Ian Welsh

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

Category: Trade Page 2 of 13

Trump’s Doing Everyone A Favor With His Tariffs (Emphasis on Canada)

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On January 28, 2025

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(Keyboard fixed, at least for now, so let’s get on with it.)

Trump has threatened blanket tariffs on multiple nations, including most of Europe, Canada and Mexico. This is an effective threat. The Bank of Canada estimated the effect of such tariffs on Canada at six percent of GDP, and I’ve seen an estimate for Germany of about one percent of GDP, after previous losses due to anti-Russia sanction effects on energy costs.

But what this tells us is that many nations are over-dependent on trade with America. Our economies are too intertwined with America’s economy, especially Canada’s. America’s massive and persistent trade deficits also indicate that America isn’t competitive. This isn’t a surprise, the American economy is controlled by oligopolies and monopolies with middlemen taking unearned profits and the overall cost structure, from housing to medical care to everything else is high, especially with respect to asset prices, which have been deliberately inflated since about 1979.

What we should do, all of us who are being threatened, is tell the US to fuck itself, slap retaliatory tariffs on the US, add in export tariffs so the US really hurts, and reorient trade towards each other—form a trade bloc without the US.

It’s worth pointing out that many of Trump’s tariffs are essentially illegal under various trade agreements the US has signed. Yet no one doubts that Trump can impose these tariffs despite their illegality. Remember that a signed treaty has the force of law in the US.

The US is, and has been a rogue nation for a long time and the rule of law means nothing in America.

I’m going to talk primarily about Canada because I know the situation here best. We’ll start with a little history.

For most of Canadian history, we exported mostly raw and refined resources to America. Minerals, oil, fish, lumber and so on. Often it was illegal to export them without doing at least primary processing: no raw logs, fish were canned in Canada and so on.

The original sin of over-integration with the US was the US-Canada auto-pact. We got a lot of jobs and factories out of it, but it was used as leverage over us. When Canada’s world-leading aviation industry of the 50s produced a jet, the Avro Arrow, which was much better than any American jet, the US threatened to take away the auto-pact unless we ended the program. And by end, I mean we disbanded Avro and we sunk the jets in a lake. Male engineers were hired by US firms, the female engineers got to be housewives, since the US in the 50s was 100% a patriarchal society. (As an aside, this was a post-war thing, the 30s were not as patriarchal.)

This story is so flaming hot in Canada that the original classification was renewed when it was due to end. Even now Canadians are angry about the Avro Arrow, something which happened 7 decades ago.

In the 80s, Prime Minister Brian Mulroney wanted a free trade pact with the US to ensure market access. Most Canadians were against it and the 88 election was fought about the FTA. Mulroney won because the anti-FTA vote was split between the Liberal and NDP parties. He rammed thru the FTA, which was later rolled into NAFTA and is now called the USMCA.

The deal included a lot more than just trade, it had IP laws and reduced the ability of Canada to use tariffs and subsidies itself and including nasty taking laws which made it nearly impossible to regulate foreign companies in Canada. Because our nation sells so many resources, the Canadian dollar tends to fluctuate a lot. When it’s high (it was higher than the US dollar for a couple years around 2015, for example) it’s devastating to our industry.

The old policy, which started around 1880 or so was called the Canadian mixed economy. When the dollar was high because of high resource prices, we’d subsidize manufacturing. When it was low, we’d subsidize resource producers and gave generous unemployment benefits to laid off resource workers.

That policy created one of the best and most prosperous economies in world history. But the condition which allowed it was that we had strong ties to both the British Empire/Commonwealth and to the US. In the 70s, the Brits, under intense US pressure since the end of WWII had their economy basically collapse. They had to go to the IMF for help and joined the EU, which bailed them out. The result of that was that their trade became very oriented towards the EU and the Commonwealth countries were left on their own.

Without a counterweight against the US, Canada felt weak. It didn’t stop Pierre Trudeau (the current PMs father) from telling the US to suck it when necessary, he even closed the border at one point, but Mulroney didn’t have the balls and he was right that our hand had become a lot weaker.

