TLDR: Why Tariffs Are Needed (Patreon)

MY TLDR: Why Tariffs Are Needed

Tariffs are needed to address the unsustainable economic imbalance between the US and China. The US overconsumes and borrows heavily, relying on China for inexpensive goods while losing manufacturing capacity and creating geopolitical vulnerabilities. China, meanwhile, overproduces, overlends, and depends excessively on US debt returns. This mutual dependency threatens both nations. Tariffs can help rebalance by:

• Encouraging the US to cut deficits, boost manufacturing, reduce consumption, and lower debt.

• Pushing China to reduce surpluses, scale back manufacturing, increase consumption, and decrease debt.

Tariffs serve as a tool to force negotiations and cooperation, aiming for an orderly rebalancing to reduce these imbalances without a disruptive crash, ensuring economic stability and reduced geopolitical risks.

THIS IS RAY's Piece:

A US-China Beautiful Rebalancing

I was pleased and not surprised that the US and China will be having “tariff negotiations,” which will be negotiations on much more than trade. In my dreams, I can imagine the US and China working out a beautiful rebalancing—one in which the unsustainable excesses are reduced to levels that are sustainable.

The Problems and the Solutions

To review, as a result of many factors that I won’t digress into again, this is the dynamic I see:

• Americans (and others) buy inexpensive manufactured goods from China that are financed by the United States borrowing from China (and others)…

• And in the process, the United States has lost its ability to manufacture effectively, which has contributed to the plight of the bottom 60%, while it has developed a geopolitically threatening dependence on manufactured goods from China (and other countries)…

• At the same time, China (and other countries) has developed an unhealthy, excessive dependence on the returns of US debt assets (and other American capital market assets).

This is an unsustainable imbalance that one way or another—i.e., in a coordinated, well-managed way or in a crash—must come to an end.

Said differently, as a result of these excesses, the US has become the world’s dominant consumer and borrower thus building foreigners’ unhealthy dependencies on selling their goods to US consumers and on the returns of US bonds and other American investments, and China has become the world’s dominant manufacturer and lender thus building unhealthy dependencies on selling and lending/investing in other markets, and all of these are threatening in a world in which mutual dependencies are threatening—so, they must be rectified.

What needs to be done about this situation? Said oversimply:

The US needs to:

• Cut the deficit

• Raise manufacturing

• Cut consumption

• Reduce its debt burden

China needs to:

• Cut the surplus

• Lower manufacturing

• Raise consumption

• Reduce its debt burden

In thinking about how to best engineer these changes, each country has a) its own domestic issues to consider, b) adequate tools to manage this situation well, and c) different approaches to managing their economies (e.g., production in the United States is primarily driven by free-market participants in pursuit of profits while what is produced in China is primarily driven by governments, especially local governments, pursuing volumes of output). That means that with cooperation and capable decision making, orderly big progress to greatly reduce these unsustainable imbalances can be made.

Because there are many ways that both sides working together can engineer a beautiful rebalancing, I won’t explore the possibilities now. I will just emphasize my main point, which is that this rebalancing, which is especially important given what the new world order is like, can and needs to happen in an orderly way, and the most important three questions are 1) will the two sides work well together to engineer big reductions in these imbalances so they take place in the least disruptive way possible, 2) how will a deal be enforced, and 3) will this deal be adhered to?