Liberation or Ruination Tarrifs – Part 7

Q: Where do you see the tarrif war going from this point between the US and China? You mentioned that the tarrif war between these two superpowers are likely to create a host of unintended consequences can you please elaborate further on them? Thank you, this is a question from Cosca 2601.

A: Long time no see. Fraternal greetings to the readers of Cosca 2601. Hope most of you graduated, landed great jobs, married the girl next door and are now doing well. Its been 20 years since I touched base with Cosca 2601, so at the risk of being too sentiments, let me dive in. The mini skirt answer to the first question is one side needs to back down before any meaningful progress can be made in finding some happy resolution to the tarrif war. I believe back channel negotiations are being conducted and there’s even a possibility that a bona fide broker will volunteer their service to arbitrate a happy ending. Who that bona fide intermediary will be is anyone’s guess, but having such an arrangement will go a long way to engineering a face saving resolution. As it is, I am doubtful either Trump or Xi will make the first move. Truth is both sides are too invested in their position to budge even an inch. But the reality is China and US need each other. Peter Zeihan is dead wrong! Both sides are also hurting. And if this persist, we are likely to see inflation and in its wake a full scale recession is probably the only logical outcome and the rest of the world will be sucked into this maelstrom. That’s the long and short of it. (Interruption).

Q: Who stands to come out the winner? And why?

A: There are no winners here. If there’s such a thing as win it will be a phyrric victory and the gains are really just valueless stuff like prestige and moral ground wins. May mean a big nothing, but if I am forced to plumb China will definitely emerge the winner. As for the US, their economy will be in shredded. I have mentioned this many times, the Chinese planners have wargamed this scenario in every possible way. They are prepared by stockpiling and pursuing a very aggressive plan to decouple from the US and this has been going on in earnest for over 5 years. But there is much more than just tarrifs here, the Chinese planners can hit surgically for example, they can deploy an array of measures that aren’t tarrifs but it has the same devastating effect such as targeting GMO crops and foodstuff of US farmers and ranchers. We are talking red states like Ohio, Nebraska and possibly even fence sitting states like Pennsylvania to degrade the MAGA grassroot support base. My point is the level of intensification can be ratcheted up not only by China, but by the US as well and to complicate matters the rest of the world will be forced to choose between China or the US. Neutrality will no longer be optional if the trade war intensifies and all this will be dangerous. (Interruption).

Q: You mention the D word again – can you please elaborate.

A: It all goes back to wargaming. Now if the US finds itself squeezed economically, then it may decide to leverage its military card by blockading certain choke points across the global trade routes that China and their reliable allies typically course their good thru…if that scenario pans out then the possibility of a kinetic conflict between the US or one of their proxies may suddenly happen with China. This is the dangerous aspect I am referring too, the probability of conflict escalating. This is also one possibility of what I mean by unintended consequences. Kompf there are many moving parts in the calculation such as what will Europe do now? How will ASEAN react to all this? What about South Korea and Japan do from this point onwards? Its really like playing Jenga when the tower is as high as the ceiling. Move this piece in and put it there, it could be OK, but move another seemlessly benign piece and it may all come tumbling down…too many moving parts and my feel is all this generates uncertainty and nervous energy, businesses don’t like this sort of climate, they need stability and certainty for them to plan coherently. As it is, its hard to impossible to plan effectively. The other aspect of unintended consequences is all these tarrifs are likely to exacerbate corruption and cronyism. Let me give you an example. Smartphones, certain categories of microchips and even some varieties of batteries used US EV’s have been exempted from tarrifs recently, its done quietly without much publicity, but who are the beneficiaries? They just happen to be the oligarchs who bankrolled Trump and the MAGA movement, those that didn’t have to live with tarrifs, so what you have here no matter how you choose is negotiate around the details is a patronage system, where those with power and influence can fudge the rules to still get an unfair advantage and all these you scratch my back and I do the same for you is just good olde corruption and cronyism at its very worst.

Q: You like to use the aphorism – water will always find its level…where do you see watermark point of all these tarrif wars?

A: Short term. There will be no shortage of spasmodic pull backs, reversals and even u-turns simply because some industries and sectors in the US are so big and influential, but these are far from ideal conditions to conduct trade and commerce. As for China, the US remains a big market that feeds thousands of small and medium sized family owned factories who employ millions of workers. Sure these excess inventories may find their way to new markets, but even then in the short term the slack will remain and thats problematic because what happens when countries in the South and beyond are flooded with cheap products? As for the US in maybe three months the average Joe is going to walk into Costco, Walmart or Target and suddenly he realizes everything from thumb tack to a set of wrenches has gone up significantly, what will happen then? The problem as I see it has alot to do with free trade that predates globalization, Bretton woods and even the rules based order. PM Wong recently made a rambling squeeze box speech about the beginning of the end as we know it….I don’t agree with his Starwars melodramatic analysis…its to soon to write the sypnosis on this tarrif war story. Water will always find its level Kompf and free trade has been around since the dawn of mankind, its endured wars, famine and some say even asteroids the size of a mall smashing into our planet, yet it has endured despite its multitudes of vicissitudes. Do you really believe the idea of free trade will just pack up and disappear like a traveling circus. I don’t believe it will, it will continue not because I am an optimist, realist or skeptic Kompf, it will do so because it is the most robust and efficient way in which mankind can make a better tomorrow. I want to be clear. I am not saying this is all a storm in a teacup that it isn’t. But its not a catasthropic event either. My feel is these are growing pains of the MAGA movement. We need to give them time for them to find their line. Maybe even some settling time is even required. When things have stilled down. My feel is the perverse result may well be how little has really actually changed….as you correctly pointed out I like to use the phrase water will always find its level.