So Mulroney rammed thru the FTA. He was repaid by the Progressive Conservative party being essentially wiped out in the next election. Canadians really didn’t want the FTA/NAFTA. But once it was in, no successor government got rid of it.

The result was that Canada lost most of its industrial base. Ironically we even lost a lot of those auto-pact jobs, as American auto companies got their pants beaten off them by Japan and South Korea.

Pre-FTA about 30% of our exports to the US were autos and auto parts, 20% were petroleum, and miscellaneous machinery was about 15%.

Fast forward to today, 30% of our exports are petroleum, 13% are automobiles (the pact), and miscellaneous machinery is about 8%.

Can you say Dutch disease? Sure you can.

We’ve become a much more one note exporter, which is why Alberta and Saskatchewan are betraying our united front. They do most of the exporting, after all.

But the larger point is general de-industrialization and over-dependence on American markets. This has become enhanced over the last 8 years as our relations with China have degraded, due to Trudeau’s stupidity and pandering to America.

If this anti-China pandering worked, if it made it so America wouldn’t pull shit like tariffs, maybe it could be justified, but all its done is hurt our relationship with a potential trade partner and counter-weight to America’s influence on our economy.

So, what to do?

To start, leave the USMCA. The US has never obeyed NAFTA or the USMCA when it didn’t want to. Back in the 00s they slapped tariffs on timber, and ignored repeated rulings against them. We should have left then, but better later than never.

Second, start rebuilding our own industrial base. We still have plenty of scientists and engineers and vibrant universities. We can still bring in more scientists and engineers if we need to. This will require tariffs and subsidies, so institute them.

Third, bribe the resource workers who will be hurt. Just straight up find a way to give them a big chunk of change.

Fourth, re-institute Canadian ownership laws which require companies to be 51% Canadian owned, including foreign subsidiaries. Have the government take an additional 10%, and promise that all dividends from that 10% will be shared with Canadian citizens as direct deposits every year. Make it clear that we are willing to trade, but that trade no longer includes the right of foreigners to buy up our economy.

Fifth, form trade deals with countries other than the US. These should be bilateral or small multilateral in most cases with tariffs and subsidies allowed on both sides for key industries. We should pick a few industry sectors to concentrate on, and trade with other countries in the other sectors: that way they get something in exchange for the deal.

Sixth, go back to the old cyclical subsidization system: industry when our currency is high, resources when it’s low. Make it so that ordinary workers (and voters) are protected from the cyclical effects of a dual economy.

Seventh, put a lot of the resource profits into a sovereign wealth fund, to reduce the cyclical effects and provide the inevitable busts and for the inevitable and ongoing movement away from petrochemicals. Like it or not, alternative energy is coming on strong and the days of the petrol economy are drawing down. We’ve still got a couple decades to go, but the role of government is to make these long term plans. The fund should prioritize investments in petroleum regions, both to get them onside and to prepare them for the drawdown.

There’s plenty more details, of course, but these are the fundamentals. We’ll talk more, soon, about how trade should actually work if it’s to be for the benefit of all countries. Needless to say, such a regime would have princicples almost directly in opposition to those that have existed under GATT and its successor, the WTO.

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France Is Being Kicked Out of YET Another French Country

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On November 29, 2024

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Recently French troops have had to leave Mali, Niger and Burkina Faso. Now it’s Chad booting them.

Update: Senegal has now announced it intends to seek the withdrawal of French troops.

The first three countries have Russian troops in them now. Wonder how long it’ll be before Chad joins the crowd?

France has been the most important country in a lot of its ex-colonies in Africa, but it’s losing its place, not just militarily but economically. Countries are turning to China for imported goods and development at the same time as they turn to Russia for security. Chinese goods, development and loans are cheaper, and neither Russia nor China interfere nearly as much in domestic politics.

It’s just a better deal. For a long time you HAD to go to the West, but now Russia and China can supply pretty much everything you need.

