Once upon a time Americans were very sensitive on the subject of taxation. They even dumped British tea into the Boston Harbor as a protest against British taxes. And the American constitution was written to give an elected Congress the primary power to impose taxes.
But over the years, Congress has transferred its power to tax to the president, always on some pretext of national security. Trump has seized this power and taken it to new limits. He has declared all imports to be subject to tariff on the grounds of national security. By his reasoning, national security and the nation’s economy are the same thing. This, in my opinion, is a total fraud and stretches the definition of national security beyond any reasonable limit. Other presidents may have abused this power, but Trump has made a total joke out of the national security criterion. If Congress lets Trump get away with this, it will have totally abrogated its power to tax.
Trump brags — and with some justification — how his tax bill lowered taxes on American people and American corporations. Congress deliberated and then had to pass the tax bill first which Trump then signed. That was the way it was supposed to work. But tariffs are a tax too and they are being levied with no Congressional approval or debate. They are only “analyzed” by unelected Trump sycophants like Commerce Secretary Wilbur Mills and China-hater Peter Navarro. America’s Founding Fathers would be appalled. Along with the stock market and anybody else who understands law and economics.
As a person educated as a free market economist with a core belief in comparative advantage, free trade and the positive role of technology, I do not know where to begin to comment on what looks like a deliberate attempt by Trump to destroy the global trading system. Since when does a trade deficit with another country mean that country is “ripping the US off”? Since the dollar is the global currency, do not all countries have to hold dollars as reserves? They import dollars like they import soybeans and under conventional accounting this puts downward pressure on the US current account. So what. Despite all the Chinese protectionist restrictions, are not most US companies making lots of money in China where they freely choose to operate restrictions, or no? Do not all nations benefit as technology accelerates on a global basis? Is not the US (as compared to China for example) a low savings country with a current account deficit since the current account is equal to gross domestic savings minus investment? And is not the US at the same time a great place to invest?
Is not the stock market headed for a major crash if Trump keeps accelerating the trade war and the tech war with China? Trump argues the US stock market is doing great thanks to his policies. The US stock market was doing great in early 1929 as well.
I could go on but the main point here is that Trump’s tariffs are harmful from an economics point of view and unconstitutional from a legal. The constitutionality is one area where I would think the left would agree with the strict constitutionalists — the constitution has been ignored. For those readers who are interested in more details on the constitutional issues, I quote below a passage from an article by Tara Golsham from a March 2018 Vox publication:
The Constitution is pretty clear: It is in Congress’ power “to lay and collect taxes, duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States,” and regulate trade between the US and other countries.
But over the past century, Congress has shifted many of the powers to raise and lower tariffs to the executive branch (a concentration of power that conservatives now decry).
There are many ways the president can impose tariffs without congressional approval. To name a few:
Trump’s White House cited Section 232 of the Trade Expansion Act of 1962, a provision that gives the secretary of commerce the authority to investigate and determine the impacts of any import on the national security of the United States — and the president the power to adjust tariffs accordingly.
Meanwhile back in the Middle Kingdom…
China has 487 Electric Car Makers, and Local Governments are Clamoring for more
The above title is a headline from a Wall Street Journal article. Even if only half true, it is reason to be skeptical about China’s vaunted Made in China 2025 plan. Electric cars are on the 2025 list of objectives. It is hard to believe the private Chinese venture capital industry, vibrant as it is, would voluntarily finance 487 electric car makers. And one must wonder what local Chinese government officials know about electric cars. 2025 comes off as a massive and inefficient state sponsored throw-money-at-technology great leap forward. OK China has a high national savings rate so maybe its government can afford to waste money. Some people will make a lot of this wasted money. In my next life, I want to start a Chinese electric car company. Meanwhile, the American government should relax.
One hears suggestions that America should have its own government-sponsored tech assistance programs to counter China. Déjà vu all over again — we used to hear that about the Japanese “threat”. America is the tech success story at least up until now, not China. China should imitate the US, not the other way around. And so should Japan, which since 1990 in sort of a reversion to isolationist Tokugawa days, closed itself off and fell backwards in the global tech race. Free market global America has been the bright tech city on the hill, at least until Trump showed up and started to put out the light. American tech has been a free market affair where the best and the brightest came to work and study. And American companies compete on a world basis including in China. And yes, China probably stole some IP technology but it did not matter since America was moving so fast.
