Monday, August 05, 2019

Trump's trade war is quietly eroding his political support

Millions of Americans don't boast that they're upset by the president's policies

Donald Trump is a stable genius but he is also illiterate in macroeconomics. He misunderstands the logic and dynamics of the international trade and its causal relationships with the monetary systems – and the monetary systems themselves.

You know, I would go further. I think that his anti-Chinese rhetoric is just another example of the victim mentality – and he could join a department of grievance studies (and become a colleague of the feminists and black rights activists) right away. Why it is so?

The underlying observations that power his sentiments are two facts:

* the persistent U.S. trade deficits in the trade with China
* the high GDP growth rates in China in recent years, above 6 percent

But to make his derivations meaningful, he also has to make another assumption, I believe, that he doesn't brag about too explicitly:

* Chinese are less skillful people so their well-being is expected to be permanently worse than the American one

It's really these three initial assumptions that must be combined in a certain way to conclude that "the Chinese have been robbing Americans" and this "robbing must be stopped by eliminating the trade deficit with China".

The victim mentality is analogous to the feminists' grief about their inability to discover the theory of relativity. It's the men's fault! Similarly, it's the Chinese fault that the U.S. GDP wasn't growing by 6% a year. In one sense, Trump's victim mentality is even more irrational than the feminists' victim mentality. The feminists are really stupider and less successful than the successful men – so they have at least some reason to be bitter. On the other hand, the Americans are still much richer than the Chinese – so it looks silly to blame the Americans' "insufficient wealth" on the evil greedy and rich (oops, what?) Chinese people.

Needless to say, the first two assumptions are right, at least assuming the common definitions. The U.S. runs huge trade deficits with China. And the Chinese growth has been impressive, relatively to the growth of the Western countries.

But the final, not so explicit, assumption is highly debatable. Should the Chinese be expected to be much poorer than Americans forever? Is their relative success a proof of their theft or other illegitimate moves? Isn't the higher growth rate caused simply by the much lower Chinese starting point – it's easier to catch up with the West?

You know, the U.S. GDP per capita is $65,000 a year (because the U.S. dollar is informally a unit in the SI system of units, it's both the nominal and the purchase-parity number). If you haven't looked for a few years, you must notice that it's higher than the numbers you used to know. On the other hand, the Chinese have $20,000 on the purchase-parity basis and only $10,000 per capita nominally!

Is this factor of 3-6 appropriate and sustainable? Whether you like it or not, two issues are most decisive for the nations' GDP per capita:

* their skills, expressed e.g. by the national IQ
* the degree of capitalism in their economy.

The smarter nations and the more capitalist nations, the wealthier you expect them to be. The intelligence isn't everything and I do think that the Chinese have some limited creativity or something that is overlooked by the bare IQ scores. But otherwise, the table above shows Chinese' average IQ as 105 – while the U.S. stands at 98, just like Czechia. The difference is 7 points, half a standard deviation, and this could be enough to beat the creativity gap if there's any.

You know, like J. Hewitt, I recently saw this amazing video with Chinese kids that do some mathematics. I guess that they use their fingers to speed up some multiplication but I am not sure. Fingering is something that I have never used myself – and if you have used fingering outside mathematics, I don't even know what it means. ;-)

In Czechia, what's hot are the new alternative methods to teach mathematics. Kids smoke marijuana and babble random things (e.g. about the mouse equal to one and the cat equal to two, no kidding) that they consider mathematics, and if the teacher dares to correct them, they scream at her and make sure that she will never do it again! Well, I am obviously a critic of these postmodern methods. But do I want our schools to switch to the Chinese fingering? I am not sure. It's not like us. It's not like what I was as a boy. On the other hand, I do think it would be great if at least thousands of Czech kids learned this Chinese know-how – at least as a hobby in special clubs. Even though – with my incomplete knowledge what the kids are actually doing – I "believe" that it's not terribly essential, I simply feel very uneasy that there are similar classes of skills that no Czech or Western kids (or adults) may replicate. It seems dangerous to me.