 

As regular readers know I’ve been following Europe’s collapse for a few years now. It’s practically a freefall. In Germany Volkswagon, for example, is planning on closing factories for the first time.

Europe’s well on its way to being what it was for most of history: a backwards and irrelevant peninsula, with the main action and most important civilizations elsewhere in Asia.

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Dollar Hegemony Decline Watch

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On September 17, 2024

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So, nice little chart here:

Seems… bad. At least for America and Europe.

Let’s lay this out:

  1. Most of what you want to buy you can buy from China, you don’t need to get it from the West, so why use dollars?
  2. China almost never uses sanctions or seizes foreign currency. The US often does. US dollars are risky, the right to use them can and is often taken away, and so often are the dollars themselves.

So why use the dollar, except that it’s still easier in some cases?

What happens when it’s no longer easier? The BRICS are spending a lot of time on an international banking system which bypasses the West and it’s allies (Japan and South Korea, basically). As that system becomes easier to use, why use the Western system or the dollar? It only exposes you to risk.

This is similar to what happened after the Huawei sanctions. Chinese firms saw the damage that was done to Huawei (they’ve roared back, but it was touch and go for a couple years.) The cry in Chinese business was “delete America.” If you bought anything important from the US you needed to find another source outside of the West, which for manufactured goods usually meant domestically, and for resources meant Africa, South America and Russia.

For a long time the way the banking system was set up you had to use the dollar, but more and more you don’t. And for a long time some key providers, like oil producers, would only take dollars, but now they’ll take Yuan.

So, again, why use the dollar when there is a safer alternative which can be used to buy or sell almost anything you want?

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The “China Cycle” Is Mostly A Thing Of the Past

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On September 9, 2024

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So, this was true once:

The Chinese learned a lot from Western Joint Ventures, and I remember talking to a consultant back in the early 2000’s about tech transfer. He said it was very clear: you got into the Chinese market and/or used their lower cost production and what they got in exchange was tech transfer. This isn’t some evil conspiracy, back in the 80s when the US fell behind on cars they basically forced Japanese car companies to set up factories in the US, and yeah, there was transfer of knowledge to American companies.

Now, for the West, what Western companies and the West in general got in return for their tech was not worth the cost: it was stupid and short-sighted, but companies were lining up to do it and economists and business gurus and politicians in the West were for it: the only thing that mattered was making more short to mid-term profits and all sorts of nonsense about it not mattering where goods were produced was espoused by very important intellectuals and officials. There was no attention to the long term cost in terms of loss of technological lead and moving the industrial base to China. I know: I was one of the voices warning, publicly, to stop taking short term profits by selling China our future.

But at this point it’s no longer accurate. Chinese car companies are more advanced than Tesla: they have better batteries, better HUDS, better auto-pilots and they also have faster product cycles.

Again, in most fields the Chinese are now more advanced than the West: the remains are important but in a minority—things like lithography and aerospace, but they’ll catch up in both in time and for Aerospace I’d already buy a jet-liner from China before Boeing, and Boeing’s problems have nothing to do with China. Airbus is still clearly better, but it won’t be in twenty years, and possibly not even in ten.

The West was 100% complicit in the “China Cycle”, but that cycle is almost entirely over and China is now just straight up more advanced and out-competing us.

The West made this choice. We could have maintained our tech lead for another fifty years or so if we wanted to and followed the necessary policies. We didn’t, and to expect China to not use the same methods every other major country used to industrialize is insane. Every accusation made in the “China Cycle” is something the US did to Britain back in the 19th century.

Perhaps China could have industrialized without it being disastrous for the West, but not under any sort of laissez-faire or neoliberal international trade regime.

If you’re young, learn Mandarin. Maybe even if you’re not young.

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The Dollar Is Impregnable & The West Will Always Control International Banking (Honest)

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On July 11, 2024

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What is geopolitical risk, you ask, and the Saudis answer:

Saudi Arabia warned it could sell off some European debt holdings in retaliation to a move by the G-7 to seize almost $300bn in frozen Russian assets, according to a report by Bloomberg.

