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December 29, 2018

Trump's China trade strategy is #winning

By Thomas Lifson

President Trump took a brilliant, gutsy step in confronting China over its parasitic trade strategy, and the signs today are unmistakable that he made the right call.

Consider two developments in the last few days.

China's principal stock market in Shanghai has closed out 2018 with the world's worst decline.  The South China Morning Post in Hong Kong reports:

Shanghai's stock benchmark ended 2018 as the world's worst market performer for a second year, falling 24.6 per cent over 12 months as an unprecedented trade war between China and the United States weighed on the Chinese economy and crimped corporate earnings.

The city's key stock index closed the year at 2,493.90, while the benchmark on the smaller Shenzhen bourse fell 33.2 per cent during the period to 1,267.87.  The combined capitalisation of the two exchanges fell by US$2.4 trillion to 43.3 trillion yuan (US$6.3 trillion) during the year, overtaken by Tokyo as Asia's largest equity market.

"The stock market is often the barometer of a nation's economic health, and the weakness in China's A-share market reflects the serious troubles in the Chinese economy," said Li Wenhui, an analyst for Huatai United Securities.

Don Surber looks at this data and concludes:

Chairman Xi's refusal to compromise with President Trump has cost his country $2.4 trillion so far in 2018.

That's enough to build 96 Mexican walls.

In fact, that's six times the American trade deficit.  In short, for every $1 in profit Red China took in trading with the USA, it lost $6 in its net worth.

President Trump's claim to be a master negotiator rests in part on his ability to grasp what each party to a negotiation has to lose.  He saw that China's massive trade surplus meant that any trade war would damage it far more than it could damage the United States.  Somehow, that strategic equation escaped his many critics, who roundly denounced him for threatening America's and the world's prosperity by launching a trade war, and mischaracterized him as a "protectionist," even as he made clear that his ultimate goal is "zero tariffs."


Trump and Xi in 2017 (White House photo).

His critics evidently subscribed to the theory that if the United States role-modeled open markets, then China would reciprocate and stop stealing our intellectual property and allow our goods to compete with theirs in domestic markets.  That is naïve in the extreme, for China's concept of "fair play" is not at all like that of the one-sided-free-trade crowd.  China's understanding of its place in the world is that China is naturally the dominant power, a status that was stolen from it by perfidious Westerners who introduced opium to China, fought a war to be able to sell it freely there (but not at home), and watched as China fell into poverty and political chaos, gleefully "cutting up the Chinese melon" with exclusive spheres of influence and extraterritoriality.

If Chinese leaders harbor resentment and inwardly believe that any tactic they use to regain their former status as the world's richest and most powerful country is "fair," well, who can blame them?  They will do whatever they can to right this historical wrong.  And soft-headed notions of fairness that allowed thousands of American factories to close and move production to China was something that they could get away with...until President Trump decided that enough was enough, and America's industrial workers should not be punished for the sins of the 19th-century Opium Wars.

Trump's alternative theory was that China's leaders would do what was best for themselves, given the circumstances facing them.  So he changed the circumstances facing them by initiating tariffs.  When they initiated counter-tariffs, targeting agricultural products from key states Trump needs to win in his re-election bid, Trump told the farmers of America that the pain would be temporary and watched as much greater pain was being inflicted in China, secure in the knowledge that they would "cry uncle" before he would.  And he was correct, as this tariff cut just a few days ago indicates.  China is signaling it wants a deal.  

The pain is about to get even worse, if media reports are correct:

 

 

China is discovering that production that was offshored to China can readily be offshored elsewhere.  In fact, a lot of textile production has moved out of China to lower-labor-cost nations like Bangladesh.  But with the cherished high technology products threatened, the consequences would be graver.

Time is on our side.  Trump knows it, and Xi knows it, too.

 

 

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