World Affairs

Art of the Deal v. Art of War. Who just won in the US-China trade war?

Total capitulation? Art of the Deal? There are actually some very interesting global dynamics at play and lessons to learn. First, to summarize, Trump announced a ‘Phase 1’ of trade deal with China. Moreover, to the dismay of many of his supporters who are virulently anti-China, he said the following: “There was a lot of friction between the US and China. Now it’s a love fest! That’s a good thing.”

 

Why Trump made the deal: As I have written numerous times over the last 1.5 years, the trade war with China was a futile effort. China is too strong, the US is too dependent on China, and it’s impossible to move any meaningful amount of manufacturing out of China.

Moreover, Trump is facing re-election and now, to make things worse, possible impeachment by Democrats. He needs a win. The best solution is to get a partial deal and declare victory.

Winners and Losers: While the US didn’t get its biggest demand — structural changes to the Chinese system — Trump certainly won some decent concessions. These include

  • China opening up its financial sector to Wall Street
  • US companies operating in China without joint ventures or technology transfer
  • Currency deal (strengthening Yuan)
  • Chinese purchase of agricultural products

Winner #1: The people who run the US are the financial guys — Goldman Sachs, JP Morgan, Blackstone, Fidelity, Vanguard, Citigroup etc. These guys don’t give a damn about manufacturing, which is a low-profit operation. The mega and easy profits are made in stocks, bonds, mutual funds, insurance, derivatives etc.

The ultimate dream of these Wall Street types is to tap into the Chinese market, which has the world’s largest middle class with the fastest growing wealth. Starting next year, these financial guys will be able to set up fully foreign-owned firms that specialize in futures, securities and mutual funds.

Winner #2: China comes out as a winner, even though it has suffered and compromised quite a bit in the negotiations. First, the US attack has forced Chinese companies to accelerate their plans for technology independence. Second, the trade war has helped strengthen the Chinese communist party and has increased the sense of nationalism among the public. China has now proven to the world and itself that it can stand up to the US — it didn’t fold in the trade war; numerous countries have refused to ban Huawei or drop out of the Belt and Road Initiative in spite of a lot of American pressure; and US corporations like the NBA and Apple have bowed to China. Third, the opening up of China will create competition and eventually improve Chinese companies. Finally, this truce will stabilize China’s economy and stop America’s hybrid wars — watch how quickly the protests in Hong Kong fizzle out; and watch how the Uyghur “concentration camp” story gets forgotten by the US media.

Partial Winners: US corporations are partial winners, and US farmers will go back to where they were before.

US corps will be able to export more, when the Yuan becomes stronger. Of course, it depends on how much and how fast Yuan rises. Also, Trump says that China has agreed to buy $40 or $50 billion worth of US agricultural products, but farming is not like a factory where you can double the output easily. So, farmers will just go back to the status quo before the trade war began.

As a historical note, George W. Bush forced China to value Yuan by about 20% (see pic below).

Yuan -- trade war

“Down” means Yuan gets stronger

Just like Bush didn’t break China, Trump won’t break China by forcing another 20 or 25% rise in Yuan’s value. In fact, that will work just fine for China, which wants to (1) move its economy more towards consumption and (2) make Yuan an international currency.

Losers: First, all the rabid anti-China, anti-communist and anti-globalist conservatives are going to be deeply disappointed. We are not decoupling with china and, worse, we are becoming more interconnected with China. There’s a big crowd on social media who spew insane things like China is our biggest enemy every day! Followers of Steve Bannon, Peter Navarro, Gordon Chang, Kyle Bass etc. will be going through the five stages of grief.

Also, the losers will be those who dreamed of manufacturing jobs streaming back from China to the US. (They may come back 10-15 years from now when industrial robots are much smarter).

Conclusion

In his White House briefing, Trump also mentioned a couple of times that this deal is good for world peace. Whether he meant it or not, the sentiment is right. The concept of “Chimerica” may have a chance to live a little longer. However, there is a catch: US elites may still be dreaming of the “Phase 2” of the deal.

What’s in Phase 2: This is the failed dream-plan to stop the rise of China. This includes “structural changes” to China’s economy — basically making China open up its entire economy to foreign banks/corporations and dismantle its socialist system. Such changes will mean that there won’t be any state-owned enterprises or government-directed plans like “Made in China 2025.”

From the beginning, US elites were trying to break China like they did with Japan in the 1980s. In the Plaza Accord, the US forced Japan to double the value of Yen, move car manufacturing plants from Japan to the US, accept crippling sanctions on Toshiba, and handover valuable semiconductor technology patents to the US. All these were possible because the US still occupied Japan. And the lead American negotiator who made it all possible was … Robert Lighthizer … who’s now been leading the charge against China for more than two years.

Phase 2 will never happen. Unlike Toshiba … Huawei and other Chinese companies now under the “entity list” can survive without US technology or market. Unlike Japan … China is an independent country. And when few days ago China revealed its hypersonic missile (DF-41) that can carry 10 nuclear warheads and strike 10 US cities at the same time within 30 minutes after launch … the US realized that gunboat diplomacy or nuclear diplomacy are off the table.

The ghosts of Opium Wars and the Century of Humiliation made sure that China was prepared for this moment.