The veiled threat was passed along from Saudi Arabia’s finance ministry earlier this year to some G-7 counterparts, as the group weighed seizing Russian assets designed to support Ukraine.

Saudi Arabia specifically signalled out the euro debt issued by France, according to Bloomberg.

Riyadh has been concerned about western efforts to seize the Kremlin’s assets for months. In April, Politico reported that Saudi Arabia, along with China and Indonesia, was privately lobbying the EU against confiscation.

Notice that Indonesia is also involved. China is less surprising, they know that freezing and even confiscation is in the cards for them when things heat up between the West and china.

China has been reducing its risk:

Edit: (Or perhaps they aren’t?)

No one wants to do business with nations that will simply take away their money. Freezing was bad, but normal. Seizure is not. Since no one seized or freezed America’s overseas assets when it invaded, say, Iraq, and no one ever seizes or freezes West European assets, it might be thought that this isn’t about “law” but about “power.” For that matter, why haven’t Israel’s overseas assets been seized?

The level of geopolitical risk from doing business in the dollar or using the Western banking system is just too high. Freezing, seizure and sanctions, plus the US applying its law extra-territorially simply because a transfer happened to go thru an American bank even though the sender and end party were both outside of America.

This abuse is long-standing, you can read accounts from the fifties, but it really picked up in the 90s. Indeed there’s an entire book, Treasury’s War, about the phenomenon.

And this is what all the economists and similar pundits who go on about how the dollar can’t be replaced don’t understand: that they are right that the costs of replacing the dollar are significant; that it’s hard, and that it’s not really worth it.

Except it is worth it, because if the cost of trade and money transfers goes up slightly under a non-dollar regime, and even a slight increase is massive when multiplied by the number and amount of transactions, it’s still worth it because of the massive reduction in geopolitical risk. And nattering on about how the Yuan can’t be used because the Chinese can’t accept the costs of using the Yuan is stupid: that’s not what the BRICS are trying to do: the idea is to create a central, multinational currency, and to simply use local currencies whenever possible, while avoiding the Western banking system entirely.

Everyone knows that the dollar and the Western banking system are guns, and that everyone who uses the dollar and the Western banking system are under those guns and can be hit at any moment if D.C. or Brussels desires it.

When this was hardly ever done, it was a risk worth taking. When China was the main industrial power who you could buy almost everything you wanted from, and the West was the only option for most technological goods, well, you had no choice.

But now nations see a way out from under the guns, and they’re going to take it, even if it costs them, because the potential cost of not doing so is catastrophic.

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Open AI Pulls Out Of China In Another Boneheaded Move

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On July 9, 2024

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The effect of chip sanctions was to create a Chinese chip industry which now controls the low-end of the chip market, and which is coming on strong. The effect of Huawei sanctions was to make Huawei stronger, end Android support and gut Apple’s market share in China.

Now we have this brilliance from “Open AI”, presumably at US government behest:

Chinese attempts to lure domestic developers away from OpenAI – considered the market leader in generative AI – will now be a lot easier, after OpenAI notified its users in China that they would be blocked from using its tools and services from 9 July.

“We are taking additional steps to block API traffic from regions where we do not support access to OpenAI’s services,” an OpenAI spokesperson told Bloomberg last month.

OpenAI has not elaborated about the reason for its sudden decision. ChatGPT is already blocked in China by the government’s firewall, but until this week developers could use virtual private networks to access OpenAI’s tools in order to fine-tune their own generative AI applications and benchmark their own research. Now the block is coming from the US side.

Generative AI isn’t like lithography machines. It takes vast amounts of data and a bunch of coders and scientists, and China has plenty of both. In fact, it’s limited mostly by access to data: social media, websites, books, art work and so on.

There’s no particular reason to think China can’t catch up and exceed in generative AI.

