How the Global Trade Contraction Begins

The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup’s upon us.

From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come into focus.  These elements, even for the most untrained of eyes, are impossible to miss.

To meet the relentless expansion of international trade, berths have been widened, and channels have been deepened to accommodate the definitive absurdity of perpetual credit creation: The CMA CGM Benjamin Franklin.  This mega container ship, if you’re unfamiliar with it, is over 20 stories tall, the width of a 12 lane freeway, and longer than four football fields.  It has enough cargo space to hold 90 million pairs of ‘Made In China’ shoes.

The secondary distortions of this mammoth – next generation – cargo ship will provide historical evidence to future generations of a political economy that went seriously awry.  For example, at the Port of Long Beach the Gerald Desmond Bridge replacement is currently being constructed at a cost of $1.5 billion.  With two towers stretching 515 feet into the sky, this will be the second tallest cable-stayed bridge in the United States.

The purpose of the bridge replacement is to provide greater clearance into the Port’s Inner Harbor for mega container ships.  As the new bridge deck goes up, it dwarfs the prior edifice like some futuristic motorway traversing up to the heavens.  We’re certainly eager to drive it when it’s complete in late-2019.

Episodes of Global Trade Contraction

The general philosophy of the bridge’s proponents appears to be that global trade expands in perpetuity.  Hence, more and more space will be needed for more and more next generation container ships.  There’s even 50-years of data to support this belief.  But that doesn’t mean what is will always be.

From a practical standpoint, global trade has expanded without interruption for so long that only senior citizens – if they still have their wits about them – can remember anything different.  Yet, global trade hasn’t always expanded.  In fact, there have been long episodes of contractions in global trade.

Those willing to look back to the first half of the 20th century will discover something that goes counter to their life experience.  Global trade, as a proportion of total economic activity, went down between the onset of World War I and the 1960s.  That’s a near 50 year run of declining global trade.  Could another half-century contraction of global trade happen again?

There are times when extrapolating from the economic past and projecting into the future are exceedingly thoughtless and blind.  Right now, may be one of those times.  By our estimation, the potential for a geopolitical shock to interrupt or reverse the global trade expansion that has been in place since the 1960s hasn’t been greater since the onset of World War I.

At the moment, it’s very well possible that we’re near the start of another long-term global trade contraction.  The impetus of the trade contraction is a politically motivated trade war.  The intended purpose is to correct the ghastly trade deficit the U.S. has with China.

Somehow, trade tariffs will make it possible for factory jobs to return to America’s rustbelt so the country can experience the nirvana of full MAGA.  Certainly, we have some reservations that a trade war will attain this desired result.  Soon we may find out in real time…

How the Global Trade Contraction Begins

This week President Trump commenced Round 2 of his high stakes trade war with China.  On Tuesday, U.S. Trade Representative Robert Lighthizer announced the U.S. will impose a 25 percent tariff on $16 billion worth of Chinese goods starting August 23.  These tariffs extend to 279 items and include tractors, chemicals, and other industrial goods.

Who knows what Mr. Lighthizer thought his announcement would provoke?  Maybe he thought it would encourage China to negotiate a new trade deal.  Regardless, China quickly responded with an in-kind 25 percent tariff on $16 billion worth of U.S. goods to go into effect the same day.  Isn’t this fun?

A trade war, in simplest terms, will result in a trade contraction.  Shrinking trade means less imported and exported goods.  Less imported and exported goods means smaller container ships.  Smaller container ships means lower bridges.

In short, a trade war means a smaller economy.  It also means a reduction in choices, and a shrinking of global wealth.  In the interim, as the trade war takes shape, all sorts of strange and dysfunctional things will happen…

Presently, cargo ship Peak Pegasus is stranded at sea, offshore from China, with 70,000 tons of soybeans.  At a cost of $12,500 per day, the Pegasus is attempting to wait out the trade war as not to incur a 25 percent tariff to offload in China.  This, you see, is how the global trade contraction begins.

How the global trade contraction will end, however, is a completely different story.  Like a California wildfire, once the conflagration starts it cannot be stopped.  Only complete devastation and destruction will bring it to its bitter end.

Sincerely,

MN Gordon
for Economic Prism

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1 Response to How the Global Trade Contraction Begins

  1. Eric says:

    It seems to me that tariffs are merely a back door but highly directed tax on consumers in the nation raising the tariff. Certainly the foreign power that is the excuse for the tariff doesn’t pay anything rather the foreign government continues as always and the local government who imposed the tariff collects money from the adjusted price of the goods, which adjusted price will be paid by the consumers. If a government announced a 25% tax on its consumers for purchasing specific foreign products the dynamic would be no different, merely the excuse.

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