The horizon is not so far as we can see, but as far as we can imagine

Trump’s Liberation Day: This Boy Could Fuck Up Boiling Water

So, Trump’s tariffs are out. He claims they’re half of what each country tariffs the US, but in fact they appear to have been determined by dividing how much the US sells to a country by how much that country sells to the US.

In other words, the more your trade surplus is, proportionally, the higher the tariffs.

This isn’t, on the face of it, necessarily stupid. But… it’s being done very stupidly.

The first problem is the most fundamental: much of what the US buys it can’t make or grow or dig up itself. New capacity takes time, so in cases where the US could in theory make whatever it is, tariffs should either be phased in, or there should be a delay “in two years the tariff will be X%.” As it stands, in a lot of cases, all this is going to do is make Americans pay a lot more.

Then there are things that the US can’t produce itself, or produce enough of. Potash from Canada, for example. The US can’t produce enough. Period. And farmers MUST have it.

So this means that there’s going to be a massive economic shock: prices will go up and/or profits will go down and the US government will need to provide massive subsidies to some industries at the same time as Trump’s budget plan massively cuts revenue due to tax cuts for the rich.

The tariffs on each country should have been individually determined based on what America buys from them, and what America sells to them. If it’s something the US can’t make, or given opportunity costs shouldn’t make (do you want to build more power plants for AI, or use it for aluminum?) then those things shouldn’t be tariffed. And if you’re buying what you really need from them, and can’t make yourself or shouldn’t (Canadian potash and aluminum, for example) then why are you tariffing? The Canadian example is a good one: Canada imports more manufactured goods from the US than it exports to America. Tariffs encourage Canada to buy less goods and re-industrialize, reducing demand for American goods and encouraging American de-industrialization.

Instead of selling goods to Canada, made using Canadian primary and secondary resources like wood and aluminum and hydro power, America is encouraging Canada to use its own resources to make its own goods. I mean, as a Canadian I think this is great and I’m very grateful to Trump, but this is stupid, really stupid, of Trump for America.

The second issue is that that one goal is to get foreign companies to buy American goods. But most American goods aren’t price competitive, especially not with China. Add on top of that the retaliatory tariffs which most countries are going to respond with, and the likely end result of this isn’t countries buying more American goods, it’s them buying less.

Now some countries are in a different situation. The EU, for example, is very vulnerable here. They have a massive trade surplus with the US, and it’s in goods and their goods are more expensive than Chinese goods, so they’re fucked: who are they going to sell to if they won’t sell to America?

The EU trade surplus is about 600 billion. America sells the EU more services than vice versa, by about 100 billion, however, so the combined services and trade surplus is around 500 billion. Yet if you drill down to balance of payments overall, it’s closer to 200 billion: the US gets a lot of investment income and other streams from Europe, for example, all those patent and copyright payments, 30% at app stores, etc, etc…

A 200 billion dollar balance of payments deficit is about 1.2% of the EU’s GDP. The correct action for the EU is to hit the US hard on services and income: tax the hell out of that and just get rid of it it in some places. Break the DMCA and set up their own app stores, for example. The screams from Silicon Valley would set off Richter 7 earthquakes.

Let’s look at another country. Japan, has a 68 billion goods trade surplus, about a 25 billion services deficit, and actually gets about 50 billion in misc payments from the US. They’re rolling in it and actually much more vulnerable than the EU because of all that payment income, which is easily disrupted. It’s hard for them to retaliate and not come out hurting bad. But there are reports they’re coordinating their response with South Korea and China, and if true, it makes sense, since they have little leverage alone.

China’s trade surplus with the US is now about 1.8% of GDP. Most Americans think it’s still 2008. It’s not. China will be fine and that’s why their official response has been, in essence, “if you want a trade war, let’s have a trade war.”

Generally speaking the correct response for most countries (but not Japan!) is going to be to go after payments: copyright, patents, app stores  and so on, and to tax services.

And this leads to third issue: hitting everyone at once. This allows coordination. If the US had just hit a few countries, everyone else would keep their heads down and hope to be ignored. One country, alone, breaking patents say, or getting rid of DMCA compliance and breaking US app stores, would be crushed. But if it’s done in a coordinated fashion, the US is toast. They can’t sanction everyone, the US financial system will just be treated as damaged and routed around. A universal clearing currency is NOT needed. In fact, for a variety of reasons, it’s one of the worst things possible. Make the deals in local currencies. Done.