It’s interesting, though, that China’s government was already blocking Chat-GPT. Clear protectionism meant to help the internal market. China’s decoupling as much as America is.

My guess is that in five to ten years the most advanced generative AI will be in China. Just as Tesla was once the world leader in electric-vehicles, then Chinese companies ate its lunch (you can get a decent EV for 14K$ in China and at each price point the quality is better than Tesla), Chinese AI companies will out-perform Open AI.

It’s China’s world now. We just live in it.

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If You Believe Either Biden Or Trump Will Halt Decline You’re A Fool

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On June 14, 2024

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There are those, even some smart people whom I otherwise respect, who think that Trump is a way to halt and reverse American decline.

This is delusional.

 

As for Biden, his claims to success are based on statistics that only a toddler or an economist would believe reflect reality, leaving aside the fact that he’s overseeing the loss of the US dollar as the primary trade currency, which will hurt the US worse than an Israeli shoving a red hot metal rod up a Palestinian civilian’s ass.

I’m on team tariff. I think they’re often a good thing. But tariffs alone cannot fix the US economy. America has too many economic pathologies. Without crushing the rich, dropping housing prices, making Private Equity illegal, forbidding share buybacks, ending stock options for executives, massive anti-trust enforcement and huge number of other policies, the US cannot take advantage of being hidden behind tariffs, especially when China is now producing more scientific and engineering advances than America.

People want hope. They need it. And they will find it, or what passes for it. We saw that with Obama, the ultimate neoliberal wannabe, who immunized bankers from their crimes and helped them steal millions of houses with fraudulent documents, then expanded fracking and bragged about, not just giving up the last chance to slow or stop climate change, but actually lighting gas on fire to speed it up.

Then Obama bragged about how much he had increased oil and gas production. Bragged.

No one is coming to save you if you are American, or, indeed Western. LePen will me a garbage fire. Starmer is one of the most mendacious neoliberal politicians of the past 50 years, an impressive feat.

If you want to do politics, you have to stop pretending that you can fix the major parties, and go third party. Yes, it’s a long shot, but it’s your only shot.

More realistically, national politics isn’t going to save your ass. You’re going to have to do it yourself, ideally with the help of other citizens. Perhaps thru a church, perhaps through a neighbourhood association, perhaps through a maker group: whatever, find a way to get like minded non-idiots together and support each other and start making the necessary changes so that you, your family and your friends have a better chance of getting thru the bad times.

It’s up to you. Climate change will not be stopped. My bet is that it is now into self-reinforcing growth. If it isn’t yet, it will be. The West’s hegemony is collapsing. As I have written repeatedly, Europe is going back to what it was for most of its history: a peripheral shithole on the edge of the Asian continent. The US is losing its empire and when it no longer had dollar privilege or a military that other countries are in terror of, Americans will find out the cost of sending their industrial base to China because if you can’t make it, other countries are going to demand a pound of flesh to send it to you.

Hell is coming and both Biden and Trump lead there, just by slightly different routes.

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Using Comparative & Absolute Advantage To Explain China’s Rise

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On May 14, 2024

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Economists spend a lot of time talking about comparative advantage: France has just the right climate and land to make great wine, for example. In the Industrial Revolution England had good quality coal in just the right place. Germany has a lot of good industrial workers and craftsmen.

Most comparative advantage, however, is cost advantage. If it’s cheaper and you can produce it for less, it’s hard to compete against you.

Absolute advantage is different. Absolute advantage is when you are the only one who sells something other people want or need. For most of the 20th century if you wanted commercial airplanes you could only get them from the US or Europe or Canada (until Canada’s aviation industry was mostly destroyed in the 50s under threat from the President of the US.) Cars were available from the West and the USSR, then from Japan and Korea. Most advanced medicines were made only by the West, though India came on strong for a lot of generics towards the end of the century.

Absolute advantage is far superior to comparative advantage: you can charge much more.

This is the second article on the West’s situation via China. If you haven, read the first “You can’t run industrial policy or a war economy under neoliberalism.”