But I digress. My point is that the Chinese are damn smart – by pure IQ, smarter than the U.S. or Czechia – and they have also had a largely capitalist economy for decades. Capitalism in the economy is more important for the material wealth than the political freedoms – although the two good things are still correlated in various ways and the political freedoms may be said to be more important than the wealth itself, for its own sake.

So you should expect the Chinese to become wealthier and to be catching up with the West. Everything else is noise in comparison. For example, the Chinese have been unquestionably stealing the know-how from the Western companies. It's true but it's not everything that they have been doing. It's still just a small part of their GDP etc. These days, Chinese companies are ahead of the world in many things. As a Nokia shareholder, I actually pray that the persuasive suggestion that Huawei is 1 year ahead of Ericsson and Nokia in 5G mobile data technologies is accurate. One year wouldn't be bad. Consumers could sacrifice it to have the greater apparent political safety. It could be more than a year...

China is doing lots of things – and is capable of exporting its products across the world. It's in no way "universally dependent" on exports to the U.S. Its annual $2.5 trillion exports mainly go to

* U.S.: 19 percent ($480 billion)
* EU: 16 percent
* ASEAN: 13 percent

So you know, Donald, even if you wanted as well as succeeded in the elimination of all the Chinese exports to the U.S., it would at most subtract 19 percent from the Chinese economy – this one-time blow would erase three years of their 6-7 percent growth rate. In reality, this would be an incredible overestimate because the Chinese exports to the U.S. will only decrease "slightly", and most of those exports that can't be sent to the U.S. may be successfully sent elsewhere, anyway. In 1990, Czechoslovakia was still exporting a vast majority of exports to the Soviet Union. The Soviet Union ran out of money... and within a few years, we were just fine and exporting a majority to Western Europe! Such barriers with a single country are almost never fatal. The world outside a country – even outside the USSR or the U.S. – is still very large to absorb your products etc.

For example, Škoda Auto – which has grown into an important and successful carmaker with over 100,000 cars a month and with a 10% profit margin – isn't exporting to the U.S. at all and it doesn't seem to be a problem. The cars may just go elsewhere.

So the actual negative impact of the trade war with the U.S. on China's economy will only subtract a few percent – and the drop of the Chinese stock markets is already a huge overreaction (and the drop of the other markets outside the Sino-American Union is almost completely unjustified). And you know, China is still importing from the U.S. – some $155 billion annually which is 7.24% out of China's $2.13 trillion imports (the U.S. is sixth in that list). So Trump doesn't really want to destroy all these U.S. exporters to China, I suppose he would prefer the U.S. exports to China grow, so much of the Chinese exports to the U.S. will be allowed to stay, anyway.

One conclusion is that Trump is incredibly overstating the potential impact that his protectionist policies may have on China. He may at most subtract a few percent from China's GDP. His idea that the Chinese will "stop getting richer" is silly. On top of that, China is obviously fighting back – the U.S. farmers won't be able to get to China now; and China has – logically and justifiably – weaken its currency, yuan, above 7 yuans per dollar. Trump may call it names – but the weakening of the currency of a country that is under attack (trade war waged with the world's only superpower) is completely logical, it's common sense, and purely free currency exchange markets would weaken the yuan now, too.

Of course that aside from the redirecting of the Chinese exports to non-U.S. destinations and aside from the increasing prices of the goods that will still go to the U.S., another significant part of the damage done to the Chinese economy will also be prevented or compensated by the weakening of the yuan. How could it be otherwise? This is how the markets react. Net feedbacks are almost always negative. Every "hit" is almost always weakened by the defensive buffers and pillows and there are many of them.

What's the point of these protectionist policies? And what are the consequences?

