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China’s financial center: Pudong, Shanghai

Trump Could Be Doing China A Favor…

The President could still win his trade war. But he could also be helping accelerate China’s transition from the world’s low-cost producer to its greatest modern-day economic powerhouse.

Trump turns up the heat on China in the past week by:

  1. Pledging to tax virtually all imports from China at least 10% beginning next month (before the next round of trade talks with China is scheduled to begin)
  2. Having his Treasury Secretary officially declare China a “currency manipulator” (which has no real immediate impact, but does initiate a formal complaint with the International Monetary Fund)
  3. And in a not totally but somewhat related move, just now formally banning U.S. government agencies from doing business with Huawei and other China tech companies, citing a fear of theft of trade secrets and other sensitive information. (That ban goes into effect next week.)

The President’s right about a lot of things when it comes to China: especially that its companies steal intellectual property with abandon, and when the government’s made agreements in the past to stop it, it hasn’t.

And yes, the U.S. buys a lot of goods manufactured in China. And yes, China probably needs the U.S. market to continue to really prosper economically, at least in the short term.

But trade wars are sieges, and China’s much better suited to withstand a siege than the U.S. We believe this for several reasons:

  1. The strong U.S. economy seems to work in Trump’s favor, but it really kind of works in China’s. True: if you’re going to do a trade war, this is the best time to do it. The U.S. economy can take a little bit of a hit and still be better than O.K. At the same time, when people have jobs and money they tend to become less price sensitive. In other words, if there’s something they want to buy, they’ll buy it, and may not even notice if it’s 10% or even 25% more expensive than it would’ve been a year or two ago. And that part of it works in China’s favor…
  2. Americans (except those serving in the military and their families) are not used to making really big sacrifices. So while Americans may be feeling prosperous right now, if there comes a time when this trade war starts to really pinch consumers, patience will start wearing very thin, very quick. That’s less likely to happen in China, where there are many instances in recent history where people endured great financial hardships for long periods, either because they felt obligated to, or were forced to.
  3. And we think this is the most important reason of all: China knows damn well it won’t be the world’s low-cost manufacturer in perpetuity. So it’s been slowly transitioning, and investing heavily in emerging economies. Trump could be accelerating this big time. Even if Trump does win his trade war, China might correctly view it as just a way to buy a few more years as they expand their influence elsewhere.

Secretary of State Mike Pompeo came very close to admitting as much in a recent visit to Thailand, where he encouraged countries in the region to do business with U.S. companies instead of taking money being thrown at them by the Chinese government. Saying U.S. companies will be better, more reliable partners. But we’re not so sure if we were a businessperson in Southeast Asia we’d agree. All we hear Trump talking about is how U.S. companies need to start manufacturing everything back home like in the “old days”. So how much stability can we anticipate if our work with U.S. companies is successful enough to attract Trump’s attention? Could we be a future target for tariffs? With that scenario, we might stake our future in the devil we know.

Part of the reason the U.S. stock market’s been so spooked by Trump’s latest salvo, is it’s also loaded with mixed messages. Less than a day after Trump’s Chief Economic Advisor insisted the U.S. had ruled out devaluing the dollar as a way to combat China manipulating its currency to make its products cheaper in dollar terms and thus make Trump’s tariffs less impactful, Trump lambasted the Federal Reserve for not doing just that. Specifically, he says he wants the Fed to cut U.S. interest rates harder and faster. How would that help? Lower interest rates means it costs less to borrow dollars, which means the Fed would literally be making dollars cheaper, in effect devaluing the U.S. currency so it would cost more to buy Chinese goods, and consumers in the U.S. would bear the full weight of Trump’s tariffs.

China denies it is manipulating its currency (which is a lie; it is.) At the same time we don’t think it’ll go too far down this road, because it’s even more essential now for it to successfully invest in other countries in the region, and for that to work, it’s investments have got to be worth something. Therefore, we think letting the Chinese currency drift down is more of a counterpunch to Trump’s tactics, and probably not a scorched-earth, all-in strategy.

