The “experts” on Wall Street didn’t believe President Trump.
Even though he’s been threatening a trade war with China for over a year now, no one thought he was crazy enough to do it.
Well, on July 6, the U.S. officially imposed 25% tax penalties on a laundry list of Chinese products — and the Chinese government retaliated in kind.
There’s been a lot of media hysteria and misinformation surrounding these new tariffs. So I asked Jim Rickards, financial expert and bestselling author of Currency Wars, to tell us more about the president’s tactics and the weapons at his disposal.
All the best,
Editor, Money & Crisis
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The Currency Wars Have Escalated
The news last week was dominated by breathless headlines about the “new” trade war between the U.S. and China. But the truth is this trade war has been brewing for years. In fact, the new trade war is simply a continuation of the currency wars that began in 2010.
Currency wars arise in a condition of too much debt and too little growth. Economic powers try to steal growth from their trading partners by devaluing their currencies to promote exports and import inflation.
This can work in the short run, but the benefits are strictly temporary because trading partners retaliate by devaluing their own currencies. The tit-for-tat devaluations leave everyone worse off because of the uncertainty and transaction costs imposed.
Once it becomes clear that currency wars are a failure, nations will often resort to trade wars. These begin with tariffs imposed by one nation on another to protect domestic industry and reduce trade deficits.
As with currency wars, the problem is retaliation. Victims of tariffs impose their own tariffs and the world is worse off. And the only logical next step is an all-out shooting war.
It began with currency wars (1921—1936), then trade wars (1930—1939) and finally a shooting war. The Second World War that began in Asia in 1936 spread to Europe in 1939 and finally the U.S. in 1941.
The present currency war began in 2010. The new trade war began in 2018. Let’s hope a new shooting war or even a third world war does not follow in sequence.
Trump’s Three-Pronged Trade Assault
Trump is like a five-star general in the currency and trade wars. He’s calling the shots, so it’s important to understand his tactics and the weapons at his disposal.
Recently he threatened to withdraw the U.S. from the World Trade Organization (WTO), the primary body for settling trade disputes. But Trump’s threat to withdraw from the WTO will not be carried out. It’s in the bluff category, strictly for show.
The fact is Trump is turning trade policy upside down without withdrawing from WTO by using other tools at his disposal.
Trump’s method is to weaponize national security considerations in the context of trade disputes. The U.S. has always had ways to stop trade flows and restrict direct foreign investment based on national security considerations. It’s just that past presidents have never used this authority because they are globalists (Republicans and Democrats).
Trump’s three main “weapons,” mostly unknown to everyday Americans, are IEEPA, CFIUS and Section 301 of the Trade Act of 1974.
- The International Emergency Economic Powers Act (IEEPA) allows the president to regulate commerce after declaring a national emergency. He can declare this emergency “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”
- The Committee on Foreign Investment (CFIUS) gives the executive branch power to monitor the impact of foreign investment in the United States, and determine if it jeopardizes national security. It can block acquisitions of U.S. firms by Chinese companies, for example.
- Section 301 of the Trade Act of 1974 is the “nuclear option” when it comes to trade wars. I don’t want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. It gives the president a free hand to impose billions of dollars of damages (if not more) on China.
So Trump has the best of both worlds. He can threaten the WTO, but doesn’t actually have to withdraw because he can get everything he wants anyway using IEEPA, CFIUS and Section 301.
The globalists are freaking out but can’t stop him.
Unlike previous globalist presidents, Trump is a nationalist. And he’s using these powers like crazy to push his agenda. Congress can’t stop him because all of these weapons are statutory; they were already passed by Congress in the 1970s and 1980s. These statutes delegate expansive powers to the president.
What’s new is not the law but the way the law is being used.
Congress Holds the President’s “Trump Card”
There is legislation pending in Congress right now to amend CFIUS. The name of the bill is the Foreign Investment Risk Review Modernization Act (FIRRMA).
This new law shuts the Chinese (and anyone else Trump doesn’t like) out of the market to acquire U.S. tech and defense stocks. Once you remove the biggest buyers from the market, prices will plunge and “re-price” to the new reality.
FIRRMA is tacked onto “must pass” legislation. This means Congress has to pass this before the end of September unless they enact a continuing resolution.
I estimate two possible outside dates for this to become law and go to the president for signature: Sunday, Sept. 30, 2018 (with no continuing resolution), or Thursday, Dec. 13, 2018 (end of this session of Congress).
Of course, markets won’t wait until then to react. Sooner than later, Wall Street will see this coming and start to discount the impact. FIRRMA has bipartisan support from liberal Democrats and conservative Republicans. It’s as close to a “sure thing” in D.C. legislation as you can get.
China will not take this lying down. They are fighting back in the trade wars using currency war weapons. They will also retaliate directly by restricting U.S. investment in China’s technology, another blow to global tech stock prices.
The trade and currency wars are like a hurricane aimed directly at tech and defense stocks. Wall Street does not see this coming, so there’s an excellent opportunity to profit by positioning in advance.
Editor’s note: For more of Jim’s insights into money and crisis, check out his new book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis. For a limited time, Jim is giving away free hardback copies of this groundbreaking book to readers of Money & Crisis. Click here to claim your free copy.