China Trade War

From a favorite blog: Humble Student of the Markets

http://humblestudentofthemarkets.blogspot.com/

A series of comments regarding China’s economic policy.

http://humblestudentofthemarkets.blogspot.com/2013/07/roach-v-pettis-on-china.html

“Michael Pettis has a different take. He wrote a Foreign Policy article about the credit crunch related convulsions within the context of the transformation from an investment-led to a consumer-led economy and also urged caution by the West in their approach to China:”

“Last week is a reminder that Beijing is playing a difficult game. The rest of the world should try to understand the stakes, and accommodate China’s transition to a more sustainable growth model. As policymakers in China continue to try to restructure the economy away from reliance on massive, debt-fueling investment projects that create little value for the economy, the United States, Europe, and Japan must implement policies that reduce trade pressures. Any additional adverse trade conditions will further jeopardize the stability of China’s economy, especially as lower trade surpluses and decreased foreign investment slow money creation by China’s central bank. A trade war would clearly be devastating for Beijing’s attempt to rebalance its economy and have potentially critical implications for global markets.”

The comment above is stunning in its implications. I translate the comment into several variants. The first and most straightforward reads, “if the West doesn’t continue to buy China’s exports there will be a global recession.”

And, if that isn’t enough of a threat, “it is the responsibility of the West to raise the living standards of China’s peasants [by sacrificing its own workers standard of living].”

Last, and most fearsome, “the West must continue to build up a China that uses its economic might to intimidate its neighbors today and will use it to build a military force to intimidate the world tomorrow.”

China is a nation that has long tantalized the Western economies and political leaders by the sheer size of its population. The West drools over the prospect of being able to sell goods and services to the Chinese population. That drool blinds the West to the self-interest of the Chinese leadership. That is, China will only buy from the West until it either steals or copies technology that enables the Chinese to sell to their own people. The Chinese market is the proverbial carrot on a stick held in front of a Western donkey to entice the donkey to pull the Chinese cart. But the donkey never gets the carrot.

The Chinese leaders know full well that their own self interest is best served by providing for its own people. It must continue to control its population. Economic freedom begets political freedom. China will only buy from the West as long as it suits them. When it no longer does various rules, regulations, laws, partnership requirements, outright theft of trade secrets and technology, and any other useful methodology will be employed to deter and defer Western benefits. The West will forever remain outside the fence looking longingly at a market they will never conquer. For a preview examine the experience of Western companies in Russia under Putin. This too was a large market the West drooled over. It has proven to be a chimera.

Given the current Chinese weaponization of its economic might the West might well respond by ceasing to be a compliant sucker market for Chinese exports. A trade war is far preferable to a military war. A trade war with China is a weapon the West can use to bend China to the interests of the West and the global welfare. A trade war could be used to pressure China to crush the North Korean (and Iranian) nuclear threat once and for all. A trade war could be used to induce China to back off from its territorial ambitions in the China Sea. A trade war could be used to align China’s global interests with those of the West in regards to the Middle East (Syria, Iran); South America (Venezuela, Cuba) and even Africa. A self-sufficient, economically powerful China is a bull [tiger?] in a global China shop.

 

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2 Responses to “China Trade War”

  1. Steven Hales Says:

    I would pay more attention to Roach (see Note below) rather than Pettis. Roach is the more balanced of the two and doesn’t see huge shifts in exchange rates that would create the scenarios which Pettis sees. For example, if China draws down FE reserves to finance a trade deficit that means it must sell foreign currency denominated assets. These proceeds will be used to purchase Yuan which will strengthen the Yuan and cause foreign goods to become cheaper to the Chinese reinforcing a reversal in trade patterns. Roach on the other hand sees a more nuanced transition where the manufacturing sector while less important from a jobs perspective because of increasing worker productivity (more capital per worker) output will continue to climb and Chinese exports move up the value chain and the other parts of the Chinese economy in the non-tradable service sector and in construction will see greater investment as urbanization of the interior continues.

    Note: Stephen Roach (Morgan Stanley), when I was in my 30s, was a go to guy on the IT worker productivity paradox (1987). His analysis showed that “networking” would amplify IT worker productivity which is exactly what happened after 1995.

  2. Tom Says:

    Well said, “The West drools over the prospect of being able to sell goods and services to the Chinese population. That drool blinds the West to the self-interest of the Chinese leadership.” And the fact that the West doesn’t seem to understand that China is ok with stealing but not having to pay for it.

    All of this compliant talk will stop quickly from China, once China has reached it’s military and economic goals. You are right on! but others seem to be blind or blinded by greed to see it.

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