Trump Might End US Financial Hegemony

John Mauldin  |


President Trump recently ordered more tariffs on an expanded list of Chinese imports.

The rate is 10%. It will rise to 25% at the beginning of 2019, unless China agrees to new trade policies before then.

Notably, Trump excluded consumer electronics products like smartphones. That shows he does not entirely ignore the tariff impact on US consumers.

I agree with the president that China has taken unfair advantage of global trade rules. Its demand for foreign companies to disclose intellectual property is insane.

That must stop. The question is how to accomplish it.

Foolish Foreign Policy?

I had hopes Trump’s business negotiation skills would help achieve productive trade talks. It did not happen that way.

Trump could have gathered a united front of other top economies that got hurt by China’s policies. Then demand China change its ways on behalf of everyone. Only then would I have sought better terms with Canada, Mexico, the EU, and others.

Instead, he has turned his allies against the US.

Part of negotiating is to have realistic demands. You will never succeed by demanding your adversary cut his own throat.

Xi Jinping can be flexible on many things. Yet he still runs a Communist government and a command economy. That leopard is not going to change its spots.

They are never going to abandon their technology goals embodied in their “Made in China 2025” program. Nor would any other country.

And I am not the only one who thinks this.

Check out this rather blunt tweet from former trade diplomat Harald Malmgren:

He wrote a book on US trade policy, serving under presidents starting with JFK. He’s retired now but remains “plugged in” to global finance better than almost anyone I know.

Dangerous Game

Now, it may be that the White House team is less talented than they think. But it may also be that they have an entirely different strategy than we think.

Some of my contacts believe the real goal is to make US businesses pull back from operating in China at all. If that’s the goal, they are off to a good start. But that is not good for US businesses or for the US.

For the moment, the US side is negotiating from a marginally stronger position. Our economy is growing nicely and can withstand some tariff pain. It will hurt certain sectors, though.

This is already happening.

Trump is playing a very dangerous game in the long run. International trade is like plumbing. Goods and money flow around through pipes and you can only squeeze so much through them.

When the US imports goods from China, we export dollars to China. We can do that because our currency is what everything else is settled in.

Cutting imports would mean we also slash dollar exports. That’s not good at all if we want to maintain our position on top of the food chain.

I recently ran across a simple and short explanation of this threat by currency expert Taggart Murphy.

Trump is doing everything he can to bring on the end of the days when the US can borrow whatever it wants in whatever amounts it wants. To be sure, there is no recipe book. The dollar is now so entrenched as the world’s money that if your assignment were to bring the curtain down on that—and thus the ability of the US to borrow whatever it wants whenever it wants—it’s not at all clear what you would do.

But you’d start by doing everything that Trump is doing—pick fights with all your allies, blow the government deficit wide open at the peak of an economic recovery, abandon any notion of fiscal responsibility, threaten sanctions on anyone and everyone who seeks to honor the deal Obama struck with Iran (thereby almost begging everyone to figure out some way to bypass the US banking system in order to do business), [Which they are openly doing –JFM] throw spanners into the works of global trade without any clear indication of what it is precisely you want for a country that structurally consumes more than it produces and thus by the laws of accounting MUST run trade and current account deficits.

That’s strong language but exactly right, especially the last part.

The End of US Hegemony

If this trade war continues, it will initially favor the US.

But eventually, the rest of the world will build new pipes to bypass us. Then we will lose the advantage. Something similar happened to our predecessor hegemon, the United Kingdom.

We don’t know what a new world financial order would look like. But the US dollar would not be on top of it. Not with populist politics, enormous debt, mass refugee migrations, and rapid technological change that could put millions out of work.

Think about this US-China rivalry as a long boxing match. We’ll see both sides throwing and absorbing punches. The lead will change often and the winner could even be a third party that may not exist yet.

I hope China reduces its most abusive practices and Trump calls off the tariffs. One of my most inside sources in China told me he believes that to be the case. And most Chinese do, too.

We should learn more in the coming months.

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