Thursday, August 29, 2019

Trump is finding the trade war not so easy to win after all

Edited version was first posted on Asia Times.

American President Donald Trump is getting discombobulated over the trade war he started with China over a year ago. He continues to claim that the US economy remains “incredibly” strong, that “we will eventually make a very good deal with China, but we are not in a hurry.”

But Wall Street is not buying. Recent stock indices have roiled violently, dropping when Trump threatens to add tariff on billions of imports from China and recovering when Trump finds excuses to delay levying the tariffs.

Trump, of course, would never blame himself as the cause of bad news on the stock market. He is blaming the Federal Reserve for unwilling to lower the interest rate as the cause for the downward volatility of the equity market. Thus, he already has a designated scape goat in place for when the stock market tanks.

As for his easy to win trade war with China, Trump is getting visibly frustrated that China is no longer acting like the patsy he has been expecting. It’s probably not his fault that he thought negotiating with China was going to be a piece of cake.

In the beginning, advisers of President Xin Jinping suggested an approach to Trump based on the assumption that China was dealing with an American leader who was rational and has the interests of the American people, if not the world, at heart. Thus, Xi flew to Mar-a-Lago to make nice with Trump and even gave Trump a way over the top state reception in Beijing.

Alas for Trump and his team, they erroneously concluded that these gestures meant that China’s negotiators will be soft and can be intimidated by harsh demands and manipulated by bait and switch tactics. Lighthizer and Pompeo began by making outlandish demands that China renounce their national plan, “Made in China, 2025” and change the way their state-owned enterprises are managed.

China revised their negotiating strategy

Gradually the Chinese negotiators began to realize that being open minded and willing to compromise was no way to deal with the American team set on negotiating in bad faith. While they continued to meet with the American team with courtesy, China offered no new concessions and began to prepare for a long standoff by adjusting their strategy.

Judging from the results of the trade data one year after the trade war, China appears to have weathered the storm far more successfully than the US.

For the year ending July 31, US export to China fell by 38%, worth $23 billion equivalent to 15% of annual US export to China. China’s export to the US dropped by 14%, worth $18 billion which was only 3% of China’s annual export to the US. The US trade deficit with China, the alleged reason for Trump to wage the trade war, has widened rather than narrowed since the trade war.

While China raised the tariff on imports from the US as a tit-for-tat measure, China lowered tariff on goods from other countries at the same time. Before the trade war, China’s average tariff on all imports was around 8%. After the trade war begin, tariff on US imports averaged 20.7 % compared to 6.7% on all the other countries selling to China.

Gaining market share in China at the expense of the US

Thus, all the exporting countries in the world except the US are enjoying increased sales to the second largest economy in the world. Canada is such a beneficiary. China’s import of agricultural products from Canada has increased by 63% while the US suffered a drop of 70%. A joke going around is that all the Maine lobsters are migrating north and to be sold as Canadian lobsters for the Chinese dinner table at a lower price than ever.

More than half of China’s export to the US are either made by American corporations in China or by contract manufacturers for the American companies. The import duty being collected (Trump’s so-called free money) by the treasury is paid by the American consumer and/or show up as additional cost by the US company.

On the one hand, Trump can’t get enough of the free money. On the other, he’s holding off on the next levy of tariffs because it would be too close to the Christmas season and would hurt the American consumer. Another clear example of contradiction emanating from an economic ignoramus.

A way to avoid the tariff is to make it elsewhere. A popular destination is to move to Vietnam from China. True, China would lose the jobs to Vietnam, but the ownership of the business would remain in the Chinese hands. This change in manufacturing location has been very popular, to the point that Vietnam is now enjoying the kind of trade surplus that is raising Trump’s ire. 

Navarro was wrong

Contrary to the original thinking by such people as Navarro, only about 3% of American manufacturing has actually returned to the US as a consequence of the tariff on imports from China. The trade war has led to an expected lose-lose outcome, but it would appear that China has managed to contain the damage far better than the US.

Somebody needs to teach Trump the economic principle of comparative advantage and the benefit of world trade. Unfortunately, it would not be Navarro, Kudlow, Bolton or anyone else in his inner circle. None care to tell the boss what the boss doesn’t want to hear.