Absolute advantage can be created. The rise of England didn’t start with the Industrial Revolution, it started when England banned exports of wool to the Netherlands. Be clear, English weavers sucked in comparison, but it didn’t matter. England produced most of the wool, and if you wanted woolens, you had no choice but to buy them England, inferior thought they were at the start, or do without.

This sort of policy used to be fairly standard. When I was young Canada would not export raw logs or raw salmon, for example, but by the 80s we had begun to do so. African nations have recently started insisting on doing primary processing in country: refine the ore or hydrocarbons, tin the fish, and so on. It’s not the same as advanced manufacturing, but it captures more of the value. If you have a resource there is more demand than supply for, you can insist. Perhaps tinning or smoking fish in the US or Mexico saved ten cents a can, but so what, before fish farming there was never enough salmon.

The problem with absolute advantage, though, is it makes you lazy. When you’re competing on comparative advantage, you have to drive down costs or increase quality, or ideally both. People don’t have to buy your goods, so they have to be better or cheaper.

Now the problem is that for about two centuries the West has had absolute advantage. For most intents and purposes everything we made had absolute advantage outside the West. We had better weapons, machines, clothes, medicines, transport. Everything.

Japan was the first non-Western nation to catch up, but an island nation without significant resources, it couldn’t compete and was conquered and made into a satrapy. South Korea was given the same treatment, and allowed to industrialize, as was Taiwan.

I was a young adult when Japan roared in the 80s, but Japan was never a serious threat, simply because it didn’t have enough population. It was never going to unseat the US or Europe, only claim its place in the (still) Western system.

China is a different matter. The reason China is eating the West’s lunch is that it has overcome most of our absolute advantage and is now competing with us on comparative advantage: Chinese goods are cheaper and in some cases, like EVs, Chinese goods are better. This often isn’t a small difference: you can buy an EV in China for 14K, and it’s a decent car.

Further, China has a massive domestic market. Oh, incomes are still not as high in the West, but the population makes up for it, and Chinese industries mostly aren’t oligopolies or monopolies. In 2019 there were over 500 EV companies. As of 2023 there were still about a hundred. The competition was fierce. There is nothing like it in the west, where car companies are essentially an oligopoly, and don’t truly compete on either price or quality.

China moved up the technological chain. They actually practice competitive market capitalism much more than we do: their markets are closer to “free” than any western country’s. They have effective subsidies due to the exchange rate and direct government intervention, of course, but that’s not the key issue any more (though it was for a long time), it’s that they are genuinely better at manufacturing than we are, and more responsive to what buyers actually want.

Many nations in the West used to have competitive internal markets, with a myriad of companies competing, but under neoliberalism, and to be fair to a certain extent under Bretton Woods liberalism, they were replaced by oligopolies. The problem with real competition is that you might lose. Fake competition is far safer, and offers far better returns for the ownership and executive classes.

Until, of course, you run into companies which are used to real competition, and they eat your lunch and you scream to the government for tariffs and trade war.

Mind you tariffs aren’t a bad idea, but if they are to work, Western companies must actually become competitive again and they don’t want to do that, it’s too much like work. Nor, as I’ve noted before, is it easy for them to do. Internal rent in the West is very high, and thus so is the cost of living. If they’re involved in a trade war, they have to sell to their own citizens, but the only way they know to reduce prices is to crush wages and if they do that, well, the internal market isn’t what it needs to be. (This is what FDR and Keynes realized, which is why New Deal and post-war capitalism emphasized having wages rising faster than inflation. It created a robust market.)

Offshoring anything another country doesn’t already know how to make is stupid, because when you offshore the locals learn how to make what you offshore and eventually they make it themselves for themselves and compete with you. “Friendshoring” can’t work, it can only crate new competitors with lower costs.

The days of the West’s absolute advantage are over. We threw it away for a few decades of high profits funneled to elites, and now we must learn to compete on comparative advantage again, something we mostly don’t have and aren’t used to being necessary.

It’s the bed we made and we have to lie in.

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