China: I see your trade war and raise you a cyberwar

It was sometime in the spring of 323 BC when Alexander the Great– the “King of the World”– passed through the gates of ancient Babylon for the last time.

He had already conquered the city nearly a decade before. But his men were worn out from fighting in India and Persia, and Babylon was a secure place to give his army a much-needed rest.

They remained there for a few months, until, quite suddenly, Alexander became extremely ill on either the 10^th or 11^th of June and then died.

The cause of his death is unknown. Some say he was poisoned. Others blame malaria, typhoid fever, or complications from his battle wounds.

What is certain, however, is that he left behind no legitimate male heir, as his wife was still pregnant at the time of his death. So almost immediately a power struggle broke out as to who would succeed him.

Macedonian tradition at the time dictated that whoever buried Alexander’s body would be the rightful claimant to his empire.

Well, Alexander’s dying wish was to be buried at an oasis in North Africa– more than 1,000 miles away. So you can just imagine the nearly year-long cat-and-mouse game where all of these generals and nobles vying for the throne continually tried to steal Alexander’s corpse from one another.

There were assassinations, sabotage, secret missions, and more, not to mention full-blown warfare among the various factions which ultimately lasted for decades– ironically far longer than Alexander reigned.

In the end, Alexander’s empire broke apart. And one of the victors– a former general and bodyguard, named Ptolemy– ended up taking over Egypt and established a ruling dynasty that lasted for centuries.

Their economic system in the ancient Ptolemaic Kingdom was essentially what we would today call “national capitalism”.

The bureaucracy was massive. Absolutely massive. Onerous regulations controlled commerce and trade. Nothing was produced that wasn’t in the government’s interest. Caravan routes and waterways were owned by the state, and their use was heavily taxed.

There were taxes on salt, stamp duties on legal documents, taxes on inheritance, and a sales tax of 10%. Plus, the tax on income reached as high as 50%.

Then there were the tariffs.

The Ptolemaic Kingdom possessed some of the finest technology in the world at that time; their fields were the most productive, and their manufactured goods were among the highest quality on the planet. So, their exports were vast and lucrative… and they traded with markets as far away as China.

Yet even though Ptolemaic Egypt’s productive technology gave them many competitive advantages over other kingdoms, the state decided at a certain point that it needed to ‘protect’ its domestic industries. So, they imposed heavy tariffs.

The results were rather predictable. Without the benefit of low-cost imports, prices rose significantly. Greek olive oil, which cost just 21 drachmas in Athens, sold for 52 drachmas in Egypt. Trade dried up, hurting both the domestic and foreign economies alike.

Trade disputes soon festered into trade wars, which quickly became actual wars. The loss of blood and treasure mounted, while rivals (like Carthage, and eventually Rome) became stronger.

This is the basic principle behind ‘mercantilism’, i.e. the prevailing zero-sum economic philosophy that dominated the world for thousands of years. It’s based on the idea that, in order for me to win, you have to lose. I become wealthier by taking from you.

Adam Smith finally codified why this way of thinking was stupid when he published An Inquiry into the Nature and Causes of the Wealth of Nations in the year 1776. Smith, the father of capitalism, realized that wealth and abundance were infinite, and that trade was not a zero-sum game. Both sides could become better off.

Yesterday– supposedly ‘Liberation Day’– constituted a gigantic step backward from capitalism… back to the zero-sum mentality of mercantilism.

I’ve written before that, yes, America has very legitimate gripes with respect to some of its foreign trading partners.

But it seems naive that these can be solved with across-the-board tariffs on essentially the entire planet.

If Apple doesn’t want to sell iPhones in China, they can choose to do that on their own. It seems silly to make hundreds of millions of Americans pay higher prices for imported goods to ‘avenge’ Apple’s lost profitability from Chinese import duties.

There are so many things wrong with this policy… and very few ways in which it could go right.

In order for tariffs to be a win, the rest of the world would just need to take it in the teeth. No other nation could impose retaliatory tariffs. Foreign businesses would need to cut their prices, and foreign central banks would need to devalue their currencies.

US consumers would need to be very forgiving and buy the narrative that the price inflation due to tariffs is “transitory”, and that domestic production will soon bring prices back down.

Most importantly, US businesses will need to immediately begin building new factories in America and ramp up domestic manufacturing.

But this is far easier said than done. New factories will require a host of state and local permits, and that bureaucracy could bog down industrial construction for years.

Not to mention that many building materials for all of these new factories will need to be imported. There are exemptions in the tariffs for copper, lumber, and steel, but other imported construction materials will be 10% to 50% more expensive now.

In short, build all of these factories will take a great deal of time and be lot more expensive. Consumers will be expected to pay the price in the meantime.

One of the biggest questions, of course, is what happens next.

History tells us that trade disputes often escalate into larger conflicts. And is anyone naive enough to think that the Chinese will simply bow obsequiously?

Perhaps they’ll use their army of hackers to take down parts of the US power grid and launch a mini cyberwar. Or perhaps they’ll cease exporting critical rare earth metals to the US– so kiss your iPhone goodbye.

We also could easily see a number of countries (including in Europe) retaliate by canceling visa-free travel for US citizens… and several countries start pulling their funds out of the United States– either in retaliation or out of fear.

This might even lead to the US imposing capital controls in order to stop foreigners from moving their money out.

Bottom line, it could get very messy, very quickly.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/china-i-see-your-trade-war-and-raise-you-a-cyberwar-152427/