In dealing with China, Trump’s unable to use one of his most effective tools for mitigating trade imbalances with other countries: get them to buy more U.S. made arms. He just boasted on Twitter about getting South Korea to do this, and he’s been encouraging the re-militarization of Japan for much the same reason.

It’s almost amusing that Trump seems so angry and surprised that China’s had the temerity to fight back against his trade war, instead of simply admitting he was right, laying down and giving up. Stephen Moore, who Trump wanted to sit on the Federal Reserve board, and has the President’s ear, recently told the Washington Post:

There’s really no other way of saying this: that’s because he’s an idiot. Because 6-months ago he was running around saying China had underestimated Trump and would soon give in. Because anybody who knows anything about China should’ve known they would fight, even if it means financial pain.

If you look at almost any of the many stories about how Chinese companies are hurting as the result of Trump’s tariffs (like this recent one we just plucked more-or-less at random from Hong Kong’s South China Morning Post), it’s curious to us that the reaction of Chinese factory owners is never “we’re screwed, we’re finished!”, but rather “we already own property in Vietnam (or wherever), and we were going to slowly move production there over the next decade or so, so now we’re going to have to figure out a way to do it now”.

Which tells us more than anything that China’s government and business owners know and have long known they are not going to remain the world’s low cost producer forever, nor do they want to. Instead, they want to concentrate more, giant world-beating companies within their borders, and give themselves more flexibility by moving more of their actual production outside. (Huawei, despite being virtually banned in the U.S., is investing billions in a new R&D facility in Shanghai, for instance.)

To that end, the Chinese government is doing hundreds of millions of dollars of deals not just in other Asian countries, but in far-flung places like Argentina, and all over Africa. (Not long ago, the U.S. was by far the biggest overseas investor in Africa, now China is). That’s where a lot of the low-cost production of the next few decades is going to come from, and the U.S. won’t be able to block imports from every country.

The U.S. had a strategy to combat China’s regional dominance, and expand on the fact that most countries in the region would rather not do business with China if given the choice because of one-sided deals in the past. But that strategy was one of the first things Trump abandoned when he took office. And since then, by and large, developing Asian economies have fallen in line behind China, not because they want to, but because if they want to get huge chunks of development money and compete with rivals in the region, they pretty much have no choice. We’re talking about the Trans Pacific Partnership, which was championed by President Obama (reason enough for Trump to oppose it), but also many Republicans. We should note that we wrote pieces in opposition to TPP, because we felt it was so broad it could easily become a free-for-all that could indeed suck away U.S. jobs at an unprecedented rate. At the same time, we applauded the basic principle at TPP’s core: putting the brakes on China’s influence over developing countries in Asia. (We even suggested that if it had been called the “F*ck China Treaty instead of the TPP, it might’ve gotten a lot more support, maybe even Trump’s).

It’s not irreversible (maybe), but for now the U.S. has lost that opportunity, and China has effectively expanded its influence way beyond…

And Trump could still “WIN”, though maybe not “sooo easily”. As we’ve said , for the simple fact that China may determine it’s not ready yet to say “we’ll do just fine even without direct access to the U.S. market, thank you”. But whatever it’s companies are doing in the meantime to withstand Trump’s siege is only moving China faster toward getting to that goal.

One final note: Trump keeps saying he thinks China may (or should) try to be delaying a reckoning on trade in the hope that a Democrat is elected President in 2020, who might go easier on them. Maybe that’s true. And if it is, you know who’s really good at hacking? The Chinese government. Maybe even as good as Russia. So while it sounds somewhat absurd at this point, we’re starting to wonder if a big component of the 2020 U.S. Presidential Election might end up being a hacking and social media battle between China and Russia? And if we start seeing hard evidence China is getting involved in support of Trump’s eventual opponent, (instead of just Russia in favor of Trump), will Trump and his Republican cohorts in the Senate continue being so nonchalant about election interference?

Written by

Peabody award winning journalist. Streaming media pioneer. Played @ CBGB back in the day. Editor-In-Chief "The Chaos Report" www.thechaosreport.com

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