without these measures, Chinese manufacturers’ efficiency and scale – helped by massive government subsidies – would have rendered India an unattractive investment destination. But India was able to seize the opportunity and increase its solar-panel exports.

Trump tariffs on Canada, Mexico

Ever the leader that keeps other countries off-balance, Trump earlier this week announced he will slap tariffs of 25% on the United States’ most important trading partners, Canada and Mexico, ostensibly as punishment for allowing illegal immigration and drugs into the country.

The President-elect also said he would, by executive order, impose a 10% tariff on Chinese products entering the country — a confusing development considering Trump campaigned on tariffs of 60% on Chinese imports. It’s unclear whether the 10% tariff would stand on its own or be on top of a 60% tariff.

Posting on his social media platform Truth Social, Trump said he would impose tariffs on Mexican and Canadian imports on day one of his administration and that the measures would remain until the “invasion” of undocumented migrants and drugs came to an end.

“Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem,” Trump said, via Al Jazeera.

Source: Truth Social

The United States is by far Canada’s largest trading partner, with businesses and individuals buying more from the US than China, Japan, France and the UK combined. The US trades the most with China, Canada and Mexico.

If the tariffs are implemented, they would raise questions about the future of the United States-Mexico-Canada Agreement, the successor to NAFTA which was negotiated to reduce trade barriers.

Gary Ng, senior economist for Asia Pacific at Natixis in Hong Kong, told Al Jazeera the tariffs could lead to higher inflation in the US, making it harder for the Federal Reserve to cut interest rates.

“Therefore, the direct implication is that the dollar will remain strong, and global central banks will find it hard to relax policies unless they accept currency depreciation… This is positive for US growth in the short run but bad for the rest of the world,” Ng said.

Economists quoted by Al Jazeera warned that Trump’s proposals would raise the cost of everyday items in the US and dampen global growth. Economists quoted by Reuters said Trump’s tariff plans would push US import duties back up to 1930s levels, stoke inflation, collapse US-China trade, draw retaliation and drastically reorder global supply chains.

Reuters noted the tariffs could spell trouble for Asian auto and electronics manufacturers that use Mexico as a low-cost production gateway to the US market.

While campaigning for election, Trump said he would put tariffs as high as 200% on cars coming across the US-Mexico border.

European carmakers could also suffer greatly from the tariffs. Companies with major operations in Mexico include Stellantis and Volkswagen.

Another Reuters article made the following points on this subject:

• Automakers are already struggling with a downturn in demand, rising costs, a slower-than-expected transition to electric vehicles and growing competition from Chinese rivals like BYD.

• Some could opt to boost operations in the United States and shift production from Mexico.

• The United States imported around the same amount of cars from Mexico as it did from Europe in 2023, but almost four times the amount of car parts.

• Nearly 80% of cars exported from Mexico between January and July this year went to the US.

• For Stellantis, the world’s 4th largest carmaker, every additional percentage point of duties on imports from Mexico could reduce pre-tax profits by about 160 million euros.

• Some 65% of the cars that VW sells in the United States would no longer be competitive if duties were added to Mexican imports. Its Puebla auto factory is Mexico’s largest and one of the biggest in the VW Group, making nearly 350,000 cars in 2023, including the Jetta, Tiguan and Taos – all for US export.

• Volkswagen US has imported around 10 times as much from Mexico so far this year than it has from Europe.

• Mercedes-Benz and BMW could produce more at their US plants, but new models would require hefty investments in tooling. Both German automakers export cars from the US, which could qualify them for tariff refunds.

• More than half the 410,793 cars built at BMW’s Spartanburg, South Carolina plant in 2023 were exported. Some of those could instead be sold locally.

• US investments by European automakers and suppliers are mostly in states like South Carolina that generally vote for Trump’s Republican Party. European firms have accounted for $12 billion, or 58%, of $20.7 billion in automotive investments there since 2006 — dwarfing the $3.8 billion from US firms.

The Economist noted the economic damage to America’s neighbors has the potential to be far greater than to China. Last year only 15% of China’s goods exports went to America, compared with 78% of Canada’s and 80% of Mexico’s.

The potential effect on Canada is so severe that some Canadian politicians, namely Ontario Premier Doug Ford, have suggested throwing Mexico under the bus and negotiating a bilateral trade deal with the US instead.

Barron’s estimated that a 10% tariff could raise the cost of a new car in the US by 4 to 5%. A 25% tariff on Canada and Mexico implies the price jump would be closer to 8%.

The higher costs could shave two to three percentage points off GM’s profit margin, versus two points and one point for Stellantis and Ford, respectively.

A 25% tariff on Mexico and Canada would reduce US car sales by about 1.1 million units, an analyst quoted by Barron’s estimated.

The Mexican government warned Trump’s steep tariffs would hammer the US economy, with Economy Minister Marcelo Ebrand saying Wednesday that US job losses could top 400,000.

General Motors and Ford, operating in Mexico, produce 88% of pickup trucks sold in the US, and Ebrand estimates a pickup’s average price will increase by $3,000.

According to the Financial Post, Mexican officials said the government plans to diversify trade away from the US, by advancing its trade agreement with the European Union and improving commercial ties with Brazil. Mexico could also impose countervailing duties on the US.

The newspaper added that Mexico has become the US’s largest trading partner, with the Mexican government estimating there’s now $800 billion annually in total trade between the neighboring countries.

Ebrard underlined the importance of improving the trade relationship between the US, Mexico and Canada, saying it stood at $1.8 trillion between January and September, and generates 30% of the world’s GDP.

