Justin’s note: Donald Trump may have just started a war.
If you read Tuesday’s Dispatch, you know that I’m talking about a trade war. You see, Trump just slapped a 25% tax on steel imports and a 10% tax on aluminum imports.
He did this because he wants to put American businesses first. But this plan may end up doing more harm than good. And that’s because Trump’s tough stance on trade could spark a global trade war. It could even lead to a shooting war with one of the most powerful countries on the planet.
You might find that hard to believe. But Doug Casey told me why this might happen during a recent phone call…
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Justin: Doug, what do you think about Trump’s approach to trade?
Doug: Well, let me start off by saying the government should have zero to do with the economy in general, and trade in particular. No subsidies, no duties, no quotas—nothing of the sort. Most people don’t understand that import duties punish the whole country to “help” some uneconomic industry or group. At the same time, it allows them to persist in the practices that make them uneconomic.
And yes, I understand the chances of the government butting out are about zero. But it’s critical to voice correct principles, even if they’re disregarded.
Of course, Trump is correct in putting America first, as opposed to subsidizing other countries. But import duties don’t put America first. They damage it. The Smoot-Hawley tariffs were what really set off the last depression, because foreigners could no longer sell to us. That destroyed their economies, resulting in business failures and high unemployment.
Duties are always a disaster. When you have a duty on things from a foreign country, you violate all kinds of economic laws. You are, in effect, putting yourself under embargo. That’s number one.
Number two, the revenue on import duties goes to a government. It feeds the beast. This revenue makes the government bigger and stronger. So, it’s bad from that point of view as well. It always impresses me as strange when people talk about “we” in reference to the State, or the government. The State is a discrete entity—like General Motors, or the Catholic Church, or the Boy Scouts. It doesn’t care about you; it cares about itself. But, unlike those other organizations, it uses guns to enforce its will. You want to deny resources to it as a moral principle.
Justin: What economic laws do tariffs violate?
Doug: Competitive advantage is the big one.
Guatemalans are good at producing bananas. Detroit is good at building cars—or at least it used to be. Trying to produce cars in Guatemala and bananas in Detroit is completely ridiculous. We don’t want a domestic banana industry; it wastes capital. But that’s what happens when you put in duties. You are, in effect, trying to make it economic for Detroit to grow bananas.
Apart from lowering Americans’ standard of living, creating economic distortions, and adding to the power of bureaucrats, it’s asking for trouble in today’s world. It’s antagonizing large groups of people who live outside the US.
Justin: I couldn’t agree more. And it seems like a lot of Trump’s policies are directly aimed at the Chinese. Why is that such a bad idea?
Doug: The Chinese came from nothing; only 40 years ago, they had nothing but a billion impoverished peasants. No money. No technology. No power. Today, they’re on par with the United States. But, if this trend continues—which it will—their economy will be triple the size of the US economy in 20 years.
At this point, the only thing the US has over them is its gigantic military—which itself is becoming very outmoded, as Putin’s recent announcements about a whole new generation of weapons has shown. And very expensive. Every year, the government spends a trillion dollars on “national security.” It’s bankrupting the US.
It’s not making any friends, either. In fact, I’m afraid it could even lead to war with China.
Justin: An actual war? Not just a trade war?
Doug: Yes, a shooting war. The Chinese don’t like seeing US aircraft carriers off their coast any more than we would like to see Chinese aircraft carriers in the Gulf of Mexico or off Santa Catalina Island.
The US is supposedly defending the interests of its so-called allies—Japan, Taiwan, the Philippines, and so forth—in the South China Sea. But the US is pointlessly asking for trouble by meddling in these affairs. It’s between the Chinese and those countries to sort out.
The last thing that we need is a war with the Chinese. But if something that’s been called Thucydides Trap is valid—and I think it is—then it’s highly likely. It refers to what happened between Athens and Sparta, the Peloponnesian War, at the end of 4th century BC. The Trap is sprung when a reigning power strikes out at the advancing power while they still have a chance of winning.
The US is in decline, and the Chinese are rapidly coming up. The US is definitely the aggressor here—although Americans robotically believe we’re always the good guys. Everybody always see themselves as the good guys, including the Nazis and the Soviets—nothing new there.
The American military thinks that a shooting war is inevitable. And it probably is. Why? Well, 4,000 years of history teaches us that it’s better to start a war when you’re more powerful than your enemy rather than wait until they’re more powerful than you. It’s always been this way. The Golden Rule of statecraft is: Do unto others—but do it first. It’s a very dangerous situation.
The US has combat troops in over 100 countries around the world, acting as a tripwire. Things could spin out of control at any time and almost anywhere on the planet. Quite possibly someplace nobody has ever even heard of.
Justin: How might the Chinese retaliate to a trade war?
Doug: Well, for one thing they could start by dumping all their Treasuries. They’ve already stopped buying more. I think they’re trying to get rid of what they have slowly. They use the proceeds to buy more things in the Third World. They already have a huge amount of control in Africa and western Asia. It beats owning the unsecured liability of a bankrupt government which is also their enemy, and earning them only 2%.
The next step is to make the yuan an international currency. And it will likely need to be a gold-backed currency so people trust it. If they can make the yuan the new international numeraire, the US will lose its major source of power. That’s because dollars are our biggest export, and have been for decades.
