The New China – US Trade War : A Matter of Survival

[Y_Participant 4591]

The New China – US Trade War : A Matter of Survival [1][2][4]
James G. Rickards
The Daily Reckoning

James G. Rickards is the Editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with more than 35 years of experience working in Washington and in capital markets on Wall Street.

He was the principal negotiator of the rescue of Long-Term Capital Management L.P. (LTCM) by the U.S Federal Reserve in 1998. His clients include institutional investors and government directorates. His work is regularly featured in the Financial Times, Evening Standard, New York Times, The Telegraph, and Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal.

He has contributed as an advisor on capital markets to the U.S. intelligence community, and at the Office of the Secretary of Defense in the Pentagon. Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), The Road to Ruin (2016) from Penguin Random House

On Thursday, March 22, 2018 the trade war that has been brewing between China and the U.S. broke into full-scale combat.

President Trump signed an Executive Order pursuant to Section 301 of the Trade Act of 1974. This order imposed $50 billion of penalties and tariffs on Chinese exports to the U.S.

Within hours, China fired back. China imposed tariffs on $50 billion of U.S. exports as retaliation for the Section 301 action by Trump

The first Trade War since the 1930s is now in full swing and may continue for years to come.

Many investors are familiar with the fact that President Franklin Roosevelt closed all of the banks in America and confiscated all of the privately-owned gold by Executive Order in the early days of his administration, which began in 1933.

Presidents since then have seized assets from countries such as Iran, Syria, North Korea and Cuba and imposed sanctions on Russia and many other countries by Executive Order.

Yet, relatively few are familiar with the Statutory Authority for these orders

The President does not need an Act of Congress to support such extreme actions. The laws have already been passed and the President has standing authority to act like a dictator with regard to financial assets.

The first such statue was the Trading With the Enemy Act of 1917, TWE. This was used to seize German assets in the U.S. during the First World War. It’s how the U.S. took control of Bayer Aspirin from the German firm Bayer AG.

TWE was the authority FDR used to close the banks and seize the gold. It’s not clear whom FDR considered the “enemy” when he used TWE; probably private gold hoarders. But, in 1977, the Congress enacted an even more extreme version of TWE called the International Emergency Economic Powers Act of 1977, or IEEPA.

This is the equivalent of a nuclear weapon when it comes to financial warfare.

IEEPA allows the President to seize or freeze any asset or block any transaction if the president deems it to be necessary in the case of a national emergency.

The problem is that “National Emergency” can be defined broadly to include trade imbalances, lost jobs or any other economic adversity. President Trump may now use IEEPA to block a variety of Chinese deals in the U.S. in retaliation for Chinese theft of U.S. intellectual property.

Trump has been threatening a trade war with China since before he was president. He campaigned on the trade issue in 2015 and 2016 and was poised to take action in early 2017 not long after his inauguration.

The key player in this trade war in addition to Trump himself is Robert Lighthizer, the United States Trade Representative (USTR). Lighthizer holds a cabinet-level position and is a veteran of the Reagan administration.

[Lighthizer is second from right]

In the early 1980s, Lighthizer used high tariffs on automobile imports to force Japanese and German auto manufacturers to move their plants to the U.S. This resulted in the creation of thousands of high-paying auto manufacturing jobs in the U.S. Now Lighthizer is running the same playbook.

Except this time his target is China, not Japan and Germany, and the products he is targeting are not automobiles but a long list of industries and manufactured goods including steel, aluminum, electronics and telecommunications equipment

Beginning in 1962, the U.S. turned its back on a successful legacy of protecting its jobs and industry and embraced the free trade theory. This was done first through the General Agreement on Tariffs and Trade, or GATT, one of the original Bretton Woods institutions in addition to the World Bank and IMF.

Beginning in 1995, the World Trade Organization, WTO, displaced GATT and has been the main venue for U.S. free trade policy ever since. China became a member of WTO on Dec. 11, 2001, but has notoriously broken many WTO rules since joining.

The switch in U.S. policy from quasi-mercantilism to free trade was driven partly by academics who embrace the simple version of free trade without understanding the flaws (exemplified by China and Taiwan).

The other supporters of free trade are globalists who understand the flaws well enough but value world jobs over U.S. jobs. If two or three jobs are created in China for every job lost in the U.S., the globalists consider that a form of progress toward their “one world” utopia..

