Trade What?

“Trade wars are good, and I am going to win.”
– Donald Trump

No Mas For Gary Cohn
Donald Trump’s chief economic adviser ex-Goldman Sachser Gary Cohn resigned. He has had enough. The last thing he needs is to be associated with or responsible for the consequences of a trade war.

As in late episodes of The Apprentice, Trump is down to a skeletal staff. To wage his trade war, he elevated Peter Navarro to be his fall guy. Navarro is considered an underweight relative to others in the Trump team, and was moonlighting in academia before joining Trump’s staff, ostensibly to beef up Steve Bannon’s alt-right contingent. His book Death By China gives him the credential, if not the credibility, to help Trump feign his China-bashing. What Gary Cohn can earn on Wall Street in a month, would probably be more than what Navarro earned in ten years. Time for Gary to head for the beach. Then save the time to go to China for some real business.

Trade war is a lose-lose proposition. That is the lesson from the Great Depression. Some also linked it to the causes for the eventual outbreak of the Second World War.

For the seemingly maniacal Donald Trump, lighting a match in a packed theatre and yelling “fire” may be part of his occupation. Except this time, he may be out-matched (no pun intended) by the Chinese. China reiterated its “3 do nots” policy on trade war : do not encourage, do not initiate, but do not fear.

As usual, things are not what they seem on the surface.

Donald Is Not A Duck
Donald Trump is no dummy. He is a shyster who can go through a dozen disguises between sunrise and sundown. He uses devils-speak and inflammatory hyperbole to hypnotize the gullible, who are the majority in a democracy. When I was asked what I thought about his presidential candidacy in June, 2016, I said he was a demagogue. That was just the first brush. The painting that is shaping up with time is far more complex. He deliberately plays the constantly erratic, to confuse his antagonists.

So what is this latest rant about? You need two words to solve the puzzle — midterm elections.

During American election seasons, bashing China is a competitive sport among politicians. No candidate can afford to be outperformed by his opponents on “standing up to China”. Trump has to do his part, in order to help his party and key supporters win or keep their seats in Congress.

The stakes are high for Trump. Lose Congress and he will be a lame-duck for the remaining two years of his presidential term. In the runup to his re-election campaign, he will have a hard time rounding up the money. If he does not bash China, he will also risk losing his alt-right support. At the very least, he has to put on a very good show, while counting the probabilities of votes.

Donald does not want to be a Duck.

Navigating Through The Fog
Understandably, the Chinese are perplexed and, before retaliating, want to calibrate the matter precisely. There is a much bigger picture, namely, the Roadmap process of US-China relations and its linkage to global destiny.

a. The Roadmap Is Still Working
During the past two weeks, China dispatched their fire-fighting team to Washington to meet Trump. Through the goodwill of Henry Kissinger (who was photographed in the Oval Office conferring with Trump a couple of days before), China’s Senior State Minister Yang (Tiger) Jiechi came to brief and de-brief his American counterparts. Then, in a very special move, China sent Liu He, the heralded new official head of strategic and economic development and financial affairs, to meet with Donald one-on-one.

The gentlemanly Liu’s job was simple. After asking Mr. Trump about his true intentions, to which the self-professed “Artist of Deals” would of course hold all his cards close to his chest and verbally blabber some bluffs, Liu wasted no time and got straight to the lowdown. He shared with Trump a small cache of statistical facts, data and hypothetical projections. Their meeting lasted less than an hour, in what both sides described as frank and practical. After the meeting, Liu said both sides expressed the belief that there will not be a trade war. Donald said he would be open to compromise. (I think he realized that he had covered up the wrong part of his anatomy with the Chinese.)

b. Putting On A Show
Right before his meeting with Liu, Trump pulled his customary grand-standing by announcing tariffs on steel and aluminum. Wait a second. Looking at my facts sheet, I found China accounted for only 3% of our steel imports. Canada is the largest with 18%, Mexico with 9%, EU with 11%, South Korea 8%, Brazil 9%, Russia 10%, Turkey 9%. So who are we launching this war against? Why are we punishing our friends and allies? Or is that just collateral damage? Immediately, there were uproars around the globe, and a chorus for retaliation.

Donald is breaking other China-wares, while professing to be bashing China.

Meanwhile, Liu used hypothetical illustrations to drive home his point with Trump. While in Washington, he was able to tell his hosts that he “heard” China just placed a big order for wheat with Russia. That does not mean China will necessarily reduce its purchases of farm products from its American friends in the farm-belts. The special relations between the US and China under the Roadmap process takes priority. But instead, China can buy less from Australia, the US ally whose leader has been zealously bashing China lately. There are also real competition from other big wheat producers such as Argentina, Ukraine, Kazakhstan that must be taken into consideration, not to mention Canada. Of course there are similar situations with soybean, corn, millet … and sorghum from Texas, which can make a good Chinese white liquor, a product with a huge consumer base.

All past US presidents in the last twenty years had imposed punitive tariffs on specific imports. They served to apply pressure on our trading partners in ongoing trade negotiations, such that we gained more concessions. But nobody called these trade wars. Only Trump does. In effect, he is using China as an excuse to pressure all other trading partners, which is typical Trump efficacy when he pulls off his “cunning” antics. But his hyperbolic rhetorics may trigger bigger counteractions than usual, and actually take the world into a warring tailspin.

c. Sacrificial Apple
Another illustration Liu can use is the iPhone. To reduce the trade surplus with America, China can stop assembling iPhones, and the Foxconn Apple-assembly plants will instead switch to making high-end Chinese-brand smart phones for China’s much bigger domestic market. It will tell Apple to make its iPhones elsewhere, thereby reducing China’s trade surplus with the US.

Tim Cook would freak out if that were the case. China exports an i-phone for say $100. It is blamed for causing a $100 trade deficit to the US by Trump. But the Chinese businesses make only $ 10 on that, Apple and other US licensors, Korean and Japanese parts suppliers make $ 70. Apple the importer/distributor marks it up by another $ 150 to sell it to US consumers for $ 250.

Now, Chinese workers may earn $ 3-5 an hour, but they make it up by working overtime. The factories operate 3 shifts a day in order to meet Apple’s demanding deadlines. If the iPhone were to be made in the US, it would cost Apple much more, and it would be unable to meet demand. The consumer may have to pay more than $300 for the product and even then, Apple’s profit would be significantly reduced. Furthermore, it will not be able to shelter away the licensing fees to low-tax Ireland, like it can when producing offshore.

That is what is meant by lose-lose. But relatively speaking, China has substitutable alternatives (as I have mentioned before). We have few. People like Navarro who think that jobs will be created this way in America simply have not done the basic homework. American consumers may even end up buying imported Huawei to fill their demand gap, when Apple cannot deliver domestically-made i-phones fast enough.

So Trump may be right. There will be a winner, although it may well be China.

A Different Tune … At Least For Now
Donald Trump was on the phone with Xi on Friday. It was a relatively long call. Trump thanked Xi profusely for helping guide the latest development in the Korean Peninsula, and for his wisdom in encouraging dialogues to ease tension instead of spiraling militaristic escalation. The two separately affirmed the correctness of continuing the cooperative relations between US and China. No mention was made of trade war.

Trump congratulated Xi for the successful convening of China’s 13th People’s Congress (China’s highest legislative assembly), and the 13th session of Chinese People’s Political Consultative Conference (China’s highest body in its elaborate system for attaining substantive and effective, rather than nominal but ineffective, democracy).

As for China-bashing in America? It will continue. (These are my words, not their.)


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