Additional add-ons to all of this include the probability of a lot of free capital flows going away. Countries that want to re-industrialize with domestically controlled supply chains, and many now will, need to keep capital at home and the retaliation against the US is going to be against a capital flow/investment system which has, with a few exceptions like Japan, mostly favored the US.

I can’t even imagine how much US property in other countries is likely to wind up forced to sell to locals, or even nationalized outright.

All of this leads to the fact that this will speed up the loss of dollar privilege, and with the loss of dollar privilege and everyone reluctant to sell to America, well, there’s no way that the US standard of living doesn’t get hit hard.

There’s a lot more to say on this. The US is counting on countries needing to sell to it. The Chinese have far more manufacturing capacity than anyone else and a cheaper cost structure. This leaves places like the EU fucked, hard. They can’t really sell to the US profitably. They can’t sell to China because their goods are too expensive. They don’t have a lot of resources to sell except food.

The correct response is to move to internal demand and collapse the cost structure (rent, housing prizes, all monopoly pricing, etc…) but neoliberal policies don’t allow that, so they’re going to try military Keynesianism, but that won’t work well either.

Truly screwed if they don’t get their heads out of their asses and ditch neoliberal bullshit, start taxing the rich, and figure out their energy situation.

But, they, they have it coming.

Long story short: the US is going to be hit by a huge inflationary shock, a decline in standard of living and, unless other countries are stupid, lose most of its overseas rentier monopoly income. The EU is in for a world of hurt, but has options. China will feel it, but they’ll be fine, they don’t need the US as a market any more.

In the longer term this might lead to improvements in the US economy: it will force reshoring, it’s just doing it in the stupidest way possible. But the US risks winding up in semi-autarchy, with an oligarch controlled economy, authoritarian but ineffective politics (think Yeltsin) amid a huge collapse of standards of living, even as it destroys its scientific and academic communities.

The road back will be a hard one and the suffering in between will be massive. And all this assumes that the political problems in America don’t boil over into civil or serious foreign wars.

Americans aren’t going to take a one-third reduction in their standard of living well, especially when so many of them are just a few hundred dollars a month away from homelessness.

Welcome to the end of the American century.

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10 Comments

  1. bruce wilder

    The American political economy is structured by and for people exploiting the legacy of American global hegemony. That hegemony is evaporating, but the structures and, in a Marxist sense, the class consciousness that goes with it, remains as a fragile, dysfunctional empty shell. The people, who knew how to operate American hegemony, to serve themselves a slice of everything, are now left to “operate” a rusting hulk in which the engine has seized and the gas tank is empty.

    Simply shifting gears on the hegemony engine to smoothly transition to traveling a different, but still paved highway, is not a realistic option. A shock to the system, on the most fundamental levels, has already been administered by reality. Pulling madly and comically on levers now that have been used quite differently and methodically for the 70+ years the hegemony machine was in working order is simply a desperation ploy.

    This play may be a farce. America needs not just a better driver, but a working vehicle to drive. The fundamental problem is the failed vehicle, not the clown in the driver’s seat.

  2. Joan

    I read JMG’s book Collapse Now and Avoid the Rush right as I attempted to emigrate for the second time. Now I’m Stateside gearing up for that third attempt and I’m hoping these shockwaves don’t keep me here.

  3. DanFmTo

    Europe’s elites, for better or worse are going to be replaced, mostly by extreme right wingers it seems. I suspect that only accelerates Europe’s demise as a global power since right wing forces will misdiagnose the problems and sure, they’ll break with neoliberalism but not in ways that are particularly useful. Immigrant purges and culture war.

  4. Failed Scholar

    Watching the Stonk Market™ eat shit this morning makes it all worth it. Honestly, if he destroys the US empire along with the neoshitlibs he will be doing all of us a giant fucking favour.

    Also Ian, typo: “The EU trade surplus is about 600 million. ” You forgot some zeroes, or your figures come from Evil Medical School 🙂

  5. NR

    Ian, it’s even stupider than you think. There’s a chance that Trump’s tariff formula was created by ChatGPT.

    https://cointelegraph.com/news/trump-tariff-rate-formula-replicated-chatgpt-observers-claim

  6. NR

    Actually the more I look at this, the more I’m convinced that this tariff formula did come from ChatGPT. There are two uninhabited island groups on there, one of which the U.S. rents a military base on. They definitely got this from ChatGPT.