Conclusion

Isn’t it ironic that that the original 2018 trade war, which started with US concerns over theft of intellectual property, has come full circle to focus on Chinese-made electric vehicles?

The United States can’t compete with China on EVs because the United States doesn’t own the supply chain — everything from mining and processing critical minerals to batteries to EV assembly — China does.

We don’t have the raw materials, nor do we have the technology (the “intellectual property”) to make electric vehicles so the US government’s first reaction is to make EVs more expensive by shutting out, through a 100% tariff (who’s going to pay that?) cheaper Chinese-made EVs out of the North American car market.

All of America’s mistakes are coming back to bite them, starting with General Motors’ ceding of permanent magnet technology to the Chinese back in the 1990s.

Without rare earths mined and processed in China, America would be unable to manufacture military hardware — rare earths are great multipliers, they are used in making everything from computer monitors and permanent magnets to lasers, guidance control systems and jet engines. There are no substitutes and no other supply source is available other than China.

But China wouldn’t have been able to develop its REE industry if it wasn’t for the dubious acquisition of Magnequench, a division of General Motors established in 1986. In 1982, General Motors research scientist John Croat created the world’s strongest permanent magnet using rare earths. The purpose of Magnequench was to produce neodymium-iron-boron (NdFeB) magnets, a superior type of permanent magnet that GM needed for its vehicles.

In 1988 Indianapolis-based Magnequench was mysteriously sold to members of former Chinese leader Deng Xiaoping’s family. The facility was then shut down and moved to China in 2000.

How the US lost the plot on rare earths

We let that happen. Trump tried to fix intellectual property theft and the US-China trade deficit, but he failed to consummate a deal before losing the 2020 election. President Biden has continued the Trump tariffs, and on EVs has quadrupled them, proving that globalization is dead and once again we’ve been snookered by the Chinese. We don’t have an out, and people need to understand that we need China more than China needs us.

Trump’s tariffs on China, Canada and Mexico threaten to re-order global trade routes and supply chains — something that is already happening due to China pressing its case in Latin America.

In a recent article we wrote about Chinese state-owned Cosco Shipping opening up a port in Chancay, Peru.

China challenges US in South America with new port in Peru — Richard Mills

The Peru port, built under China’s Belt and Road Initiative (BRI), will reduce shipping times to China from 35 to 23 days, cutting logistics costs by at least 20%, a Chinese Foreign Ministry spokesperson said. Chancay will be the first port to be controlled by China in South America. It can accommodate vessels up to 18,000 TEUs (20-foot equivalent units), the largest in the world. The ships can sail directly to and from Asia, cutting out North America. 

Brazil’s ambassador in Peru says the Chancay Port is “an opportunity for grain and meat production,” naming four Brazilian states that would benefit. He added that “Brazilian businesses are delighted with the possibility of not using the Panama Canal to take their goods to Asia,” and noted there would need to be investment in the Interoceanic Oceanic Highway which runs from southern Peru across the Andes to Brazil. A rail link is in the study phase.

Given what’s happening in South America, and earlier, Africa, a trade war instigated by the United States and inflicted upon not only China but US allies in Europe, Canada and Mexico feeds right into China’s plans for world trade domination.

First, Trump trained his guns on China, promising 60% tariffs. Then he flipped the script and threatened 25% tariffs on Canada and Mexico. European carmakers with plants in Mexico could be badly impacted.

With Western powers squabbling amongst themselves, China gets a free hand in strengthening its South America-China supply chain, including offtake agreements with lithium and copper mines. Remember, China already has its Belt and Road Initiative, of which nearly 150 countries have signed onto. Why should Beijing care about 60-70% tariffs on Chinese imports into the United States when two-thirds of the world’s population and 40% of global GDP are within China’s trading orbit?

Globalization is dead and the world is re-organizing into trading blocs. The World Economic Forum identifies six but it’s really China and the United States against each other, with each forming trading alliances with countries that stand to benefit the most from an agreement.

The US is sealing off its borders physically and economically with high tariff walls. Tariffs are inflationary, a tax on consumers and a drag on economic growth. Instead of tariffs the United States should be thinking about supply chains and how to get the materials they need for the new electrified economy. Instead of throwing up tariffs against its North American trading partners Mexico and Canada, it should seek offtake agreements with mines in Mexico, Canada and especially, South America, which has an abundance of mines and minerals.

China realized long ago that “he who has the commodities rules the world.” Isn’t it about time that America woke up to this reality and started working towards solutions, by forging new trading relationships with its allies or renewing existing ones?

We should also remember that just because Donald Trump says he’s going to do something, doesn’t mean it will actually happen. Trump is a businessman looking for a deal. His threats are often just the first salvo fired and he expects the other party to counter-offer.

While Trump appears to hold all the cards, with the Republicans controlling the White House, the Senate and the House of Representatives, in fact his administration could face a variety of domestic and international crises that could overwhelm his administration and derail earlier plans.

Examples include global warming, another health crisis like covid-19, the economy, and geopolitics. As Project Syndicate reminds us,

Potential sources of instability are not hard to find, including America’s enormous and growing fiscal deficits, fragile global supply chains, China’s increasingly precarious economy, anemic European markets, and the wars in Eastern Europe and the Middle East.

On top of these preexisting vulnerabilities are the new ones that Trump will introduce if he launches another trade war against China, cuts taxes for the rich, recklessly reduces the size of the government, and slashes regulations on the private sector. His agenda is a recipe for unanticipated consequences and government ineffectiveness…

Trump’s supporters seem to believe that their leader is immune to the ups and downs of politics and history. But this illusion will not last long. Events will see to that.

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Richard (Rick) Mills

aheadoftheherd.com

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