Tariffs
This week US President Joe Biden took to Twitter (I still can’t get around to calling it X) to unveil a sweeping array of China tariffs that target key strategic sectors.
Source: X
This comes hot on the heels of the news (as reported by the Financial Times) that the Biden administration has revoked export licenses that allow Intel and Qualcomm to supply Huawei with semiconductors as Washington increases the pressure on the Chinese telecoms equipment company. The move by the US Department of Commerce affects the supply of chips for Huawei’s laptop computers and mobile phones, according to people familiar with the situation.
https://www.ft.com/content/cf965960-b083-49ee-bae1-6ce95fe872a3
This is important. These moves are a direct assault on the global trading system that has grown over the last couple of decades, where China exports to the world and runs massive surpluses and the US absorbs these surpluses by running the corresponding deficits. While this set-up worked well for both parties for a while, it is increasingly clear that for the US, the strategic weaknesses that have resulted are now overwhelming any financial benefits.
Observations
- This policy direction is bipartisan.
The recent tariffs from the Biden administration are a something of a pivot from his previous position.
Source: X
It appears that both sides are now firmly in this camp. Trump responded to the Biden tariffs by saying he would impose 200% tariffs.
- This policy is inflationary.
If decades of liberalized global trade acted as a deflationary impulse around the globe, a big shift in the opposite direction should have the opposite effect. The Covid crisis gave us an insight into what disruption to global supply chains means for prices. Tariffs on this scale are simply a man-made disruption to supply chains.
Imposing tariffs on China to revitalize US industries may be the best policy from a strategic and national security perspective, however it is unlikely to be good from a financial perspective for holders of long dated US Treasuries.
- This policy is in time, revolutionary.
There is no need for a resource-endowed, advanced, developed nation such as the US to be running persistent trade deficits. This dynamic links back to the US dollar’s role as the global reserve currency. The removal of a US deficit means the removal of the flow of dollars that lubricates the Eurodollar system where tens of trillions of offshore dollar debt circulate. Re-modelling the current account via tariffs necessitates a re-modelling of capital account via changes in financial flows, leading to potentially explosive moves in currencies and asset classes.
Inflation and revolution are normally very low on the list of priorities for any member of the political class. However, the existing global system, with the US at its centre, is clearly hurting the US strategic interests and both sides of the political spectrum know it. Exiting or at the very least, re-wiring this system, is going to cause mayhem. But it’s the only way.