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Tariffs Will Make the Global Economic Collapse Much Worse: Part 2

By: Curtis Ophoven

3/26/2010 - 11 Comments

A growing number of politicians and economists are calling for an increase in trade tariffs, to reign in the unfair monetary policies and currency manipulations of other nations – namely China.

In Part 1 I started this discussion about why I don’t think tariffs are going to help us deal with the ongoing global economic collapse.

Chinese Currency Manipulation

The Chinese government is clearly manipulating their currency in order to keep as many of their citizens employed as possible.  At the same time they are hurting their people by reducing the value of their money through major inflation.  They are allowing the U.S. to export our inflation to them. 

This is why we have been able to get away with creating massive inflation by increasing the supply of dollars by the trillions, because other nations are buying up the dollars to keep their currencies from rising against the dollar in order to keep their exports shipping. 

This is why inflation is growing at 10%+ in many of the developing nations, while we have 0% inflation – yet the Federal Reserve is the primary source of global inflation.   

Both the U.S and China know that this policy has already lasted too long and a change in policy will not be easy for either nation to deal with, although China will clearly be more beneficial.

The day that China realizes that we cannot repay our debts to them and starts selling dollars will not be a good day for us.  Perhaps the day has already come, as China has been a net seller of Treasury Bills for several months.

China has done us a favor by allowing us to continue to create inflation much longer than we should have. 

Obama’s plan to double our manufacturing jobs in the next five years that he mentioned in his state of the union address will not come with higher paying jobs or a higher standard of living.  These jobs will come with a drastic drop in wages (or a drop in the value of wages by way of inflation) and living standards. 

China’s currency manipulation has put off the day of reckoning.  Increasing tariffs with China will cause them to stop doing us this favor.  Therefore, Obama doesn’t realize what he is asking for.  Tariffs will accelerate the global economic collapse. 

Tariffs or not, governments around the world need to drastically reduce spending in order to avoid a global bankruptcy.

Tariffs Are Taxes

Tariffs are a means to control prices and labor, just like price controls or wage freezes.  Central control of prices or wages always ends badly.  Labor and capital need to be free in order to find the businesses that can best serve the consumer.

In that sense, tariffs are just another form of economic central planning, which I have written about many timesGovernment central economic planning hinders capitalism by reducing capital and production and results in wealth destruction. 

Wealth is best created when labor and prices are free.  Tariffs reduce global wealth.  

The global economic crisis is not going to be solved by reducing global wealth.  Tariffs are only good for a small group of people for a short period of time.

What the world needs is sound money (backed by gold), then a reduction in government debt, and a reduction of government controls (tax and regulation) to unleash capitalism (free labor, wages and prices) throughout the world. 

Obama supports tariffs just as he supports higher taxes, because they temporarily create more income for the government, at the expense of the people as we pay higher prices for goods.

Tariffs are just another form of taxes, which result is even less jobs as the businesses that the tariffs are protecting go bankrupt.

The real issue with our trade problems are the massive increase in money that we continue to create (inflation) and export in exchange for goods and services.

The source of our demand to continue to create new money (inflation) is our ever expanding government.

If we stopped creating inflation, China wouldn’t be able to continue vendor financing our consumers to buy their products and we wouldn’t be in this situation to begin with.

Tariffs don't protect jobs or wages. The only real solution to our trade problems is to stop printing money and reduce the size of our government so that the dollar strengthens in value rather then continues to weaken.

International Trade Agreements

Another complicated issue related to tariffs is the threat of national sovereignty that large scale international trade agreements like NAFTA and CAFTA create.  This is where free market economists struggle to agree. 

The WTO (World Trade Organization) and the International Trade Organization were created after WWII.  But many of the large scale international trade agreements they have helped to create over the last several decades threaten national sovereignty because they put the authority to trade in the hands of the international community.

Therefore many of these international trade agreements are actually unconstitutional because they give away our authority to regulate commerce – which the U.S. constitution clearly grants only to Congress.  Here is an article by Ron Paul that further explains. This is also why Ron Paul is sometimes accused of being in support of tariffs, which he is not.

Most international trade agreements are disguised as free trade agreements to gain political support for their passage.

These international trade agreements do not support our freedom, they oppose our freedom.  And their underlining principle is to control labor and prices – much like a monopoly.  Therefore they are not in our best interest.  They do not represent free trade because free trade occurs in the absence of government interference of the flow of goods.

