Monday, May 20, 2019

Trump's Strategy in the China Trade War - Gary Gindler


by Gary Gindler

Perhaps we are witnessing a grand miscalculation on the part of the Chinese.

A recent stock sell-off was "explained" to the public as "investors are worried due to tariffs on Chinese imports." However, it should be known that market makers are doing this on a regular basis: from a cacophony of daily news, they pick up one story and broadcast it as a "reason" for the stock market moving up or down in a particular day. It makes the unsuspecting public (who is always positioned in a way to maximize losses) feel "good" and "in the know" even if people lose money at every market turn — fake news at its best. However, keep in mind that the sell-off manifests much deeper reasons: reconfiguration and correcting decades-old unfair trade imbalances.

The best tariff (tax on imported goods) equals zero — at least this is what standard economic theory says. However, such a rule is valid only when both trading partners are set at zero. If either side moves one iota above zero in tariffs, it makes its population pay for that move. So what happens when one party does not respond to an unfriendly move from zero to some non-zero tariff? In a short time frame, it hurts the side that makes such a move, but in the long run, it could eventually bankrupt businesses on the other side and, in turn, bring enormous benefits for those who made such a move first. The more time other side keeps indifferent, the more it loses in the end.

Enter China: it established non-zero tariffs years ago on practically all American goods and services, while the United States was busy discussing the stained blue dress, "hanging chads," "9/11 was inside job," "keep your doctor," and "Trump is Putin's marionette." As a result, many American businesses moved to other countries, including China, and took millions of jobs with them. The Maoist Chinese rulers were completely satisfied with this American complacency. (Let us recall that Maoism differs from other leftist -isms in an area of "coexistence." Maoism declares that during the transformational period from capitalism to communism, both capitalistic and collectivistic enterprises coexist — both under strict Communist Party leadership. That is why all Chinese billionaires are close to the Communist Party apparatus.)

American decades-long inaction led to enormous imbalances in the world market. Every independent observer understands that the situation on Trump's plate does not have any suitable solution besides going back to the mutual zero tariffs mode. However, the United States cannot do this unilaterally, because the situation has reached a breaking point. 

Trump knows all this. He also knows that any country that unilaterally increases tariff hurts domestic manufactures in the short term. The solution he implemented to alleviate this is brilliant. Trump decided to increase external taxes (tariffs) and, at the same time, to decrease domestic taxes. 

Will the recent painful moves by the American side in the tariff war make Chinese communists think harder? Not at the moment. China buys about 180 billion dollars' worth of American goods in a year; America buys about 560 billion dollars' worth of Chinese goods. This asymmetry, known as the trade deficit, is a double-edged sword: on the one hand, an increasing trade deficit means increased Chinese profits. On the other hand, it means a loss of leverage in trade disputes simply because the Chinese have a bigger amount to lose. 

To explain Trump's approach further, let us imagine the world economic imbalances as a pair (i.e., the U.S. and some other country) of communicating vessels that use money as their fluid. If the level of fluid in one of such vessels increases (i.e., the wealth of one country in respect to the other), the level of fluid in another vessel will try to compensate. The law of economic gravity equalizes the levels of fluid (i.e., negates economic disparity).

How is it possible to correct such an imbalance? Possibly by relocating businesses from one country to another. China has been doing this for decades by using various tricks; tariffs are just one of them.

Now it is America's turn. Trump pushed for substantial tax decreases for domestic manufacturers and substantial, painful tax increases for the foreign ones. The proverbial "big sucking sound" everybody hears is the sound of businesses relocating back to the U.S., bringing with them jobs, prosperity, and a headache for Democrats. Such massive relocation of businesses and accompanying wealth transfer would not be possible without Trump's double punch — first on the domestic and then the international front. 

The world is on the verge of a massive exodus of manufacturing, investing, and finances from China and all other countries into the United States. The communicating vessels must equalize the trade imbalances, whether one likes it or not, and President Trump's double punch approach triggers ejecting businesses from other countries and injecting them into the U.S.

Leftists dream of "wealth redistribution," too. However, their latest endeavors in this arena failed spectacularly: NAFTA, TPP, and the Paris Climate Accord. All these globalist schemes of redistributing wealth from the United States to underdeveloped countries were either short-lived or dead on arrival. Trump's wealth redistribution differs from the leftists' one not only in scale. It differs in its implementation mechanism: if leftists can achieve their wealth redistribution only by force, Trump's free-market approach employs market's internal mechanism for self-regulation and self-correction.

By retaliating in the decades-old tariff war, Trump has no choice. Either China eventually bankrupts the United States or the United States bankrupts China. Finally, there is the third commonsense desired outcome: both parties settle for free trade with zero tariffs.

In stark contrast with all previous tariff wars known to humanity, all three such outcomes are negative for China due to its deep dependency on the American market and American know-how. 

In an attempt to show Trump who is in charge in Asia, Chinese communists forced North Korean communists to fire two small rockets. Both rockets fell into neutral waters less than 300 miles from the shore. Just to confirm otherwise, the United States launched two ICBMs toward the East. One was launched about 10 minutes after North Korean rockets and flew about 6,000 miles, another one about 7,000 miles. Both ICBMs were unarmed and dived into the Pacific. Everybody noticed the difference, not just in Asia. 

Perhaps we are witnessing a grand miscalculation on the part of the Chinese, who for some reason blindly believe the "mainstream" media that Trump will be soon removed from office via impeachment or that Joe Biden (who is practically under complete Chinese control) has good chances to defeat Trump in 2020 elections. So the Chinese side decided to wait and has torpedoed its recent agreement with Trump. Big mistake.

No wonder the current mood in China among those who do not watch CNN is pretty telling: "manufacturers who mainly sell to Europe and the United States need to start taking pain killers again." The recent Trump moves increased tariffs on about one third of the Chinese goods America buys. Watch and see what happens when Trump approaches the two thirds mark and beyond.


Gary Gindler, Ph.D. is a conservative blogger at Gary Gindler Chronicles. Follow him on Twitter.

Source: https://www.americanthinker.com/articles/2019/05/trumps_strategy_in_the_china_trade_war.html

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