Sunday, June 24, 2018

Zero Hedge Trump Drops New Bomb In Trade War: Plans To Restrict China Investment In US Firms

The FT reports that according to officials and people briefed on the discussions, the administration has decided to restrict China’s ability to invest in or acquire US companies in the industries identified by Beijing in its so-called Made in China 2025 plan.…
"The Trump administration, kind of across the board, has very much blurred the line and seems to be saying that any significant economic challenge the US faces is also a national security challenge." 
This is not new actually. It is integral to the neoconservative Wolfowitz Doctrine of February 1992. But it is also part of a strategy that Steve Bannon brought to the Trump campaign and early administration. Since Bannon's (and others') departure, the neocon faction has grown in power and influence.

The so-called trade war that is developing is pretty naked economic warfare.

Zero Hedge


djrichard said...

How much of the imbalance in trade in goods and services can be explained by what Trump wants to block here?

Konrad said...

So let me get this straight…

[1] US manufacturers move their factories to China in order to exploit cheap Chinese labor, thereby wiping out U.S. jobs.

[2] Chinese workers toil in sweatshops for US companies, thereby building China into a manufacturing giant

[3] Products that Chinese workers make for US companies are sent to the USA, and are listed as “imports” from China.

[4] As a result of U.S. corporate greed (which Trump supports) the USA has a trade deficit with China.

[5] Trump calls U.S. corporate greed “unfair practices” by China. Trump vows revenge on China for U.S. corporate greed.

[6] U.S. workers were already smashed by offshoring, and now, because of Trump’s tariffs, U.S. workers must pay more money for goods made by Chinese workers.

[7] Trump calls this double-assault on U.S. workers “Making America great again.”


Tom Hickey said...

There is reason to think that it was never really about the trade deficit at all. That was just a cover for the real plans, 1) the Bannon-necon plan to isolate China politically and economically and surround it militarily in order to prevent China's rise and maintain permanent US global hegemony, and 2) the Navarro plan to force nations into "real free trade," involving the abolition of all tariffs and subsidies, which would result in US economic domination as the world's largest economy and financial center.

djrichard said...

Konrad, my position is that China took the US down this path by their central bank engaging in currency manipulation (printing yuan to buy US dollars from their exporters). Which had a dual-fold effect of stimulating their exporters, but also stimulating their economy in general (at least the asset-side) through what was effectively a QE operation. Where the US central bank uses QE to buy US debt, the PBoC used QE to buy US dollars. In the process, the dollars purchased by the PBoC were repatriated back to the US in exchange for US debt instruments (mostly treasuries).

But it also had a knock-on effect for US corporations. By keeping the yuan pegged cheaper, it made it financially attractive for US corporations to outsource their supply chains to China. Those US corporations knew they weren't exposed to risk of currency fluctuation, so they had a guaranteed way of reducing cost.

At some point the PBoC disengaged from this practice - at least they're not so heavy handed about it, and have a lighter touch. This was about the time they had to be more hands off in order for the yuan to be accepted into the SDR basket. All other things being equal, that should have resulted in a repricing of the US dollar, making it cheaper compared to the yuan, and would have therefore jeopardized the whole value prop for US corporations to outsource their supply chains to China. Instead, demand for the US dollar picked up in China as the PBoC was reducing their demand. So the peg stayed stable. And the demand wasn't for increased US goods and services. It was for something else. Question is what?

My speculation is that other parties in China have picked up from where the PBoC left off and are keeping up demand for the US dollar in exchange for US assets (debt instruments and stocks). Data from the IMF doesn't show that (e.g. China isn't a key contributor according to this IMF data on World investment in US), but even so, that's my speculation.

There are other sources of demand for the US dollar as well.
- Chinese interests that are buying controlling interest in corporations, either through public stock or through private acquisitions (per this article). But I don't think that's a big contributor
- US corporations making a profit in China in yuan (e.g. Starbucks) that need to convert their profit to dollars to bring the profits back home.
- dollar-based financing in China. E.g. BIS data on debt in China and its denomination
- Use of the US dollar by China for oil purchases (i.e. classic trade imbalance due the US dollar being the petrocurrency)
- A variant of the previous bullet, where the US dollar is used by China for where they've outsourced their supply chains to other countries.

