The China Questions

Guest Post by The Zman

As is always the case in these matters, the Michael Crichton observation about the media should be kept in mind. The growing rift between China and the United States is a complicated matter by itself. The impact it will have on global trade, the US economy and geopolitics is even more complex. Even people paid to risk real money in these areas don’t have a firm grasp of all the moving pieces. The people posting in the media know even less. Often they know nothing at all.

That does not mean there is nothing we can know. The first question, in any heated trade dispute between two countries, is “who is buying and who is selling?” and the related question is, “What is being traded?” In this regard, trade disputes are not a lot different from disputes between customers and vendors. How they proceed and how the end is entirely controlled by the relationship and the products in question. That determines who has the most leverage in the dispute.

In this case, the relationship is easy to sort. U.S. imports from China totaled $539.5 billion in 2018. U.S. exports were $179.3 billion. That export total is about 7% of all U.S. exports for 2018. Put another way, the U.S. market is about 5% of the Chinese economy, assuming the fake Chinese economic numbers are even close to reality, which is surely not the case. The Chinese market is less than one percent of the U.S. economy in 2018. Imports are about 3% of the U.S. economy.

Right away, the relationship between China is the U.S. is not an equal one, in terms of dollars, but also in terms of impact. Then there is the nature of trade between the two countries. Almost all of the U.S. exports to China in 2018 were aircraft parts, electronic components and car parts. In many cases, these are either high precision items the Chinese cannot produce or they have intellectual property that the Chinese will try to steal, so they are made in the U. S. and sent to China.

This is why Trump is playing hardball. He believes he has far less to lose than the Chinese in a trade war. Even if all trade with China comes to an end, the cost to the U.S. economy is not going to be devastating. In fact, it will be hardly noticed. Much of that trade will be replaced with other cheap labor countries, as it is not really trade in the conventional sense. America’s economic relationship with China is about off-shoring manufacturing to dodge labor, tax and environmental laws.

This is a point that cannot be made enough. When American producers sell good to Canada, and Canadian producers sell good to America, that’s trade. When American producers move manufacturing to Mexico, then bring those goods back home under a tariff free regime, that’s not trade. China is not selling the world anything the world does not have or cannot make. What China is selling is a safe haven to avoid the labor, tax and environmental laws that exist in the West.

That does not mean there can be no impact. That’s the other set of questions that can be examined from the outside. China can play a long game, as the Chinese leaders are not facing annual elections and endless media scrutiny. The West, particularly Trump, are in an endless election cycle. Any little blip in the economy is magnified by the media and then fed into the political calculus. While this trade war will inflict more pain on China, they have a much higher pain threshold than Trump.

That’s the theory. It is not all that clear just how much pain Trump will suffer from this standoff with China. The timing actually works in his favor. The slow buildup not only gives American business time to adjust, it gives the political class time to cast it as the typical good guy versus bad guy story. Xi Jinping is not exactly a lovable Jackie Chan type of guy, so casting him as a villain will be easy. In other words, Trump may be trading a little economic capital for a lot of political capital.

Then there is the question of just how much pain China can take and for how long. It is just assumed by Western analysts that the Chinese can absorb any amount of suffering for as long as it takes. After all, China weathered the Cultural Revolution without a mass revolt by the people. Mao had to die before the party moved to end the madness. Why would the Chinese people revolt over a slight down turn in the economy? Why would the party move against Xi Jinping, if the trade war contracts her economy?

No one can know this, but we do know that wealthy people are far more sensitive to small changes in the economy than poor people. We see this in the West. A small down turn has the middle class turning against their party, but a generation long depression in coal country has not caused a revolt. That same reality may be true in China. There are a lot of people living bourgeois lifestyles along the Chinese coast, all financed by one-sided trade with the United States and her allies.

While all of this economic 4-D chess will occupy the pundits, there may be a simple answer to what is going on with China. It could simply be that China has become a liability to the West. The benefits of moving manufacturing to China has been consumed at this point. What’s left is the liability, which is currency manipulation, IP theft, espionage and financial shenanigans. China is running out of friends in Western capitals. The appetite for tolerating this stuff may be waning.

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