Chinese Tariffs Will Never Help Americans – Only Hurt Them

Keith Fitz-Gerald Sep 01, 2017

President Donald Trump is reportedly on the warpath when it comes to Chinese tariffs.

According to Axios and apparently confirmed with sources having knowledge of the meeting, America’s leader reported told his staff, “I want tariffs.”

Fox Business Network anchor Stuart Varney, himself a London School of Economics graduate, sought my take Monday morning.

So stupid and so misguided that “I don’t know where to begin,” I responded.

There is no doubt that the allure of protectionism is strong, but the reality is that it hurts the very people it’s supposed to help. And, badly at that.

The legendary Art Laffer, a Reagan-Era economist who is regarded as the father of supply-side economics, quickly agreed, observing, “Protectionism never works.”

Then he launched in with a thought to drive the point home – and I’m paraphrasing – if protectionism worked, North Korea would be a bastion of capitalism and success.

I couldn’t agree more strongly.

Never mind the politics. Let’s get those off the table right now. I don’t have the luxury of taking sides in my capacity as Chief Investment Strategist.

My job is to help you understand the profit potential inherent in today’s complicated world, no matter how it is created or who makes the moves needed to line up your money and your profits.

History is Very Clear…

Europe tried protectionism in the 18th century and it failed because of the mercantilism upon which it was based. Prices rose and productivity fell as nations enacted punitive trade measures intended to stamp out cross-border transactions in the name of protecting home-grown economic strength.

Workers who were unable to improve their own personal productivity were left destitute.

The continent would try again during the 19th century using the theory that industrialism could supplant mercantilism. That failed too and, insidiously, laid the groundwork for both fascism and Nazism.

Contrary to what political leaders at the time promised, workers were left behind yet again as prices rose and jobs vanished. Protectionism didn’t bring them back, but rather, made their lot in life far worse. Jobs were not “saved” on anything other than a short-term basis and competitiveness declined markedly.

I know this is counter-intuitive but hang in there with me for a moment.

Remember something we talk about frequently: money will constantly flow to where it’s treated best.

Our own history is equally painful.

The McKinley Tariff of 1890 tried to protect American producers by raising the average duty on foreign imports from 38% to 49.5%. Trade simply went elsewhere, causing GDP to fall 2% and unemployment to triple.

The Smoot-Hawley Tariff of 1930 tried to protect American agriculture specifically. Yet, American exports and imports fell by more than 50%. American GDP fell 40% in only three years from 1930 to 1933. Unemployment tripled, again.

More recently there was the Country Origin of Labelling restrictions – “COOL” for short – in 2009. American producers had to spend $2.6 billion to comply with its implementation, which resulted in higher prices and fewer goods. American consumers, meanwhile, spent a staggering $9 billion more on goods and services than they would have had to, had the regulations not existed.

Presidents are not immune to this line of thinking. Like most politicians, they pander to their constituents on the assumption that this will help them get re-elected or simply “buy” votes they’ll need down the line on another matter. It doesn’t matter who or which party we’re talking about.

For instance, President Carter tried to protect American TV makers in 1977 by enacting punitive protectionist measures against Japanese manufacturers flooding U.S. markets at the time. As expected, Japanese sales tanked, but South Korean and Taiwanese sales jumped while Mexican imports skyrocketed. What’s more, all three – South Korean, Taiwanese, and Japanese – makers started assembling components inside the United States using imported sub-assemblies that were not restricted under the legislation.

President Obama tried the same thing with Chinese tires in 2009. That nation’s imported tire sales immediately declined but those from South Korea, Taiwan, and other nations immediately filled the gap. The economic cost to consumers was $900,000 per job for each of the estimated 1,200 jobs saved according to Gary Clyde Hufbauer and Sean Lowry of the Peterson Institute. Meanwhile consumers paid an additional $1.1 billion for tires, the prices of which shot sharply higher when the threat of Chinese competition was removed.

Trade tariffs always:

  • Harm the nation trying to protect itself; and,
  • Devastate the consumers who are the intended beneficiaries.

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Again, I know this is hard to stomach, particularly if you’re one of millions of people displaced by global trade and automation. I don’t mean to diminish the impact of what you’re experiencing.

Personally, in fact, I think it stinks and that our government should be taking steps to make sure the prosperity associated with global trade gets effectively (and fairly distributed) at every level. But, that’s a discussion for another time.

What I want you to understand in the name of higher profits is that restricting trade is not the panacea that our President (and many politicians of all stripes) believe because it means trading lots of money for less money and fewer jobs. Not the other way around.

Especially when it comes to China.

You’ll get zero debate – from me at least – that China’s a bully.

The Red Dragon engages in its own tariffs, currency manipulation, intellectual property theft, cyber warfare and more. All of those things collectively suggest that it’s very much a situation of “damn everybody else’s interests” in the name of furthering China’s rise.

In fact, they’ve even begun developing a weapon called, “sha shou jian.” Translated into English, it’s known as “The Assassins Mace.” Its purpose is to annihilate U.S. Naval Forces in the Western Pacific. Watch the alarming video by clicking here.

So now what?

There’s Always a Path to Profits… If You Know Where to Look

For all its faults, China is a great manufacturing resource. That means any company making goods there but selling globally stands to benefit from the inevitable protectionist response should President Trump go ahead.

I’m particularly partial to Apple Inc. (NasdaqGS:AAPL), for example, which has a large section of its supply chain in China but sells those same products in more than 91 other countries around the world.

Right now the stock is trading at record highs associated with speculation surrounding the widely anticipated iPhone 8. The company’s stock just hit a near record high of $162.85 on reports that iPhone shipments could jump 9.1% in 2018. If that happens, it will be the biggest jump in iPhone shipment growth since 2015, according to IDC.

Then there’s the upgrade cycle which is supported by more than 635 million current users, all of whom are potential repeat customers.

For me, though, the real magic associated with Apple is the ecosphere. That’s the term I use to express the market Apple intends to create surrounding each consumer from the moment he or she wakes up to the moment they go to bed.

It’s home automation, music, artificial intelligence and more.

All of which is tariff-proof.

Until next time,

Keith

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