What happens when no one wants to own dollars anymore? All those dollars would start coming back to the US. The influx of trillions of dollars from abroad would be extremely inflationary.
The real wealth in the US would start flowing out in exchange for those dollars. It would be the exact opposite of what’s happened over the last 50 years, where we shipped out paper dollars to foreigners and imported lots of real wealth at basically zero cost.
I think we’ll end up in military action because when there are economic problems, governments like to blame them on foreigners. That usually winds up involving the military. The military—contrary to popular myth—doesn’t defend the country, so much as act as an instrument for the government to enforce its will abroad. It could get out of control. A country like China doesn’t take to being bullied.
Justin: Doug, you mentioned a gold-backed yuan? But the Chinese also are taking steps to launch a petroyuan. How big of a threat is that to US supremacy?
Doug: I wouldn’t worry about a so-called petroyuan, except that it will really antagonize the US. Will the Saudis and/or the Iranians take yuan in exchange for a Chinese military umbrella to replace the American one? Maybe.
However, one of the nice things about the cryptocurrency revolution is it’s directed people’s attention to the fact that none of the paper currencies issued by governments have any real value. They’re not redeemable with anything by their issuer. They’re only redeemable by whatever some merchant someplace might give you. So, the Chinese will only succeed at replacing the US dollar with a gold-backed yuan. That’s what they’ll do.
Justin: That would certainly be bad for the US dollar—actually for US assets in general.
Doug: Yes. Right now, the deficit of the US government is about a trillion dollars a year. That’s in supposedly good times. That debt is basically all being sold to the Fed. It’s the direct engine of inflation, creating more dollars. The Chinese will be more responsible with their gold yuan—which is coming. They’ll need it to foster trade with their multitrillion-dollar One Road and One Belt project. They certainly won’t want to use the dollar, the currency of their enemy.
The US sees that it’s rapidly losing economic power. They’ll see that they’re resented politically around the world, seen as bullies. And they see that new-wave military tech is turning carrier groups and air wings of B-52’s and B-2’s into expensive junk. They may do something stupid, like launch a preemptive strike against China.
It would make about as much sense as the Peloponnesian War, or World War I. But these things can take on a life of their own. I just hope we don’t have World War III in some form. That would be most inconvenient and unpleasant.
Justin: Thanks for taking the time to speak with me today, Doug.
Doug: You’re welcome.
That was staggeringly unconvincing.
Agreed, sort of like interviewing a Slumlord on why renter’s rights legislation is bad. LOL.
China levies tariffs on our products, correct?
But that’s only done to protect their markets and industry.
They have the right to do that, The United States doesn’t.
Ridiculous column…America was most prosperous under a high tariff wall and a government funded by tariffs and excise taxes. Casey is just another globalist looter.
All I can say is this guy is full of sh*t. He doesn’t back any of his statements with facts. Regardless of how bad our government is right now we need it. The world is full of corrupt people and governments. Our government system is full of corrupt and ignorant people who have no values but the system is valuable. We just need to put the right people in power. Not those who are dedicated to the party but those who are dedicated to values.
Tariffs should be what the government lives on; not direct taxes on income. Those ignorant of the constitution would complain about tariffs. Isn’t it sad that the people of today do not see the value of representative government probably because representative government now represents the corporations. Maybe we should repeal the 17th amendment so the states can get their voice back.
I’m fine with tariffs on end products, like other nations do to us. Tariffs on steel/aluminum only without any tariffs on other nations such as China’s end products will not help at all in the long run. It merely will continue to keep foreign products coming in much cheaper and hurt our manafacturing that uses a lot of steel/alum. If we begin to sell even less goods b/c of it, it actually could hurt US Steel/aluminum in the long run. I’m all for fair trade, but if they don’t put tariffs on foreign goods then this has bad longterm ramifications for a lot of US businesses. Many US businesses already struggle to come close to matching price for end products, forcing them to just use more expensive materials domestically will do nothing to stop China etc. from continuing to win the price battle. There would need to be tariffs on the foreign end products that use Steel/Alum to truly try and level the playing field. Same thing China does with US cars and the like.
I hate the title as if we are starting a “trade war”. The globalists in this country capitulated and surrendered back in the 90’s to the countries using trade war. It’s hard to call it a war, if our country never fought, and the elite generals actually work for the other country setting up financial skimming operations as hundreds of thousands of jobs went poof. At least the reciprocal tariffs ideas floated would make sense, although in the short run if countries continue to fight for their competitive advantage it certainly will just lead to higher prices. Casey and people like him aren’t really free traders, they want the US to basically do nothing and pretend most other countries aren’t putting big tariffs on tons of US goods. The financial markets like their skimming operations though, they don’t care about reality in terms of the US making much of anything. Most of them didn’t get rich of the US producing jobs, but rather quite the opposite, off the backs of poorer countries and cheaper labor. Our betters are always telling us how we can have a magic economy buying other peoples shit and producing very little ourselves…but clearly that just leads to large amounts of permanent unemployment/national debt-fest.
I’d like to see heavy tariffs on imported lumber and lumber products as well.
And no exemptions for anyone on anything, that Reagan “most favored nation” stuff is what lead to the demise of our industries at the hands of foreigners.