Are Tariffs bad?

At university, tariffs were “bad”. It was pretty simple stuff and simple to calculate. Comparative Advantage, everyone richer for it. Free trade, hooray. Indeed, it is mathematically “proven” they are bad.

It plays out here. Australia is comparatively good at mining, agriculture and that’s it. China is comparatively good at manufacturing almost everything. They get Australian lobster, we get everything that’s made. The difference is there is a positive externality in manufacturing. Innovation arises mostly from the factory floor. New ideas, better ways of doing things. Those externalities are not in the tariff calculations. Catching lobster is one thing, manufacturing sensitive instruments is quite another. The knowledge grows every year (and compounds), that is not true at the same rate in primary industries. That is why we will one day look across the ocean and ask “how are they doing that?”

Take America, after it gutted its own manufacturing base by taking loads of free stuff from China. They forgot how to manufacture. There is a massive intellectual property tax in not doing stuff yourself. While it’s working, it’s absolutely fine and when it stops working, it’s very bad.

The best example here is computer chips. Comparative Advantage writ large. So much so that only one country in the world can manufacture the chips everyone wants, Taiwan. More than that though, the deep knowledge resides within one company, Taiwan Semiconductor Manufacturing. They make chips for Apple, NVIDIA and almost everyone else. Within that company the really deep knowledge resides with about 100 people. The manufacturing process involves advanced lithography, which needs to be good enough that the chips are reliable. It is unimaginably complex and built on years of compounded experience, effort and individual (unsung) brilliance. America’s big chip manufacturer has basically forgotten how this stuff is done. Intel’s stock price sits where it was in 1998.

It sounds ridiculous to say it but a lot of global progress in the last two years has come from those 100 people. The rest of us do not know, we have forgotten or never learned. So much so, that the island where those select few work is now surrounded by warships from multiple countries. There is a very real negative externality to comparative advantage in some cases.

Tariffs are bad but not knowing how stuff is done is arguably worse. In Australia, we seem blissfully unaware that our entire existence sits in the gift of everyone else.

Larry

The BlackRock Annual Letter was out this week. Amongst other interesting things, Larry Fink called out huge US deficits as a risk to the US Dollar. Pretty extraordinary from such a prominent US fund manager. I don’t see the risk from Bitcoin as so great yet.

The point is more general. Most governments around the world now have permanent, baked in deficits. The French government is now 60% of GDP. The UK is never getting its budget back into balance, nor is Japan, Italy or indeed the US. These huge economies have no choice but to monetise their national currencies (as Japan has done).

To me, Bitcoin will never become a Reserve Currency in the way we understand it now. Will central banks around the world start divesting dollars and buying Bitcoin? I think not. Central banks are there to administer fiat currency, they won’t start hedging with Bitcoin to accelerate their own death.

Far more likely that individually people default to the reserve currency of greatest strength. Just as for the past 50 years, people in countries with hyperinflationary currencies have cried out for dollars, they will do so for bitcoin. The global bitcoin hedge will be created one person at a time rather than one nation at a time.

I was surprised throughout the report how thematically aligned BlackRock is with our own thinking. We talk about Euro-demographics a lot, sure enough here is their chart.

This one is seriously alarming because the collapse in the working population in the next 10 years is the steepest of the next century. BlackRock believes AI might save Europe. The problem is if the EU blew their chance on AI in the very first innings. If AI does help them, it will be the US collecting the cheque.

They even had the ‘no such thing as a low energy rich country chart’.

“There’s a fascinating relationship between a country’s wealth and its energy consumption. The correlation is nearly perfect: more energy, more wealth. At some point, though, this relationship is supposed to break down. As economies grow richer, they typically keep growing with less incremental energy, thanks to efficiency gains. But you could argue that’s not the case anymore. Even in the richest nations, prosperity is once again defined by our ability—and our willingness—to produce and consume more energy.”

The obvious question here is, does Larry Fink subscribe to MoneyBits? I’m starting to think so. His full letter is here.

AI of the Storm

Excellent article from Matt Barrie on AI this week. It’s a long one but well worth a read over the weekend.

I couldn’t help but form the view that it is outright technical warfare now. The Americans clearly have a slight chip advantage, but the Chinese now have the algorithmic lead. It may not be long before they move ahead on on all fronts.

