Taxes are Coming! Taxes are Coming!

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Apple's Tim Cook
Apple's Tim Cook

Apple prices may increase because of the massive Tariffs we may be imposing on Chinabut there is an easy solution where there would be ZERO tax, and indeed a tax incentive. Make your products in the United States instead of China. Start building new plants now. Exciting!

Tweet by US President Donald Trump

President Trump, on almost a daily basis, brags how his tax cut has stimulated the US economy. This tax cut was passed with the approval of Congress in accordance with the procedure set out in the American constitution by the country’s founding fathers. But now, he is imposing billions of dollars of taxes—TARIFFS ARE TAXES—on the American economy. And he is doing this by Executive Order—a procedure not permitted by the American constitution. He gets away with this because Congress has abdicated its authority and in the postwar period passed several bills allowing to unilaterally impose tariffs with the justification of “national security.” Like the US risks imminent attack from Canada, or the EU or even China?

National security is the criterion of scoundrels. Congress knows what Trump is doing is totally dishonest but—gutless as it is—it does nothing. The opposition party—the Democrats—would rather pick on Trump for his multitudinous sexual peccadilloes, or what so far has turned out to be imaginary collusion and Russian election offenses.

Quoted above is one of Trump’s recent tweets. It is in my opinion one of the stupidest statements on economics ever made by an American president. Apple (AAPL) is one of the most—if not the most—successful companies in the history of capitalism. It pioneered the global smartphone revolution which has changed the world. Apple designs its products mostly in the United States and sells them globally. It has created what can only be viewed as a miracle of manufacturing efficiency and global supply chain logistics. For example, Apple’s processors, the brains of its smartphones, get designed in America, manufactured in Asia by Taiwan Semiconductor (TSM) and Samsung and assembled in China by Foxconn and Pegatron. Actually over 200 suppliers provide parts for the iPhone and these come from a number of nations including the US, China and Japan. And Apple itself rakes in the profits.

And now the American president wants to disrupt this American success story’s operations and dramatically increase costs for the American consumer!

All of this is bad news for investors, for US allies (Americans who take Trump seriously must now lie awake at night worrying about a Canadian attack!) and of course for China. Steve Jobs in what is now a famous meeting with Obama told him that it just didn’t make sense for Apple to do any serious manufacturing in the US. It wasn’t just that Asian wage rates were cheaper. In fact, the manufacturing skills and the needed (Confucian?) discipline were in abundance in Asia.

My advice to Apple—and I say this only partly tongue in cheek—would be to leave its miracle supply network unchanged but to hire a few thousand coal miners to dig for coal under its new Cupertino headquarters. And maybe put a steel mill in that open circle of the new headquarters. Trump loves coal miners and steel workers. They are his economic future for America! Exciting!

Bad News for Investors

US investors have to face reality. They have been living off the “good Trump” while markets outside the US have been heading south in response to US tariff policies. The good Trump is the one who cut income taxes and regulations. But we are now faced with the “bad Trump”—the Trump who wants to disrupt international trade, impose unconstitutional taxes on the US and, as I will argue, is anti-technology. Trump’s tariffs will push up the US inflation rate which has been held down in past years by the “good” deflation resulting from globalization. Corporate profits which have been soaring will slow down, especially for tech companies which are very China dependent. And not to be forgotten is America’s soaring budget deficit which Trump did sign off on.

And finally there is Newton’s third law of politics—For every political action, there is an equal and opposite reaction. Trump has brought angry protectionism and, in the eyes of many, misogynist and racist attitudes. There are those who think Trump’s slogan is really Let’s make America a Great White country again. Unfortunately, all this has enabled the rise of an equally economics—ignorant and socially intolerant far left. America’s future? Investors aren’t going to like them, that’s for sure. Donald Trump is largely responsible for this rise of the lunatic left.

The stock market optimists have argued thus far that Trump’s tariffs are really a bargaining tool and that all will end well. The art of the deal. I don’t believe this. Read Peter Navarro’s anti-China book and read Trump’s speeches over the years. He really believes all this protectionist stuff. It’s core for him. And he has a special animus towards China. And he has no interest in, nor any understanding of technology. Reporters on the major news networks sometimes say the US is “winning” the trade wars, as if it were a football game. Nobody “wins” a trade war. There are only losers.

