Ep. 44: The Trump Tariffs with Daniel LaCalle

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Episode Description

One of President Trump’s biggest campaign promises was to level the playing field regarding the US and its trading partners. Now, over 500 days into the Trump Presidency, the United States has pulled out of the Trans Pacific Partnership, begun renegotiating the North American Free Trade Agreement, and levied tariffs on multiple countries, including China.

Economist Daniel LaCalle, author of Escape from the Central Bank Trap, discusses what Trump’s new tariffs on China, Mexico, Canada, and the European Union mean for the world economy. Are we in a trade war?

Stay tuned for a direct, uncensored interview.

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Show Notes (abridged script)

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Tariff Basics

Why do countries use tariffs?

“Tariffs themselves are an atrocious measure.” ~ Daniel LaCalle

Countries use tariffs to aid their domestic businesses and industries. They are a way of controlling trade and deciding who benefits from that trade and who is punished.

Daniel describes that tariffs are often used as a counter-measure against “hidden barriers” to trade. Such hidden barriers might be bureaucratic, legistative, or even copyright barriers.

Discussing the US’s trade deficits

“The aggressiveness of the trade deficit [between the US and China] is illogical.” ~ Daniel LaCalle

The United States is the preferred customer of the high exporting nations; however, those same nations place high barriers on the United States for those deals.

“Protectionism is only damaging to the country that implements it.” ~ Daniel LaCalle

Why should Americans care?

“There is a point when fair trade is what matters…I think we all understand, for example, that we prefer to buy coffee that is a little bit more expensive because it is produced in a fair way.” ~ Daniel LaCalle on the Trump tariffs

What does “fair trade” mean?

“Fair trade means that the rules, regulations, and everything that has to do with the process of trading, is, not only equal, but equally manageable for all sides of the trading spectrum.” ~ Daniel LaCalle

Daniel says we need to redesign the way trade happens globally. Fair trade can’t just be from the perspective of one country or company.

The Trump Tariffs: A 25% Tariff on $200 Billion Worth of Chinese Goods

Was this tariff necessary?

“Anyone who has seen a western movie knows this is a showdown in which no one wants to fire a bullet. The objective here is to come to a negotiated agreement.” ~ Daniel LaCalle

“I think that the Trump Administration is placing these tariffs in order to force China to reduce the trade barriers to the United States.” ~ Daniel LaCalle

What are the trade barriers from China?

“China is a country that has a tremendous amount of companies that are state-owned. Companies that receive huge subsidies despite the fact that they generate returns below their cost of capital.” ~ Daniel LaCalle

Daniel says the most obvious one is the lack of security regarding copyrights in China. He also mentions bureaucracy, subsidies, and currency and capital control.

China’s Response: Are we in a trade war?

“Either we have been in a trade war for years, or we’re not in a trade war right now.” ~ Daniel LaCalle

Daniel mentions World Trade Organization reports depicting massive increases in trade barriers around the world. Those reports have been around since well before this most recent round of tariffs.

“The concept of a reciprocal trade war is impossible when you have the largest customer with the largest vendor.” ~ Daniel LaCalle on whether the Trump tariffs put the US in a trade war

“Tariffs, subsidies, and hidden barriers to trade are perpetuating poverty in those countries.” ~ Daniel LaCalle

China’s Devaluation of the Yuan

“Devaluation is not a tool for trade and is not a tool for exports. It is a tool for cronyism.” ~ Daniel LaCalle on China’s devaluation of the yuan.

“If devaluation was a tool to export your way out of problems, Venezuela, Argentina, and Turkey would be the biggest exporting nations in the world. But they’re not.” ~ Daniel LaCalle on China’s devaluation of the yuan.

Who will win this trade war?

Daniel states that if this ends badly, neither party will come out on top. However, at the moment, he says that the United States has the advantage.

“An exporting nation cannot present itself as somebody that is going to export massively to the world, while putting barriers inside.” ~ Daniel LaCalle

“You cannot expect your currency to be a world reserve currency and also have capital controls.” ~ Daniel LaCalle on China’s currency manipulation

The Trump Tariffs on Steel and Aluminum from Mexico, Canada and the European Union

Over Capacity of Steel and Aluminum Industries

“If you look at the main producers of steel and aluminum globally, all of them have overcapacity way beyond their internal demand requirements.” ~ Daniel LaCalle

“Why should one nation bail out the overcapacity of everybody else?” ~ Daniel LaCalle on the Trump tariffs

Two Reasons for this, Says Daniel

Daniel states there are two reasons for having such detrimental overcapacity in these industries. First, to sustain GDP. Second, to keep the concept of “strategic industries.”

Is this another trade war?

Daniel says this is not a trade war like that of China. The real problem, he says, is that each government analyzes their GDP without reference to the rest of the world.

“Governments are elected locally, but the economy moves globally.” ~ Daniel LaCalle

NAFTA Negotiations

This is just another showdown, Daniel tells us. What we need, he says, are trade agreements that account for global challenges. While this is a difficult task, the North American countries are valuable trading partners for one another.

Does Trump have a strategy?

The Necessity of a “Booming Economy”

“I think President Trump wants to be reelected.I think President Trump needs an absolutely booming economy…in order to be reelected.” ~ Daniel LaCalle on the risk of the Trump tariffs

Trump’s ability to win, Daniel states, is essentially tied to the country’s economic performance.

Bills with Luke Scorziell does not provide investment, tax, or legal advice or recommendations. This material is solely intended for educational purposes based on publicly available information and may change at any time. Additionally, this article’s content is a summary of the Interviewee’s comments and, while rephrased by the Author, are not from the Author himself.

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About Luke Scorziell

Mr. Scorziell created The Edge of Ideas when he was 15 years old. After a few years of blogging he found a passion for podcasting and now regularly has guests on his show, Bills with Luke Scorziell. Find out more about Luke and his unique journey. Feel free to send Luke a message below.