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UPDATE: China is Ready to fight Trump’s Trade War

LET’S LAY OUT THE WEAPONS FOR THIS WAR

Trump is demanding that AMERICANS pay a 25% tax if China does not give in to his demands.

Chinese President Xi Jinping has offered his support to Saudi Arabia’s embattled Crown Prince Mohammed bin Salman in the wake of the international outcry over the killing of the journalist Jamal Khashoggi.

 Trump’s threats, dating back to his election, go as high as 45% tariffs on all Chinese goods. That would essentially cut the US and China off from trade.  Trump’s idea of a weapon seems to be that his tax will force Americans to stop buying cell phones, TVs, and sports jackets labeled “MADE IN CHINA.”  He seems not to understand that many American companies, including Apple and GM, now sell most of their product in China.  Sure the jobs are Chinese, but the capital is American. Trump has no idea what capital means or why the flow of capital, not cash, is critical to China. 

Why would this bother Xi Jinping?

China’s weaponry for this fight is a lot more complex.

As Premier leader of China, Xi needs to consider the employees of what amounts to a massive corporation.  I say “employees” and “corporation” because China is not a traditional state.  Under the Communist Party, everyone, even a small farmer, an employee of China’s Alibaba, a start up entrepreneur in Hong King or an engineer at Boeing China, is seen as a worker for the state. Xi needs to provide for the needs of 1.5 billion employees but he can also call on the strengths of those workers in ways unimaginable in the US. 

The threat to Chinese consumers is dubious. Even if the beans come from Brazil, someone needs to pay for them in dollars.  If we do not buy stuff from China, Chinese workers will have fewer greenbacks to spend on stuff the rest of the world sells to CHINA like American soybeans and apples.  Xi may not see this loss as an insuperable issue. as long as he can buy cheap produce elsewhere,  In fact, trade deals with Brazil for soybeans or Australia for wheat just strengthens China.

On the other hand, China’s companies still need to buy tech stuff from US manufacturers.  So, as long as the US has a lead in tech, China needs dollars to purchase high tech goods.  The question, is how long will the US have that lead and, in the short run,  how much would some loss of revenue from exports from China, impede China’s ability to buy tech from the US? 

Demands by the US negotiator and trade hawk, Robert Lightizer, that  China adopt American laws may, as President Xi has said, conflict with China’s internal business standard.   So,  China’s retaliatory tariffs might make soy sauce more expensive for the Chinese housewife but it is not obvious that any loss of dollars from trade to the US will not be more than compensated for as long as China continues to be able to obtain US tech from US companies working in China.  As with Huawei and 5G, China can decide just to build high tech stuff using its own technology as they also appear to be doing in their effort to build a domestic competitor to Boeing’s 737.  Meanwhile, as suggested below, China can emulate Japan by outsourcing manufacturing to Mexico while profits flow back to China.  

Dollars are really important to China in ways other than buying US stuff.  The growing Chinese economy depends on oil!  Half the world’s shipping is in Chinese boats, fueled by oil.  Here too, China may “hold  the Trumpcard.” Trump’s effort to cut Chinese earnings in dollars will help Chinese corporate leaders figure out how to get Iran, that now sells 50% of its oil to China, to accept payment in 人民币, the Chinese currency. Sadly for the US, this may not be so hard to do given Mr. Trump’s other wars with Venezuela and Iran or Europe’s turn to Russia for fuel. The ohso moral Saudis have already concluded an agreement to sell their oil to China.  Put9n is also very willing to accept the 人民币.

It is important to understand how different President Xi is from President Trump. As a student during the worst of the cultural revolution, the teenaged Xi hid out in a cave reading Mao. After the cultural revolution Xi’s father led the creation of China’s first “Special Industrial Zone” near Hong Kong. Xi rose through the ranks in the amazing era where Deng Xioaping invented a new form of totalitarian government, combining state capitalism with a national model of government. China Inc is more similar to a huge American corporation than to the failures of Leninism under Stalin.

Unlike the many failed totalitarian states,  China has now had an orderly succession of five leaders.  Deng’s vision was long term.  He and his successors laid the basis for a massive corporation that could compete with the more fractious US.  Unlike most American corporations, China’s board of directors, the Central Committee of the Communist Party thinks long term.  Neither the US government nor most American corporate boards can plan even five years ahead.  Like a good Mafia boss, Mr. Xi may decide to bring this conflict with the U.S. to the mattresses..

  • “China does not want a trade war but is not afraid of it,” Geng Shuang, a spokesman for the Chinese Foreign Ministry, told a press briefing on Monday. “We will not succumb to any external pressure and have the determination and ability to safeguard our legitimate rights and interests.”