The market optimists argue that if things get bad, the market will crash and Trump will give in and then we will all live happily ever after. Trump is a politician after all who seems to be super sensitive to the stock market’s moves. This isn’t good news. Wishing for a stock market crash is wishing for a cure that’s worse than the disease.

Trump Has No Interest in Technology

No one expects the American president to be a computer nerd but it’s fair to say Trump doesn’t know a computer chip from a potato chip. Nor does he care. Trump judges Silicon Valley based on political considerations and a number of big tech firms are on in his crosshairs: Amazon because Jeff Bezos owns the super liberal, anti-Trump Washington Post; and, the social media companies Twitter, Google and Facebook because they lean slightly left in curating the news that filters through their platforms.

But it would not be true to say that his Navarro-led band of China hating advisers are tech-ignorant. They know that if the US is to remain a global hegemon, it must remain number one in such things as 5G and AI. And the rise of China must be stopped.

I have the following fear which I hope proves unfounded. After the US laying incredible tariffs on Chinese imports and crippling US China trade, China will still not kowtow to Trump. Out of frustration and in response to all the economic pain felt from the tariffs on the US side, Trump will turn to destructive non-trade measures like embargoing the export of semiconductor equipment to China. Navarro will be happy to supply Trump with a list of ways to damage Chinese technology. US semiconductor and telecommunications companies will be collateral damage and their stocks will go down in flames. And I think these measures will be regarded as desperation efforts.

There are a lot of reasons for the success of US tech companies but perhaps the most important is FREEDOM. The private sector-driven US tech sector is free to compete and invest globally and, at least recently, has not had protection from imports. US tech firms have been heavily involved with China and happily so despite Chinese protectionism and alleged theft of intellectual property. The best and the brightest from around the world come to the US to work and study. This includes a large number of Chinese students who study STEM subjects and try to stay in the US to work. Trump is already limiting visas of Chinese students and scholars and cutting off Chinese investment in the United States. The Trump Administration is already hurting the US tech sector.

Time to Bottom Fish in Chinese Stocks?

Absolutely not. Wait at least until Trump’s tariffs are fully implemented. Then, at some point in the future, when the US starts implementing desperation non-tariff punishments against China, buy. When they are giving Chinese stocks away and the US tech stocks are heading down in flames.

Some Things You Didn’t Realize About China And Will Enable China to Stand Up to Trump

Unless there is some change in Trump and Republican domination of the US political process in the midterm election, Trump’s war on China is going to continue and ultimately going to fail. Here’s some things people shouldn’t forget.

First, China has a long history of dynasties surviving hundreds of years and always dominating their geographic region when the dynasties reach their apogee. The Communist dynasty began in 1949 and, for better or worse, is on the ascent. The current regime like all Chinese has a sense of history and won’t be pushed around.

Second, China is what has been called a high IQ nation. On this I recommend a book by economist Garett Jones called Hive Mind. Jones asserts that high IQ nations have certain advantages. According to Jones, higher IQ people tend among other things to save more and be more cooperative. Quoting the research of other researchers and various national IQ statistics, he points out East Asian people, i.e. Chinese and neighboring East Asian sinic people, score higher than other groups on IQ (he is wrong on one point in that Ashkenazi Jews score even higher. East Asians rank number two. Good enough!) It seems likely that over time, China will be able to overcome American technological roadblocks. Just look how puny North Korea—basically a Communist Confucian China-knockoff—has been able to put up sophisticated intercontinental ballistic missiles. The majority of third world nations could not do that.

Third, there is the Confucian tradition of obedience. For the last fifteen hundred years or so, to succeed in China a man (women did not take these exams) had to take a series of rigorous exams based on Confucian philosophy. And what did Confucius teach? Obedience. People predicting a Chinese (or North Korean) collapse are underestimating the Confucian tradition of obedience which serves Communist authoritarian dynasties well. Of course this can stifle creativity. Recent Chinese efforts to tighten internet information flow and curtail computer games can be viewed as a negative product of this Confucian tradition. China’s biggest obstacle to further progress isn’t Trump—it’s China.

Taxes are Coming! Taxes are Coming!