  7. bruce wilder

    People mostly do not understand economics. Attribute that to the civic mythologies of neoclassical “Econ 101” and the self-justifying arrogance of libertarian ideologies if you like, it does not make it easy to find an effective rhetoric to build support for an effective political program for a new American or European economy.

    I am inclined to agree with Ian that the most likely outcome is a crash of the American economy very painful for the working and middle classes. But, I am assuming that the crash will be made painful by the political powers that be. That aspect of the situation is worth paying attention.

    Almost all the economic benefits of U.S. economic hegemony have been channeled upward. All the structures of intellectual property rentierism and the leveraging of industrialization to generate cash flow and so on — these do not benefit the vast majority of the population. These collapsing structures directly undermine the economic foundations of the oligarchy and indirectly the military industrial complex, the surveillance state and FIRE. It is because the powers that be have been preparing for this day, that we can be sure that just as building these structures did not benefit the majority, so the majority will be made to suffer the “cost” of their collapse. It is not that any benefit will be taken away from those in the generality, who never benefitted much to begin with. It is that the oligarchs will cram their own losses down the throats of the general population.

  8. bruce wilder

    leveraging of DEindustrialization

    damn autocorrect

  9. GrimJim

    Whenever Trump acts, we are reminded that we are living in the Stupidest Timeline.

    That the tariff rates are based not on tariffs but on trade deficits… that would be so hilarious, were it not showing just how stupid Trump and his people are.

    This is what you get when you closet yourself with uneducated sycophants, none of whom ever took Econ 101, let alone know how to balance their own checkbooks.

    This is what happens when you come to depend on loyalty rather than expertise.

    Sadly, it will also showcase everything I’ve said about how ramshackle the whole system is. Collapse will continue to accelerate, which will bring about more stupid responses, which will accelerate collapse further, and so on.

    If Musk is able to keep on with DOGE through the end of May as he originally claimed he would, he will continue chopping away at any department that remains effective in controlling the collapse.

    If we are lucky, he will realize that his wealth and power are collapsing even faster, and bail on DOGE to try to perform damage control. Hard to become master of a techno-state if you do not have the wealth and power remaining to do so…

    But all his bailing on DOGE will do is slow down the collapse slightly. The worst of the damage is done.

    In Blues Brothers terms, we are now at the point where the engine is still running but blowing oil onto the windshield.

    Soon, all too soon, we will get to the point where the whole system is going to blow.

    Then the car stops, Trump and Musk and their coterie of villains jump out, and the whole car just falls to pieces as they flee…

    Unfortunately, the rest of us are stuck depending on that car…

  10. Mark Pontin

    Ian: ‘In the longer term this might lead to improvements in the US economy: it will force reshoring, it’s just doing it in the stupidest way possible.’

    Not even that.

    [A] It’s 2025. If after 2025 factories returned to the USA, they’d be automated. We’ve discussed this, but look up China’s factories and the figures on numbers of people they employ. Globally, manufacturing employment, jobs, and salaries are going the way agricultural employment did. In some modern factories, they don’t even waste money on lights inside them and they’re kept dark, because only machines are in there.

    [B] Still, the necessary expertise and technology to automate factories are to a large extent Japanese and Northern European. So building such factories in the US might be theoretically feasible while the US dollar remains worth anything.

    Granted, in practice that would do nothing — zilch, zero, nada — to bring manufacturing jobs back to the US. ‘But so what?’ some of the brighter minds in the Trump administration may have said to themselves. ‘We’ll have reshored manufacturing and the US will be geopolitically secure as a result, which is what we care about.’

    Nah.

    Firstly, building such factories would be extremely capital intensive. How would the companies building them recoup their investments as overheads rise and the dollar collapses and the ranks of the US unemployed grow? People would need to have salaries to buy the products these factories will produce, after all

    Secondly, we know it’s not going to happen because it hasn’t already. With all the money the Biden administration’s IRA threw at the problem, efforts to rebuild manufacturing in the US have already ground to a halt now that the free government money has stopped. In other words, no company is willing to do it on their own dime.

    Furthermore, buildings these modern factories would require a multi-year investment on any company’s part; businesses always needs reliability and particularly so in the case of these kinds of investments. And yet the US under Trump is completely unreliable and untrustworthy.

    The thing about trust, of course, is that once it’s gone, it’s gone. So now that the US under Trump has stabbed everybody in the back, anybody who trusted the US again would be a fool, wouldn’t they?

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