Robert Lightizer has been around as an America first, free trade advocate since the Reagan era.  Under Reagan, Lightizer worked to undermine Japan’s continuing growth as a technology superpower.  That effort resulted in Japanese companies from Sony to Toyota developing plants in America.

The real issue is not tchotchkes made in China.  Trump is not going to make the American assembly line worker competitive with low priced labor elsewhere. The concessions demanded by Robert Lightizer,  the American negotiator,  focus on an issues that would weaken China as a global competitor. The issue is not just buying American high tech goods.  China, Inc. wants to make that stuff too.  Robert Lighthizer is intent on stopping Chinese access to American technology based on companies like Boeing, Apple or Tesla that now build their products in China.  Under Chinese law, these companies must share the underlying technology with Chinese companies. From China’s point of view, this is simply a matter of fair competition.  Chinese companies do not have any internal controls like those recently forcing Qualcomm its lower its priced because Qualcom  has an effective monopoly.   Trump sees this internal Chinese law as unfair .  As Trump should know, as in love and war, all is fair in business.  

China is also likely more politically resilient than Trump’s America.  Mr. Xi’s ability to make demands on his workers is based on a decades-long effort not just to build a Chinese model that combines capitalism with state control, but to use very modern methods of propaganda to influence his workers.

China’s need for markets for its products is also key to the Silk Road Initiative.  China had been working at creating affluent trading partners in a worldwide fashion that includes not just central Asia but the Mediterranean, Africa and even Latin America.  Increasingly, Xi’s China, Inc. is a lot like the British Empire of the 1800s.  The idea is a dlobal economy where new markets provide the profits that drive commerce under the Chinese flag.  In that world, the American consumer is no more important than someone in Russia or Brazil.   Even the military plays its part.  China, Inc. is supported by a Navy that understands that its job is to assure the company can sell its stuff.  Along with 50% of the world’s shipping, the Chinese Navy is becoming a major commercial force.  Imagine if Apple’s Tim Cook could order a nuclear carrier to assure that his cargo ships could provide iPhones to sell in Singapore! 

THE FAMOUS CHOCOLATE CAKE,  So far China has dealt with Trump by agreeing to buy stuff.  I have no doubt President Xi will soon buy his suits from a Trump labeled vendor on Alibaba and appear with his wife dressed in the latest Ivanka branded tchotchkes.  That stuff will make Mr. T happy, but the harder issues are those that underly China’s long term strategy.

When Trump offered President Xi a wonderful slice of chocolate cake back at Mar a Lago, Xi Jinping smiled.  The master of The Art of the Deal saw this handshake as a sensible step to a world where China would agree to be more like a Trump enterprise .. focused on glitter and short term profits.  Meanwhile, China’s military was working to dominate Southeast Asia sea lanes, it was growing its Belt and Road Initiative globally and making loans to low-income countries to win friends and strategic allies.  That dogged effort will last a lot longer than the imperiled Trump Presidency.

The British-born actor does not even speak proper Chinese:  “I can’t lie about this. We Frankensteined a lot of my really terrible Chinese sounds because I’m pretty much tone-deaf, and Chinese you’ve gotta use tones. “

Selling cheap goods to the US is not in China’s long term interest.  China, Inc. wants MADE IN CHINA to imply the highest tech and greatest value. They want China’s products to be indispensable to the world economy.  In their view, ten years from now I will be flying on a Chinese-made airplane , driving a car powered by Chinese batteries, and watching the Malaysian Chinese Henry Golding star in a Chinese-produced comedy about rich folks in Shanghai. Maybe the movie will also premiere at the now Chinese-owned Grauman’s Chinese Theater in Los Angeles.  Given that Mr. Golding speaks Chinese very badly, his part may need to be dubbed.

Tariffs do not block foreign investment,  Contrary to popular perception, the U.S. does a lot of manufacturing,, about 18 percent of global manufacturing compared to  20 percent for  China.  The US is also a prime market for manufactured goods, probably the prime market. . But U.S. manufacturing, like manyfacturing in Germany or Japan, is increasingly handled by robots rather than people.  American capital flows to China reflect cheap labor there.  China, Inc can play that game too

If China needs US dollars, there is another way for CHINA, Inc to make money  … sell stuff made in other countries. Trump has not just gone to war with China, he is at trade war with the world.  That strategy was exactly what happened in the 1930s when the Smooth Hawley Tariffs harmed worldwide commerce, helping turn an economic contraction into the Great Depression.  The rest of the world today may decide to step around the US.  Within that world are countries like Mexico and Vietnam that look a lot like China during the Deng years. With China’s help they can join together to replace the US consumer.

