Tariff wars cannot help the United States of America. Oh yes, they can give POTUS political points and could boost production temporarily. But tariff wars that succeed would damage the world economy in one important way. If a tariff war succeeded in improving the trade balances that the USA has with foreign nations, it will cause a shortage of Eurodollars. That will result in a slowing world economy which will ultimately drag the United States down as well. 

Jeffrey P Snider has been at the forefront of modern Eurodollar theory. This was acknowledged by Christian Hutchings, in a Linkedin article that helps us understand what is at stake in the tariff wars. Before getting into that article and his introduction of one Chinese General Liang's view on the virtual American economy, let us look at some recent work by Snider. 

It is necessary to repeat what Eurodollars are. Eurodollars are the reserve currency of the world. Eurodollars, not dollars are what fund worldwide investment. The Triffin Paradox of trade deficits results for the nation creating the reserve currency. And there is scarcity in the Eurodollar reserve currency market even without tariff wars. Fed tightening is often not tightening in a real sense here at home, but it hurts emerging markets badly. 

While we cannot have sympathy for the communists, as Snider has said, we can have sympathy for 1.4 billion Chinese people who will be affected by the Eurodollar squeeze, which will ultimately attack the US economy. As Snider said:

When China signed on to the eurodollar system, they did so thinking it was a one-way ticket to paradise. Even after 2008, there were complaints about it (Zhou in March 2009) but no serious challenge once it looked like Emerging Markets were going to emerge maybe even the winner – it was widely believed there was a “new normal” in the West leaving growth the exclusive property of the East (and South).

It was a higher order mistake along the lines of these “decoupling” outbreaks. In the immediate aftermath of the Great “Recession”, everyone acted as if the developing world was going to decouple from the lack of recovery in the developed world.

There is no decoupling, however, only variances in the time dimension. 

It makes sense when in the same article, Snider said:

Furthermore, given the recent history of the global reserve currency system, eurodollar not dollar, what were the chances “going right” was going to last more than maybe a few quarters longer?

If there is no decoupling, then not only will emerging markets fail with a shortage of Eurodollars, but the holder of the reserve currency could fail too. Hutchings clears this up:

Basically that the Fed has limited control over a shadow banking system which appears to grow/shrink on its own accord in consistency with world economics/credit demand (or lack thereof in recent times). The growth of the Eurodollar market over the last 20yrs has been huge relative to the money supply within the US – suggesting that the market is naturally building up a structural short USD position via financing USDs (think banking liabilities) via other currencies (assets). Keep in mind that Eurodollars are transferable onshore and therefore have an ability to influence the money supply of the US directly, therefore potentially limiting the effect of monetary policy by the Fed. 

 and:

...as Eurodollars grow to support world economic growth, this raises economic activity in the US resulting in Fed monetary tightening in response to an overheating economy – this of course raises the cost of financing for everyone else and pricks asset bubbles in high beta asset classes (EM being an obvious example) and the Fed is forced to ease rates and help the US economy recover as its impacted by a slowdown in global growth and trade. The cycle keeps repeating itself until the USD is replaced by something else for world trade - or at least the world starts to trade with itself using alternative fiat bases.

Remember, all this is a probable reality even without trade wars. 

Trade wars:

So, enter Trump and trade wars. It gets worse. Hutchings points out that if Trump were to succeed in reducing trade deficits, the shortage of Eurodollars will become worse.

I wrote about Kissinger's warning to Trump about the importance of maintaining the reserve currency. I said:

Kissinger does understand that isolationism by the reserve currency nation results in lack of liquidity to the world. With the reserve currency being entrusted to the USA, the world then reinvests dollars into the United States. Because of the Fed, it is likely that not enough dollars are reinvested in the USA. But the alternative is worse.

So Hutchings nails the disaster that could befall us, as he quotes Chinese Major General Qiao Liang:

The Americans came up with a solution: issuing debt to bring the dollar back to the U.S. The Americans started to play a game of printing money with one hand and borrowing money with the other hand. Printing money can make money. Borrowing money can also make money. This financial economy (using money to make money) is much easier than the real (industry-based) economy. Why will it bother with manufacturing industries that have only low value-adding capabilities?

The US prints money that becomes Eurodollars. Those Eurodollars need to come back to the USA to keep our economy vibrant. 

Liang says that only 5 trillion dollars of GDP in the USA is from the real economy, while 13 trillion is from the financialization of our economy. So, we aren't very strong as to our real economy, massively smaller than China. People should be informed of this. Unfortunate that a communist has to tell us! 

So, the disaster is, of course, that mainstreet churns out only 5 trillion dollars of GDP while China's main street churns out way more. In order for the US virtual economy, the financialized economy, to succeed, there has to be production of real stuff elsewhere. 

The tariff wars carried to conclusion could result in the weakening of the US financialized economy, and the destruction of China's real economy. That will cause momentous upheaval in the world. Our children and grandchildren are facing real problems. 

Trump and other presidents who follow his mercantilist policies will be forced to go to war continually in order to offset the weakening of the financialized economy here at home (the real economy is already pitifully weak). Germany's nationalism grew increasingly vibrant over the years prior to WW2.

We may be forced to talk about similarities with Germany leading up to WW2. It is too soon to talk about that scenario. But it could happen to the USA.

As it is, to keep the virtual US economy going, China must grow. We must foster that growth or we will pay a heavy price and the world will become an infinitely more dangerous place.   

For further reading (Major Liang accuses Bannon and others of misinterpreting his book, Unrestricted Warfare): Chinese Military Strategist Who Inspired Steve Bannon Attacks Donald Trump's "Outdated Imperialist Thinking".