Morris Chang, the legendary naturalized-American founder and just retired CEO of one of the world’s most important semiconductor firms, Taiwan Semiconductor (TSM), has said that the Chinese will need at least five years to catch up on semiconductors. Mr. Chang is a man of vision. He only has to take out his binoculars, look out his window and see across the Taiwan Straits his only major Chinese competitor, Shanghai-based Semiconductor Manufacturing International (SMIC). Founded in 2000, SMIC is at the 28nm node in its semiconductor processor manufacturing. TSMC is at 7nm. TSMC is years ahead. But to quote Chang five years from now, the Chinese “will catch up with where we are now, but in five years we will be ahead of them again, by another five years.” That is unless Trump and his nativist troglodytes don’t slap endless restrictions on US companies to protect American IP and disrupt with tariffs a very globally integrated semiconductor supply chain. One hears similar optimistic comments from others in the industry including memory chip producer Micron’s (MU) CEO as well as the prestigious industry publication IC Insights. The Chinese threaten nobody in semiconductors, at least not in the short to medium term.
But What About the Strong Dollar?
Trump is now complaining about other countries manipulating their currencies downward against the dollar. That is probably not correct. He has been slapping tariffs on US importers around the globe. Naturally their currencies—and that includes the Chinese renminbi—are going to weaken. Yes this weakening will in part offset the tariffs. That is a natural market reaction, not a currency manipulation. In any case, the markets will in the long run offset a currency manipulation. If a country holds down the value of its currency, in the long run internal inflation will be the result and this will offset the currency manipulation. That happened in China in response to Chinese currency manipulation years ago. Trump should take a course in economics.
Along with this, Trump is now pressuring the Fed to stop raising short-term interest rates. Other things equal, an increase in US interest rates will cause funds to flow into the US and strengthen the dollar. The increase in interest rates should be no surprise to anyone since the Fed has been signaling it would do this for quite some time. Ironically, it is Trump appointee Fed Chair Powell who is raising the rates and not super dovish former Chair Janet Yellin whom Trump fired.
So What Is the Investor to Do?
With the US economy going great guns, and the US tech sector in particular doing so well, I would normally be urging buy, buy, buy American and also Chinese stocks, especially tech. But the American President apparently is trying to destroy the global trading system and has initiated a tech war with China. This would suggest caution.
One must ask, is Trump only bluffing and in the end will be recognized as the master of the deal or is he initiating an international economic death spiral. The markets so far have acted like Trump’s trade wars are no big deal. For most economists, free trade is a religion so maybe with my economist hat on I am too pessimistic. My own guess is that he will settle with the Europeans, the Canadians and the Mexicans before the US midterm elections. Hopefully things will not have gone too far by then. But there will be no settlement with the Chinese before the elections. The tech war with the Chinese is based upon a Trump desire to maintain American hegemony in Asia. There is also the Trump Administration’s lack of understanding of the tech industry’s need for freedom of ideas and people. Chinese students in STEM subjects are now reportedly being restricted as to how long they can study in the US. Finally there are Trump’s deeply held views that China needs to be punished for major past job losses in the American Midwest (which in any case is now at back at full employment). Trump wants revenge.
Regarding China, I believe there is an unspoken racial animus. The US in its past had a long history of discrimination and even violence against Asians. Several years ago Trump shadow advisor Steve Bannon slipped and said there were too many Asian CEOs in Silicon Valley. Even today, American Chinese are having to sue to remove discriminatory quotas at Harvard and other major US universities.
For American investors, better to keep some cash for now, avoid Chinese stocks and companies with major dealings with China. Stay long companies which do not have a China story. Unfortunately this leaves out a lot of good companies.
This tech war cannot go on forever and there are a lot of great Chinese companies. There will be a time to get back in. Wars end and a new equilibrium will prevail.