Trade, Currency and Military Skirmishes – Part 1

Donald Playing God
After only 7 days into the Trump administration, the time it took God to create heaven and earth,  it had already become clear that skirmishes between the US and China will be inevitable.

I use the word “skirmish” here, but everybody knows that it can potentially be a euphemism if the discords degenerate into a full-blown “war”.  At the moment, skirmishes cannot be avoided given Trump’s predisposition.  It would be natural for the two sides, especially the US, to learn some reiterative lessons before they finally opt for developing the cooperative relationship mapped out in my  Roadmap.  So it goes.

I will try to help you understand the central issues and the salient realities related to each of the three major areas of potential skirmishes, in trade, currency and military.  It would be helpful to remember a key notion, which is — the most important and ultimate purpose of US policy agenda in the world is to defend the supremacy status of the US dollar.   Without that notion, you might think the US actions and modus operandi make no sense.  That is not entirely true.

This post covers the trade issues, which are likely to be the first area where skirmishes will erupt.

US-China Trade
US-China co-dependence is none starker than by looking at the amount of trade between the two countries.  For 2015, total trade (export plus import) between the US and China was USD 558 billion (likely to be close to USD 600 billion in 2016).  In that, China’s export was roughly 3 times that of the US, resulting in US trade deficit of USD 365 billion.  Both sides admit that is a problem.

Donald said he would impose an import landing tax on Chinese goods of 45% in his election campaign.  Everybody just shrugged their shoulders until he got elected, inaugurated, and started to “fulfill” some of his “promises” quite literally!  Now people start to do their homework and, shockingly, discover that he does have the power to do these things, like an import tax, without Congressional approval.  The Chinese immediately started to prepare for the eventualities.

Simple and Not-so-simple
Trump’s simplistic thinking is that imposing a punitive tax on Chinese goods will make US-made products more competitive, and manufacturing to return to America, thus creating lots of jobs.  However, the structural components and dynamics of these trade items are not so simple.  His assumptions are fraught with misconceptions, including historical factors that were America’s own making. (Steve Jobs told Obama that, even if Apple’s i-phones are not made in China, they will not be made in America.  It is as simple as that.)

There is no doubt that a trade war will be disastrous for both countries and the world, and even minor skirmishes and partial retaliatory measures would hurt in the short run.  We knew from the history of the trade wars in the aftermath of the 1929 market crash that they spiraled into currency wars and ended up in World War II.  If not careful, Trump’s attempt to hop, skip and jump across the quicksand may land us all in a sea of sinking mud.

China Up Against The Wall?
Let us examine some facts and what China’s reactions may cause:

1.  China buys 50% of US total exports of soybeans and 20% of its cotton exports.  It can buy these from countries like Argentina, Canada, Australia, etc. even Ukraine and Poland!  If that happens, many parts of middle America would get hurt badly, farmers may even be crippled financially.

2.  China buys 30% of Boeing’s jumbo jets produced.  That is roughly the same as what it purchased from EU’s Airbus.  If it switches entirely to Airbus, and ramps up its own domestic production, Boeing and its suppliers would potentially lose as many as 5 million jobs.  China is fully capable of producing its own large passenger planes and purposely does not do so.  When and if it does, it will eventually pose a strong price competition.

3.  Actually, out of China’s export profits, 40% belong to US companies’ operations in China.  So a curb on these imports and a levy of landing tax on them will greatly hurt US business interests, not to mention the domestic Jewish markups on all sorts of Chinese imports, especially consumer products.

4.  If the aforementioned markups were to continue in spite of the higher landed costs, the middle class in America will be paying a lot more for consumers’ daily essentials.  (Hopefully that will help them wean off some of their indulgences over the long-run, but can the economy cope with the consequences?)

The key points to recognize is that US exports to China are, by and large, substitutable.  But China’s imports to the US can only be substituted at great and potentially unaffordable costs to US businesses and the general population.  Once China substitutes its US imports, like in farm produce and airplanes, they may never return.

Donald Trump, Fix Your Own Walls!

It is not that China does not want to buy American products.  In fact, it has earned all these US dollars that it needs to put to good use.  Instead, it is the US Congress that would not allow companies to sell anything good to China on account of what it myopically considered national security.  Most of the items the US Congress classified in its volumes of prohibited products are not really strategic, and even less so over time.  This policy also backfired over the long run as China ended up getting many things it could have bought from America elsewhere and, more significantly, developed the capabilities and skills to produce them domestically.  As China advances rapidly, there is less and less America can sell to China at competitive pricing.  China’s research and development and innovations are fast catching up, and in some ways already surpassing the US.  As we shall see, that has also become a problem that will deserve some focus, when we proceed in developing the eventual cooperative partnership under my Roadmap.

If not careful, Donald Trump will dig a grave for America without knowing it.  He has to lead the US out of its multi-faceted stagnacy, not plunge it into more wars, economic or otherwise.  He should be building bridges to the world and fixing America’s broken walls, not erecting new ones.
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In the next post, we will talk about the potential military standoffs and skirmishes with China.

-doublewood

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