As I have explained in many previous blog posts, the U.S. trade deficits are basically inseparable from the critical role played by the U.S. dollar. Other countries – that run trade surpluses – are storing their earned new money in the U.S. dollars, U.S. bonds, and U.S. stocks. because they think those are a safe choice with a lot of potential for the future. You may consider U.S. dollars, U.S. bonds, and U.S. stocks to be "products" that the U.S. exports and that are not counted in the conventional trade balance. If you counted them, or some part of them, you would see that the U.S. has a balanced "modified" trade!

That's how it works. Any attempt to "cure" the deficit will create some other changes, like the strengthening of the dollar relatively to the other currencies (or weakening of the yuan), that will restore almost the whole gap. There's no easy way to harmlessly eliminate the gap because it's just the flip side of the attractiveness of the U.S. currency, bonds, and securities.

Mr Trump, if you wanted to really eliminate the U.S. trade deficit, then damage the credibility of the U.S. dollar and perhaps the U.S. bonds. It will weaken and the U.S. will resemble China or Czechia that have undervalued currencies and that run the trade surpluses for that reason. Do you really want it? The purchase power of the Americans would weaken – that's really proportional to the strength of the currency. Almost everyone would feel hurt because the Americans' life will really resemble the Chinese lives – and the latter are more miserable!

Almost every American would feel hurt especially because in average, Americans think as consumers more than they think as producers. Why is it so? It's simple. It's because America consumes more than it produces! If you divide the consumption and production to the per-capita numbers, the same thing will hold for the average American. Because the average American consumes more than he produces (he can afford it because other nations love to send goods created by hard work for newly and easily printed pictures of Benjamin Franklin), he will feel more harmed when his consumption becomes harder – than he will be thankful for the better opportunities to export to China.

The net result of the trade war is negative – although it's just comparable to 1% of the GDP for either country, not much larger numbers that Trump is probably dreaming about. The trade war is stupid because:

* Lots of exporters to China are harmed by the understandable reciprocal action – now it includes numerous new farmers who may vote Democrats.
* Most of Americans are really upset because the rather important Chinese products are getting more expensive in the U.S., and it's totally dumb to suggest that they're not getting expensive.
* On top of that, the trade war hysteria cripples the stock markets which hurts Americans – who are often investors whose wealth or pension depends on the well-being of the stock market. Trump logically gets blamed for the decreases even if they're temporary and even if they're overreactions.

A particularly risky aspect of the last point is that most Americans will prefer not to be open about these sentiments. People don't want to look vulnerable – or obsessed with their money. So even most of the Americans who are really upset about the drop of the stock market in recent days will remain silent about the anger or superficially minimize it. I am almost certain that most of the TRF readers are rather annoyed by the havoc in the stock markets in recent days – like some time ago.

But they feel it because it's totally rational to be upset by these decreases of the stock markets when their material well-being honestly depends on it. So they may vote for a different candidate – as I wrote, I recommend Tulsi Gabbard wholeheartedly, and not just for this trade reason – who supports the trade peace (am I the first one to use the term? If so, send me royalties for using it!) instead of the trade war.

My estimate is that each 2% drop of the stock market indices that may be attributed to Trump's moves causes a 1% drop of his preferences. Some of the support may return, some of it may be permanent even if the stock market recovers in a week or a month. If he managed to send the indices to zero, his approval rate would be close to zero, too. You just don't want to do that, Donald, because those may be the percentage points that decide about the result of the 2020 elections.

Given the fact that you are viewed as a strongman who "is never wrong", the cleanest solution would be for you to announce that The Reference Frame has finally managed to explain the trade to you, that you were wrong (as the Czech president Zeman has said, only a moron never changes his opinions!), you won't err again, and your protectionist policies will be abolished since the next week. Even the very statement by Trump that "he admits of having been wrong once" would be so touching that Trump would gain millions of undecided voters and some Democrats.

Thanks in advance for your consideration, the Donald! I actually believe that you "feel" that the leftists in the Democratic Party are "more real" enemies of yours than the poor Chinese leaders who have to deal with your infantile trade wars – and you should adjust your behavior according to this observation.

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