Most encouraging though is that the shackles are off. It’s an actual race now like the space race. The Americans are going for it at full speed. OpenAI just raised $41billion this week valuing the company at US$300bn. For context, that makes it double the size of the largest company on the ASX. Commbank has a market cap of US$160bn. Likewise in China, it’s clear that DeepSeek has access to state capital and state resources.

Further down the line, Cursor, which is a coding aid for developers, raised $625m valuing them at US$10billion.  That would see them easily in the top 50 companies in Australia. It might seem over the top but in fact tools like Cursor are the thing that actually replaces staff. One good person + Cursor is probably three good people from two years ago. The penny is beginning to drop on this point, at least in the private sector.

Massive companies are being born here through the adoption of tech. Australia’s prospects of participating look slim though. The government’s proposal for the next three years could have been written in 1950 or 1980. They seem to bear no relation to what’s happening in the world.

I know it sounds radical but it might be more interesting to say:

“we will deploy a massive army of robots and AI across Australia to accelerate our mineral search; to advance our farming expertise; to drive cars in remote areas where there is no access. In five years we will never risk a human life down a mine again. We have the energy, the resources and the room”. 

The tools exist. Australia ignores them.

Meme of the week

New Zealand’s trade minister. What was his alternative? A Manuka Honey ban?

Euro-Trash

It’s a special feature of the United Kingdom that people will say “I’m off to Europe” apparently unaware that they are already there. Since I’m from the UK, it’s precisely the reason I avoid dunking on them. It’s not Europe after all. This week, I’ll make an exception.

In one of the peculiarities of British Politics they have something known as the ‘Spring Statement’. In it the Chancellor of the Exchequer updates on how the government is going against its budget that it would have laid out in the prior year. Last week, Chancellor Reeves said this

So I will set out the immediate steps that we are taking to boost Britain’s defence industry… 

… and to make the UK a defence industrial superpower.  

We will spend a minimum of 10% of the Ministry of Defence’s equipment budget on novel technologies … 

… including drones and AI enabled technology… 

… driving forward advanced manufacturing production in places like Glasgow, in Derby and in Newport… 

There is a slight problem with all of this though. Britain no longer has the energy (quite literally) to do such a thing and a quick tour of history will tell us why.

In the 1970’s times were tough in Britain. Britain took a loan from the IMF in 1976 so bad were its deficits. Something else was happening at the time though, they discovered a massive amount of oil and gas in the North Sea. Slowly, that came online and its bounty started to shower across the country in the boom years of the 1980’s. Peaking with the public listing of British Gas in 1986. It also helped drive some onshoring of manufacturing production that had been lost because power was cheap and wages were relatively low at the time.

As of today, over 75% of the known reserves are extracted and production is in decline. Britain has changed course from hydrocarbons and is committed to net zero emissions. They are in fact deeply and ideologically committed to that goal at almost any expense. So much so, that energy in Britain now costs a fortune (industrial prices listed below, retail prices are a bit lower).

As a consequence, the industrial base is dying. A case in point being two of Britain’s last blast furnaces closed down this week because they lose too much money.

“The blast furnaces and steelmaking operations are no longer financially sustainable due to highly challenging market conditions, the imposition of tariffs, and higher environmental costs relating to the production of high-carbon steel,” 

The idea that the UK is suddenly going to become some massive industrial production house is pretend. People are scared to heat their houses in the UK because the cost of energy is so enormous. It mostly stems from the fact that they have run out of their own oil and gas and replaced it with imported wind farms.

Eventually, we will face the issue. We need a lot more energy. There is simply no limit to the amount we could use and our wealth, and the wealth of nations, is directly tied to it. It is absolutely that simple. Some countries are not lying to themselves about this (China, India, the US). Other countries in Europe are in a total state of denial and decay. The UK is one. 

This was a headline on the BBC in 2021. It was at the height of the Bitcoin energy use era.  There were two ways to react to that; firstly as most people did ooh that’s terrible and we better ban it? Or, how is that possible? Why is that happening? Energy is money. Some people got it and most people didn’t.

Since that day, Bitcoin’s energy use has tripled, along with its price.