The big trade news of the week is the announcement that President Trump has suspended raising tariffs from 10% to 25% on $200 billion worth of Chinese goods. This arrangement comes with a 90 day adjustment period in which the two countries agreed to work on issues ranging from the trade imbalance to China’s forced technology transfer policies. Last week, the stock market had taken some 200 point hits daily, however one non-descript commitment from both sides is all it takes for the numbers to shoot right back up to record highs.
I have a feeling this 90 day delay is just so Chinese officials can buy themselves time to figure out what to do. By then, the new session of Congress will start, and the Chinese need to see if they have any friends left to leverage (read: bribe). Before the midterms, China was endorsing a DNC win because they wanted trade to be “normalized,” AKA go back to getting everything they want, while conceding to none of America’s demands. Last week, a diplomat for the People’s Republic Cui Tiankai said that the world’s two largest economies could not be separated, and if President Trump tried there would be consequences. When asked what retaliatory measures China would take, the administrator failed to comment, only mentioning that calling in US debt held by the country was not a realistic option. I had an economics professor in college who commented from time to time that the US had China “over a barrel.” He would say that when you owe a little money, the bank owns you. When you owe a lot of money, you own the bank because you get to dictate when they are paid back.
China may have two billion citizens giving political pundits the impression that their future global dominance is all but assured. One fifth of the world’s population may be Asian, but those countries do not produce anywhere near 1/5th of the global food supply. This is where the real weakness of globalization begins to expose itself. China has also been making some noise on the oil import front, in that they are upset over the amount of US crude on the international market. They want to buy from us and not get involved with the Middle East and its problems. If there was ever a hot war between the two hemispheres, then the United States would be in a much better position to defend itself. We have all the infrastructure and raw materials required to keep us alive. They already break international fishing regulations and violate Vietnam’s Economic Exclusionary Zone searching for oil, just to keep up with current demand. If any constraints were applied to the Great Red Dragon, then it would begin to consume its own tail in short order.
While the US stock market may drop 200 to 300 points a day during the recent trade turbulence, the American media tries to play this up as the beginning of the end. Even though a dovish Fed announcement regarding interest rates can reverse months of losses in mere minutes, if you listened to any economist on the MSM networks, you would get the impression that the sky is perpetually falling. Looking across the Pacific, the Shanghai Index has lost 20% of its total value this year alone. If that happened to Wall Street, then we would be living through another Great Depression right now. That’s how catastrophic a simple 10% tariff on a quarter of the Chinese goods we import can have. I’ve noticed that for the duration of the “trade war” China has had very muted and calculated responses. Compare this to how China reacts when a US naval ship passes by one of their island bases and it becomes clear why they react differently in those two situations. This is because on the economic front they have very few options to deploy against us, other than cancelling our Happy Meal toys.