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Peter Schiff Digs Down to the Root Cause of the Trade Deficit Problem

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In last Friday’s podcast, Peter Schiff talked about the potential impact of the trade war, arguing it could prick the US bubble economy. As a follow-up, in his latest podcast, Peter talked more about why a trade war could be worse for the US economy than most pundits seem to think, and he dug down to the root cause of the trade deficit.

The bottom line is slapping tariffs on Chinese imports isn’t going to solve the problem.

The Trump administration raised the stakes in the trade war again this week, threatening 10% tariffs on another $200 billion worth of Chinese imports. According to Seeking Alpha,  the new list appears to target Beijing’s important manufacturing export industries, going after electronics, textiles, metal components and auto parts. Food and personal sectors will also be affected, along with beauty goods and makeup products.

China’s commerce ministry said it was “shocked” by the latest US actions and called them “completely unacceptable.” It plans to complain to the World Trade Organization. The Chinese also vowed to retaliate with a “combination of quantitative and qualitative measures.”

The US mainstream doesn’t seem particularly concerned about the trade war. A Reuters headline Tuesday proclaimed “Dollar strengthens as trade war fears fade, risk appetite returns.”

As Peter Schiff pointed out in his latest podcast, a lot of American analysts seem to think the trade war won’t have much impact because “the economy is strong.”  They argue that we couldn’t have done this when Obama was president, but now that the economy is humming, we can afford to get our house in order and deal with the trade situation. Peter called this “utter nonsense.”

We don’t have a great economy. We have the same economy we had under Obama.”

Peter underscored the point by citing GDP and jobs data then and now.

Those who say we don’t need to worry about a trade war also cite the fact that imports only makes up about 15% of US GDP. As Peter says, that’s a pretty significant chunk of the economy. You can’t just dismiss that. And regardless, you can’t just look at the direct impact a trade war will have on imports. You also have to consider the ripple effect.

The economic harm is not just confined to the imports themselves. You have to look at the whole economy that is built around the import.”

Peter used a store that sells imported products as an example. The store sells those products because they are cheaper, or in some cases, similar American products don’t even exist.

If those products weren’t there and the shelves were empty, or the shelves were stocked with goods that were so expensive most people couldn’t afford to buy them, how is that going to impact GDP? Well, it’s not just that we’re going to import less. That store may not be in business. Or if it is in business, it might downsize. It might become smaller. It might pay less rent to the landlord because it has less space. It may hire fewer workers because it’s going to have lower sales. So, all of that is going to pyramid throughout the entire economy. So, you can’t have a false sense of security into thinking that such a small part of the economy is imports. You have to look at how the rest of the economy depends on those imports, and without those imports, those jobs don’t exist, the rents won’t be there. A lot of people are going to be affected but the absence of those imports or if the price goes up to the point it impacts sales.”

There have been reports that Trump is helping out his daughter by exempting shoes and apparel from the tariffs. Ivanka Trump has a fashion line and some of her shoes and clothing are made in China. But Peter said he doesn’t think the president is just trying to protect his daughter’s business.

I think they recognize that, wait a minute, if we put 25% tariffs on apparel and shoes that would be immediately felt, right away, immediately and noticeably, by so many voters, because everybody buys clothing.”

Think about people with children. They are constantly buying clothes as the kids grow. Imagine if all of a sudden, all those clothes were 25% more expensive.

That would immediately evoke an outrage.”

Trade war supporters say we need tariffs to protect American industries. After all, the US had tariffs before. And that’s true. In the early days of the republic, tariffs raised revenue for the federal government and protected fledgling industries that were just getting off the ground. But should we really need tariffs in 2018?

The fact that we need them now at this stage in our development just really shows you how far back we’ve gone.”

The bottom line is we are not getting to the root cause of the problem. The trade deficits are not the problem. They are the consequence of the problem. And what is the problem? A lack of productivity caused by bloated government and burdensome regulations that crush American businesses. We don’t have capital investment because Fed monetary policy discourages savings and encourages debt. We have distortions and bubbles in the economy due to central bank actions. The American education system is not turning out workers who can produce goods in a modern economy.

Government is encouraging all the wrong things. They are punishing all the right things … Unless we are going to address the lack of competitiveness in the US economy by deregulation and shrinking government so we can lower taxes, unless we are going to completely upend the educational bureaucracy …  the protectionist tariffs aren’t going to protect anything because there is nothing to protect.”

As just one practical example, Peter goes on to talk about how government regulations have driven up the price of medicines. Make sure you listen to the whole show.

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