In theory, the last two bullets could result in the US dollar being repatriated back to the US for goods and services. But that's not happening either. Either through outright currency manipulation by central banks in other countries or by other parties picking up the slack from their central banks in the same way as happening in China.

Bottom line, if you want more of a balance in goods and services, you're going to have to reduce demand for other things that are not goods and services.

djrichard said...

Or in fewer words, China is buying our currency by selling us goods. Why?

Konrad said...

@ Tom Hickey: I think you are correct. The whole “trade” thing “was just a cover for the real plans,” as you say, which is to encircle China.

I think that for most average Americans, “China” is an abstraction; an empty word.

However I briefly visited Shanghai, briefly lived in Singapore and Japan, and lived in India for 2 ½ years. Wherever I went in Asia, China was always a factor. Every nation factored China into its foreign policy equation. Newspapers always had articles about China, as though there was an elephant in the room, and everyone was discussing ways to avoid angering the elephant and being crushed by it.

The point is that China is an economic giant, and the leaders of the Western Empire are increasingly frightened by it, even if average people in the West don’t know what’s happening.

China is such a giant that Trump’s overtures to North Korea are part of an effort to bring North Korea into the US / South Korean camp, rather than let North Korea go to China. This is not Trump's idea. He is just obeying his handlers.

India has a huge economy and a very strong military, yet India too is worried about China. (India shares a 2,100-long border with China, and the line has been disputed for decades.) Since the U.S. Empire is becoming increasingly stupid and feeble, India is now seeking to protect itself by inching closer to Russia in its relations.

This is not as new as it may seem. For 44 years from India’s independence (1947) to the fall of the USSR (1991) India was more allied with the USSR than with the USA (even though India called itself “non-aligned”).

Matt Franko said...

“Or in fewer words, China is buying our currency by selling us goods. Why?“

All shitholes do it...

Noah Way said...

"All shitholes do it."

You must have a shitload of it.

Tom Hickey said...

A few key points that are foundational in understanding "China." "China" is a term used to lump together a whole lot of related issues. It's not just China but China is the elephant in the room.

1. Growth is happening in the emerging world, not the developed world and large firms in the developed world know this and take it into account in their planning. China is now the overwhelmingly dominant factor in the emerging world.

2. As China develops, it will become the largest economy and consequently the most powerful and influential country, regaining its historical place as the "central realm." This is already resulting in a shifting world order away from total US dominance. China is already becoming the pivot rather than the West. China is rising and the West is setting to the point that it now evident.

3. The US is committed to its total dominance geopolitically, which necessitates both economic and military dominance.

4. The US is impulsive and impatient. The Chinese are patient and long term thinker and planners.

5. Western people think that they are exceptional and that everyone want to be like them and live like them. They see everything only through their own perspective.

6. China as traditionally absorbed its adversaries rather than conquering time. It has even absorbed its conquerors.

7. There is a Thucydides trap building and fueling incipient conflict, which is becoming more and more open. Although not yet hot war, the economic war is on to prevent China's rise that threatens to eclipse US power.

This is the key dynamic going on in the great game on the grand chessboard now, as the major players, the US and China, move their pieces.

Konrad said...

@TOM HICKEY: All excellent points. I copied them and will be thinking about them for some time to come.

”As China develops, it will regain its historical place as the ‘central realm’.”

Yes. I once asked a Chinese person for the exact translation of “China.”

She said, “Middle kingdom or central realm.”

“China is rising and the West is setting to the point that it now evident.”

Yes. We can deny this all we want, but it will not change reality. As the West enters its final death throes, its leaders will resort to increasingly desperate (but futile) measures, which includes throwing millions of Western peasants into a war they cannot win.

It doesn’t matter how many tanks, planes, or ships the Empire has. Since the Empire is already defeated morally and spiritually, it will be defeated militarily and economically.