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Reader Comments

Comment 1
This will not end well Says: on Saturday, March 27, 2010 8:54:32 AM

http://www.bloomberg.com/apps/news?pid=20601110&sid=aJQiKTm5M_68
China, U.S. Are on ‘Collision Course,’ Roubini Says

March 25 (Bloomberg) -- The U.S. and China are on a “collision course” over the value of the Chinese currency and investors are underestimating the disruptions for global financial markets, according to Nouriel Roubini.

“The risk of a collision course on China’s currency peg and a wider trade rift between the world’s largest debtor and creditor nations has risen significantly in recent months,” Roubini, a professor at New York University, wrote in a note to clients. “Markets do not seem to be pricing in the potential consequences of the U.S. labeling China a currency manipulator, which could be significant even if both sides avoid taking immediate bilateral actions.”

There is a 50 percent chance that the U.S. government will label China a currency manipulator, said Roubini, who issued his comments after attending a private meeting for Western delegates with Premier Wen Jiabao at the annual China Development Forum.

Labeling China a currency manipulator would make it easier for companies to seek import duties, U.S. Senator Charles Schumer said this week. China will balk at allowing the yuan to appreciate if that happens, Donald Straszheim, director of China research at International Strategy & Investment Group, said yesterday.

China’s Shanghai Composite Index fell the most in two weeks today, led by shipping companies, on concern rising trade tensions will hamper the recovery for exports. Yuan forwards declined after China reiterated it won’t yield to foreign calls for currency appreciation to resume.

‘Foreign Pressure’

“The Chinese government will not succumb to foreign pressure to adjust our exchange rate,” Vice Minister Zhong Shan told reporters during a trip to Washington to meet with U.S. officials and lawmakers. “To force the appreciation of the renminbi will be counterproductive.”

The Treasury Department is “seriously considering” labeling China a currency manipulator in an April 15 report, Schumer said March 23.

China has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade.

The nation may post its first trade deficit in six years this month, a shift that may reinforce the government’s reluctance to end the yuan’s peg to the dollar, Standard Chartered Bank Plc said this week. China’s exports surged 46 percent last month.

China will limit the yuan’s appreciation to 4 percent over the next 12 months because of a “super cautious” outlook on the global economy, Roubini said in a March 8 interview.

Roubini, who runs his own global economic strategy firm, correctly predicted a “hard landing” for the world economy in 2007 and has become famous for his pessimistic projections."

--Allen Wan in Shanghai. With assistance from Judy Chen. Editors: Richard Frost, Linus Chua



Comment 2
Mo Says: on Saturday, March 27, 2010 8:57:15 AM

This article says to get ready but it does not say what we should be doing to get ready?

79 Percent Of American Voters Say They Think The U.S. Economy Could Collapse

http://theeconomiccollapseblog.com/archives/79-percent-of-american-voters-say-they-think-the-u-s-economy-could-collapse-and-they-are-absolutely-right
"In the midst of all the Health Care Bill nonsense, here is another bracing shot of doom from the Economic Collpase blog.

Unfortunately, instead of learning from the past and trying to reduce debt, the U.S. government just keeps spending money and piling up debt faster and faster.

But if they stop all of this reckless spending the U.S. economy could plunge right into a depression of unprecedented magnitude and pretty much everyone would be voted out of office.

But if they keep on with all of this reckless spending the long-term consequences will be catastrophic beyond anything that any of us can even imagine.

Either way, this thing is going to end really, really badly. Whether you want to face it or not, there is no economic future for the United States under the current system.

Enjoy things while they are still relatively good, because this is as good as things are going to get. Incredibly hard times are coming and we all need to start getting ready."



Comment 3
Schmitty Says: on Saturday, March 27, 2010 9:01:36 AM

This guy knows how to survive

William Rankin
From Wikipedia, the free encyclopedia

Lieutenant Colonel William Rankin (c. 1920 — July 6, 2009) is the only known person to survive a fall from the top of a cumulonimbus thunderstorm cloud.[1] He was a USMC pilot, and a World War II and Korean War veteran. He was flying an F-8 jet fighter over a cumulonimbus cloud when the engine stalled, forcing him to eject and parachute into the cloud.[1] Colonel Rankin wrote a book about his experience, "The Man Who Rode the Thunder."[2]

The fall:
In the summer of 1959, Rankin was flying from South Weymouth Naval Air Station, Massachusetts to Beaufort, North Carolina. He was climbing over a thunderhead that peaked at 45,000 ft (13.7 km), when—at 47,000 ft (14.3 km) and at mach 0.82—he heard a loud bump and rumble from the engine. The rpm fell to zero, and the fire warning light flashed.[1] He pulled a lever to deploy auxiliary power, but the lever broke off in his hands...

http://en.wikipedia.org/wiki/William_Rankin


Comment 4
Ricky Says: on Saturday, March 27, 2010 9:08:34 AM

Mo, buy a railroad if you want to survive - and if you eject from a plane, wear a chute!!

