Trade Dictators Know What’s Best

Sometimes I like to think we live with complete freedom.

We are certainly freer here in Australian than many other places in the world. That’s something to be grateful for.

But think about all the oversight and control you live with.

The price of money (interest rates) is not decided by markets. It’s set by central banks, in our case the Reserve Bank of Australia (RBA).

The quantity of money is not determined by market forces. Borrowers always want money. It’s usually up to the banks whether they want to supply that credit or not.

Both the price and supply of money are factors that will affect you and your wealth in the future. And yet both are not determined by markets. They’re controlled by entities.

Same goes for these trade tariffs…

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Trade dictators

Those in the US might even be freer than we. Yet they too are affected by controls and constraints. Here’s what readers of an American publication, The Daily Cut, have to say on the matter…

Here’s reader Bill T, writing in yesterday’s mailbag…

I hate to break it to you, but socialism is already here in the U.S. and it’s not going anywhere.

Think Social Security, Medicare, Medicaid, unsustainable pensions for government workers, etc. And nobody is going to vote for anyone who wants to reduce or eliminate those benefits.

And here’s reader Greg D:

Our system WAS laissez-faire capitalism. Today, the “United States” government controls all the major means of production (and most of the minor means!).

Trump’s tariffs are more oversight Bill and Greg will likely disagree with.

Not only is Trump taxing Chinese goods, he’s goading China to funnel money into a dying industry. He wants Chinese businesses to buy more US soybeans.

Why? So he can keep a section of his voters happy.

Of course, these businesses won’t buy on Trump’s or Chinese President Xi Jinping’s say so. Their purchase decision will be dictated by price.

So, when Trump says he wants Chinese businesses to buy more US soybeans, what he’s actually saying is for government to meddle in markets to make US soybeans cheaper.

And that meddling man will be Xi.

He’ll remove import taxes on US soybeans and put them elsewhere.

This is the present situation for a wide variety of US and Chinese goods, not just soybeans. Their prices are not determined by the market.

They are manipulated by Trump and Xi.

Apparently, these two trade dictators know best. And they’re forcing markets this way and that.

If you remember, Trump and Xi are still honouring their trade halt agreement. Both men said they would hold off on any further import taxes until 1 March.

But we’re close approaching this date.

It might be very unlikely Trump and Xi will come to a complete agreement in the next 21 days. If that’s the case, just watch as further tariffs pile on.

This might be the alarmist stance.

I tend to think Trump and Xi will avoid all-out war. Instead they might just extend the deadline to iron out key points of an agreement.

A few days ago, Trump sat down with Chinese officials. The idea was to make some in-roads on coming to an agreement.

And from what we saw, Trump seems pretty happy about where the conversations are going.

From South China Morning Post:

China and the US were upbeat on progress towards settling their trade disputes after wrapping up two days of tough negotiations in Washington, sending Chinese markets higher ahead of a deadline to avoid additional tariffs.

…The talks covered a wide range of issues, including forced technology transfers, intellectual property protection, market access, the trade deficit, cybertheft, government subsidies to China’s state-owned enterprises, and currency controls, the White House said. But they did not discuss the US indictment against Chinese telecoms giant Huawei Technologies and its chief financial officer Sabrina Meng Wanzhou.

With the March 1 end to a 90-day truce on tariffs looming – and the threat of more US duties on US$200 billion worth of Chinese goods – both sides have been keen to make progress to stave off a further escalation of their trade war. US President Donald Trump on Thursday said he looked forward to meeting Chinese leader Xi Jinping to iron out the final details of an agreement at an unspecified date.

Trump later said both countries were making ‘tremendous progress’ with trade talks. He might get his trade balance after all.

But I doubt he’ll like what comes next.

What’s coming next?

If you’ve been following the whole trade debacle, you will have heard that Trump wants less technology theft and more domestic manufacturing jobs.

To get both, Trump’s idea is to tax the living daylights out of China.

He’s making it hard for Chinese firms to get their hands on US tech. He’s making it hard for US businesses to buy cheap goods from China.

It hurts China in two different ways.

First by limiting the amount of tech transferred to China, limiting the ability of foreign workers to learn how to produce hi-tech products. Second by cutting China’s export-led gravy train.

Manufacturing exports is why China has such high economic growth. Manufacturers in China continued to grow on international demand.

The more new goods they produced, the more their economy grows.

But now with less demand from the US, China’s economy is starting to falter.

Yet this might have happened regardless. And that’s because manufacturing efficiency is outpacing global demand each year.

Countries like China, Japan and Germany are becoming so efficient, they are effectively giving the power of manufacturing to everyone else.

What do I mean by that?

Well, as automation and robotics remove the need for skilled and unskilled low-cost labour, the fixed costs to set up a factory in the US is basically the same as the costs in China or Japan.

What happens at this point is you get globalism and trade in reverse.

And that’s because manufacturers start to look local. They don’t send operations off-shore. The cost of operating domestically is basically the same.

And with local operations they can save on shipping costs and get goods to customers quicker.

This is a world we’re moving towards slowly, each and every year.

It’s a localised world where Trump will get his manufacturing industry back. But none of the jobs are coming with it.

As dictator of your portfolio, I suggest you make moves to benefit from this global shift.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Could lithium be Australia’s next resource boom? Click here to find out.


Harje Ronngard is the lead Editor at Money Morning. He’s also the Editor of Wealth Eruption and Gold & Commodities Stock Trader, and co-Editor of the Third Wave Portfolio.

The aim of both Wealth Eruption and the Third Wave Portfolio is to find misunderstood opportunities. These are the type of investments that multiply small amounts of money five- to 10-times in size.

Harje has an academic background in investments and valuation. He’s had experience across a range of asset classes, from futures to equities.

For any investment, Harje believes you only need to ask two questions. What is it worth? And how much does it cost? These two questions alone open up a world of opportunities, which Harje shares with Money Morning readers five days a week.


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