In fact, the foreign ministers of China, Japan and South Korea would be able to give Trump the tutorial in economics that he badly needs. They are currently meeting in Beijing to promote economic cooperation and safeguard free trade. Specifically mentioned in the agenda is to strengthen cooperation on big data, artificial intelligence and 5G. The very same areas that the Trump administration fears competition from China. 

That the three Asia powers with quite disparate domestic and global agendas can meet to discuss cooperation on matters of common interest would suggest that the foreign ministers can also give Trump lessons on international relations and diplomacy.

The Wall Street Journal on August 20, 2019 ran an opinion piece entitled, “Trump is Losing the Trade War with China.” The author suggested that the US can more effectively deal with China by forming coalitions with other countries. (The author neglected to point out that such coalitions are virtually impossible given Trump’s go-it-alone approach.) For the Journal to declare Trump losing the trade war has to be disconcerting for the Trump administration.

American economists expect recession

On top of that, according to a widely reported survey just released by the National Association for Business Economics, 75% of their members surveyed expected a recession before the end of 2021 while the other 25% expected to see signs of the recession as early as 2020. No one expected no recession. The main source for their pessimism is coming from the negative fallout of the trade war.

Trump believes that the prospects of his re-election are tied to the stock market. Since stock market declines generally lead actual recession by about 6-9 months, the timing of the market drop associated with a looming recession could be quite damaging to Trump’s re-election. Despite his bravado, members of his team such as Kudlow and Navarro have been scurrying around the media circuit talking up the economy and denying any signs of economic slowdown.

When things go wrong, somebody in the White House gets fired. When it becomes obvious that the trade war is not turning out as expected, and the stock market does tumble, someone will have to walk the plank. Most likely that would be Navarro. He sold Trump on taking on China and convinced him that a trade war was easy to win.

Friday, August 23, 2019

Nathan Rich lambasts NYT coverage of Hong Kong

See for his critique of the NYT slanted and bias coverage of the HK protest.

In contrast, see how CGTN's review of timeline of incidents leading to the protests, The program has also carefully document the work of National Endowment for Democracy.

Monday, August 19, 2019

Book review: The China Mirage

As the US China relations worsen steadily, it's more critical than ever that the American public pick up a copy of James Bradley's "The China Mirage," lest America's tragic history in Asia is repeated by the present White House, unguided by facts and cultural understanding.

Armed with comprehensively thorough research and meticulous documentation, the author described a history, beginning from the Japan's Meiji era to present day, that the American leadership has never understood Asia and repeatedly made erroneous assumptions about the Asian countries and Asian culture.

Theodore Roosevelt admired Japan because the emissary from Japan was one of the unusually rare (at the time) individuals that graduated from Harvard. From his friendship with Baron Kaneko, Roosevelt became convinced that Japan as the most westernized country in Asia will lead an enlightened Asia to join the western world. He acted on his impression by secretly agreeing with Japan that the US would not stand in the way of Japan's invasion and occupation of the Korean Peninsula. Thus the fate of millions of Koreans was sealed by a US president who never set foot in Japan.

Franklin Roosevelt was similarly influenced by the Soong sisters and their brother T.V. Soong. This family was also educated in the US, spoke flawless American English and furthermore were apparently devout Christians. They convinced Franklin that Chiang Kai-shek, who married the youngest of the Soong sisters, and the Kuomintang would lead and transform China into a western democracy.

State Department officials based in China during WWII reported that Chiang enjoyed virtually no popular support, contrary to Mao Tse-tung and the Communist Party that had become a viable fighting force against the Japanese. These were officials that spoke fluent Chinese and kept in frequent contact with both sides. Their reports were ignored.

The book described a litany of mistakes made by Washington that also led to the Korean War and later the Vietnam War. The common root of all these mistakes was decisions made based on total absence of any knowledge of Asian culture and history and the presumption that Asian countries all desperately want to become democracies just like America.

Author Bradley not only relied on usual published sources but he also dug deep from obscure references and personal papers rarely visited by others. That he has assembled his findings into an entertaining narrative should not diminish the importance of his findings and the lesson from history that we must not ignore.