Warren Buffett sees strong rail system as key to U.S. growth

http://www.usatoday.com/money/companies/management/2010-03-25-buffett23_CV_N.htm
Buffett chuckles at the suggestion that buying the nation's second-biggest railroad is a sign of senility. He argues that railroads represent the future. They're best-positioned to haul the raw material and finished goods for a nation and economy that he insists are bound to grow. Unlike trucks, trains don't have to compete on congested highways. Nor do railroads depend on strapped governments to maintain infrastructure.

But the person who bets on this country and its economy going backward is the guy who has to explain himself, not me.

"Since 1790, this (the USA and its economy) is the wonder of the world," Buffett says. "The ingredients of that have not disappeared from this world; 9/11 and all sorts of things have come and gone, but the United States' success story isn't over." That's why he was comfortable in November calling Berkshire's BNSF buyout an "all-in wager on the economic future of the United States."

"Our country's prosperity depends on its having an efficient and well-maintained rail system," he said. At the same time, he said, "America must grow and prosper for railroads to do well."

BNSF's Rose says the industry, and BNSF in particular, is well-positioned to help the nation prosper. It's already made huge investments in new technology, infrastructure and markets, he says.

"This has an enormous beneficial effect on society," Buffett says


Comment 5
Bubble Burster Says: on Saturday, March 27, 2010 9:10:09 AM

The Silent Entitlements Monster: Social Security, Medicare And Interest On The Debt Will Gobble Up Every Single Tax Dollar By 2020

http://theeconomiccollapseblog.com/archives/the-silent-entitlements-monster-social-security-medicare-and-interest-on-the-debt-will-gobble-up-every-single-tax-dollar-by-2020



Comment 6
Samantha Says: on Saturday, March 27, 2010 9:20:32 AM

http://wiggys.com/category.cfm?category=6
Mo, to survive buy a good warm sleeping bag as if you live anywhere up north you will freeze without heat in the winter season (unless of course we are blessed with some good ol global warming). Sorry for the thread drift but this 20% off sale is too good to pass up.


Comment 7
Chang Says: on Sunday, March 28, 2010 4:21:58 PM

http://www.thestar.com/business/article/785512--olive-china-s-artificially-suppressed-currency-costs-jobs
"There are much tougher sanctions that could be applied to China. Western nations could simply close their markets to the export-driven Chinese economy, making an abrupt end to that nation's industrial revolution. They could end the transfers of Western technology that Beijing insists upon as part of every Western industrial partnership in China.

Naysayers object that the Chinese could dump their massive $889 billion in U.S. currency reserves. But the greenback would plummet in value the moment China began to sell, devaluing the rest of its U.S.-denominated securities. Besides, a cheaper greenback would be an enormous competitive advantage for America.

"Right now America has China over a barrel, not the other way around," Krugman notes."



Comment 8
Lei Says: on Sunday, March 28, 2010 4:24:45 PM

The Dethroning of the U.S. Dollar Will Happen Sooner Than You Think

http://www.bearmarketcentral.com/commentary/money-morning/404-110409-the-dethroning-of-the-us-dollar-will-happen-sooner-than-you-think
1. The Asian Region Currency Partnership is Happening Now

2. Soon "Black Gold" is No Longer Quoted in Greenbacks

3. U.S. Firms Are Already Adopting a China Focus




Comment 9
Sally Says: on Sunday, March 28, 2010 5:41:45 PM

Samantha, don't you know the chances are higher for global cooling than global warming!

http://content.usatoday.com/communities/sciencefair/post/2010/03/global-cooling-what-happens-if-the-iceland-volcano-blows/1





Comment 10
Chen Says: on Sunday, March 28, 2010 5:44:15 PM

ECU Group's Philip Manduca "We Are At A Tipping Point" And The Only Thing That May Save The Euro Is A Collapse Of The USA

http://www.zerohedge.com/article/ecu-groups-philip-manduca-we-are-tipping-point-and-only-thing-may-save-euro-collapse-us


Comment 11
edward Says: on Sunday, April 04, 2010 4:47:30 PM

http://articles.mercola.com/sites/articles/archive/2010/03/30/60-minutes-exposes-united-states-financial-collapse.aspx
60 Minutes TV show exposes the insiders collapse of the Wall Street banks


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