by Jim Rickards, Daily Reckoning:
After Trump announced the steep 30% U.S. tariffs on imports of solar panels and washing machines. the Chinese Commerce Ministry expressed “strong dissatisfaction” and said it “aggravates the global trade environment.”
Trump is not done with tariffs. In the days and weeks ahead, we can expect further announcements with regard to steel and aluminum imports to the U.S. Again, such imports come largely from China, but the tariffs will likely affect all exporters to the U.S.
Ironically these announcements came just as President Trump was preparing to go to Davos, Switzerland for the World Economic Forum.
The Davos elites vehemently oppose both trade and capital controls, preferring instead a globalist “one-world” approach. The only problem with the Davos elite theory is that it is empirically, historically and analytically wrong.
The theory of free trade is based on an idea called “comparative advantage.” This idea goes back to David Ricardo, an early 19th century British economist. Ricardo’s theory was that countries should not try to be self-sufficient in all manufacturing, mining and agriculture.
Instead countries should specialize in what they do best, and let others also specialize in what they do best. Then countries could simply trade the goods they make for the goods made by others. All sides would be better off because prices would be lower as a result of specialization in those goods where you have a natural advantage.
It’s a nice theory often summed up in the idea that Tom Brady should not mow his own lawn because it makes more sense to pay a landscaper while he practices football.
But, the theory is flawed. For one thing, comparative advantage is not static. It changes over time. Importantly comparative advantage can be created from thin air. Taiwan had no comparative advantage in semiconductors in the 1980s, but the government made a political decision to create the state-sponsored Taiwan Semiconductor Manufacturing Company.
Today Taiwan Semiconductor is the largest supplier of semiconductors in the world. The government nurtured Taiwan Semiconductor with tariffs and subsidies when it was most vulnerable to foreign competition. Today Taiwan Semiconductor is a publicly traded company that competes effectively around the world, but it would never have attained that status without government help in its early days.
If the theory of comparative advantage were true, Japan would still be exporting tuna fish instead of cars, computers, TVs, steel and much more.
The same can be said of the globalists’ view that capital should flow freely across borders. That might be advantageous in theory but market manipulation by central banks and rouge actors like Goldman Sachs and big hedge funds make it a treacherous proposition.
In the depths of the Asian financial crisis of 1997, Malaysian Prime Minister Mahathir closed Malaysia’s capital account to preserve hard currency and defend his exchange rate. Mahathir was excoriated at the time by the likes of George Soros. Soros went so far as to call Mahathir a “menace to his country.”
But scholars today agree that Mahathir made the right move. In recent years, even the IMF has said there are certain circumstances where capital controls are fully justified.
If open trade, and open capital flows are flawed ideas, why do the Davos elite support them?
The answer is that these theories, which have superficial appeal to everyday citizens, are the perfect smokescreen for the elites’ hidden agenda. That agenda is to diminish the power of the United States, and the U.S. dollar, in world affairs and to enhance the power of rising nations especially China.
If several hundred million Chinese can be pulled from poverty by leaving the U.S. market open while China subsidies its companies, imposes its own tariffs, steals intellectual property, and limits U.S. foreign direct investment, then that’s fine. If U.S. workers lose their jobs in the process, that’s fine too. The elites don’t care about the U.S.; they only care about their “one world” vision.
Trump is calling their bluff. When Trump says “America First” he means it. So does Trump’s top trade advisor Robert Lighthizer. Lighthizer is a veteran of the Reagan administration who forced the Japanese to move their auto plants to the U.S. in the 1980s by imposing steep tariffs on Japanese imported cars.
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