It would be in China’s interest to offer that s0rt of help.  Today’s China Inc was created with billions of dollars of investment, often from America,  As a result of that investment President Xi is the head of a firm that is an assembly hub for parts sourced globally.  In turn, the post-Deng regime has wisely invested Chinese capital in infrastructure and in the underlying technology to build parts needed for those plants.  Those parts today feed not just Chinese manufacturers but plants all over the world.   The cost of abandoning the Chinese supply chain is far more serious a threat than Trump’s tariffs on finished goods.

What happens if China announces that it is developing factories in Mexico? Since NAFTA, the  Mexican government has supported a Deng like effort using American capital and Mexican tax breaks, to create a modern manufacturing system that rivals China but has cheaper labor and lower shipping costs.  Is the US going to apply tariffs to Mexican made goods because a Mexican company is owned by a Chinse company?  Is that even legal under the WTO?  What would Trump do?  Block US investments in China?

The important thing to understand is that the model for the world economy has changed.  The change is not only global, but it is also internal to China.  As a national corporation, China can decide to shift its capital to Mexico … or other low wage states … while using the return on capital to fund China’s internal social goals.  That strategy, embodied in the Silk Road Initiative, has no comparable answer from the US or from our allies.  Even with a better President than Trump, a system where corporate goals are determined on Wall Street rather than in Congress, may not be in a position to compete with Chna.,

While Trump acts like a Mafia boss defending his territory, President Xi will lead an effort that demands patience from his investors, the Chinese people.  Xi can do this because he commands a much larger part of the Chinese society than any American President, with the exception of FDR and Lincoln.  Xi is also not an unstable dictator like Mussolini or a shaky egomaniac like Trump.  Under Xi is a cadre of very competent corporate leaders.  Some of these are “in government,”  some are “in the party” and others run private corporations but all participate in Xi’s national policy.  As in a big American corporation, there are Chinese leaders who want to focus on the near term by giving in to Trump but the others will look longer term and see China “staying strong and resisting.”   President Xi Jinping and the country’s policymakers appear now to be siding with the latter faction.  Da Wei, professor at the Beijing University, said on PBS’ “Frontline ” [W]e will have another type of Cold War. I think it is a comprehensive confrontation. … If that happens it will last for quite a long time. That’s a tragedy for everyone.”

Go deeper: Trump’s long trade war

Trump Wants US to Use Socialism to Respond to Chinese Capitalism???

How the US Violates the Laws They Want to Apply to China

While the US Spent 5 Trillions of War, China Built High Speed Rail and Purchased The Majority of The World’s Shipping Fleet. 

Insights into China

The View from Europe. Trump’s US now as much an enemy of Democracy and free Trade as China! 

CHINA Becoming #1 in Tech?

Is the   US becoming a developing nation?

Is Corporate China the Ultimate Form of Government?

Will The Trump Tariffs Repeat the Harm Done in the 1930’s by Smoot-Hawley? 


2 Comments Add Yours ↓

  1. Mark Adams #
    1

    The problem for China is it has not fundamentally changed to a modern economy. It is still the economy of the emperor. This one man controls. In order to maintain control China must again turn inward and isolate itself. Potential partners at some point must insist on transparency, or at least ask where is the funding for cities with no residents and highways being paid for. Under Capitalism businesses must be able to fail, or you get bubbles. China is a real big bubble, that requires growth, and that growth has come from dependency on trade rather than true growth in its own economy, that has to be freed from government to function properly. So far China has made good bets, and covered poor bets, but nothing China has to sell has to be purchased by any American. Tariffs should mean American manufactures getting a bite at the apple, or Mexican manufactures. ConsumerChina’s behavior should be to avoid products with a tariff on it and buy substitutes. While American farmers are hurt temporarily, and consumers are hurt temporarily, China needs to resolve this more than the United States. China’s rival India is helped by the trade war.

  2. theaveeditor #
    2

    I suggest you look at my essay particularly for the idea that China is more like MIcrosoft then it is like the US. China is a big corporation that plans long term. So, ask if you were Xi, or on his board, how would you fight this war? My thoughts:

    1. Appease Trump, buy some stuff.
    2. Appease Lightizer by appearing to do something about IP. The easy way to do that would support the idea of an agreement between the US and China that would allow Chinese companies here to buy into American tech companies while agreeing that Chinese companies and American using American tech agree to pay royalties.
    3. Exporting low wage jobs to Mexico and similar places using Chinese capital so that there is a cash flow back through China. ….sounds like how GM, Boeing etc now work in China?



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