I refer you to Charles Hugh Smith [4] convincing case that classical free trade theory no longer applies in today’s hyper-connected markets.

[Y – In CHS’s article [4] it is evident that the Mobile Capital in today’s markets negates not only the free trade theory of globalists, but also the protectionist theory of isolationists by the same rationale. Thus a trade war heralds a zero-sum outcome where neither party wins -Y]

With the U.S. using its nuclear option in financial warfare, investors should hope that the Chinese don’t respond in kind.

President Trump may not appreciate the extent to which China will go to protect its interests. Trade negotiations are not the art of the deal, as far as China is concerned. Their goal is national survival.

China’s economy is not just about providing jobs, goods and services that people want and need.

It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver. The overriding imperative of the Chinese leadership is to avoid societal unrest.

But China is less stable and less powerful than it appears on the surface. Its apparent stability is more of a mask concealing internal divisions.

And it is afraid that its hold on power is weaker than many in the West suspect.

Remember Tiananmen Square [3]? Rather than showing the power and unity of the Chinese government, Beijing took a different lesson from Tiananmen Square.

[Y – Background : The Tiananmen Square protests of 1989, commonly known in mainland China as the June Fourth Incident, were student-led demonstrations in Beijing, the capital of the People’s Republic of China, in 1989.

More broadly, it refers to the popular national movement inspired by the Beijing protests during that period, sometimes called the ’89 Democracy Movement.

The protests were forcibly suppressed after the government declared martial law. In what became known in the West as the Tiananmen Square Massacre, troops with automatic rifles and tanks killed at least several hundred demonstrators trying to block the military’s advance towards Tiananmen Square. The number of civilian deaths has been estimated variously from 180 to 10,454 – Y]

As my colleague Kevin Massengill has pointed out, it revealed China’s political fragility.

We all know about the massacre. But what is not widely known is that several army officers refused orders to crush protests throughout China.

Seven retired generals, including a former Defense Minister, signed a letter opposing the use of force against the people of Beijing.

“Due to the exigent circumstances, we as old soldiers, make the following request: Since the People’s Army belongs to the people, it cannot stand against the people, much less kill the people, and must not be permitted to fire on the people and cause bloodshed; to prevent the situation from escalating, the Army must not enter the city.”

“I’d rather be beheaded than be a criminal in the eyes of history,” said one general commanding forces in the Beijing military district.

They were not the only one who felt that way. As Kevin has noted, armored divisions of 10,000 soldiers allowed themselves to be stopped for days by crowds of students and ordinary citizens who brought them food and water while explaining why their cause was just.

An estimated 3,500 PLA officers disobeyed orders to crush protests. Many Chinese army officers were reportedly executed. Others were demoted, or faced court martial and imprisonment.

The Tiananmen Square Massacre, Kevin says, is an example of why and proves that the position of the Chinese Communist Party is more precarious than is widely understood, even now, almost 30 years later.

Here’s something else not widely known about the protests. The Tiananmen Square protests and massacre of 1989 did not start out as a liberty movement, although that’s how they are remembered in the West. It started out as an anti-inflation protest, and that’s how the Communists remember it.

And given China’s current economic problem, Beijing’s challenge is becoming more difficult every day. Consider what’s happening in China right now.

Growth in GDP is conventionally defined as the sum of consumer spending, investment, government spending (excluding transfer payments) and net exports.

Most large economies other than oil-producing nations get most of their growth from consumption, followed by investment, with relatively small contributions from government spending and net exports.

A typical composition would show a 65% contribution from consumption plus a 15% contribution from investment. China is nearly the opposite, with about 35% from consumption and 45% from investment.

That might be fine in a fast-growing emerging-market economy like China if the investment component were carefully designed to produce growth in the future as well as short-term jobs and inputs.

But that’s not the case.

Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused.

What’s worse is that these white elephants are being financed with debt that can never be repaid. And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful.

Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.

This wasted infrastructure spending is the beginning of the debt disaster that is coming soon. China is on the horns of a dilemma with no good way out.

On the one hand, China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes. The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.

The Communist Chinese leadership knew that a day of reckoning would come. The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).

Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.

Instead of these unpalatable extremes, the Chinese leadership is trying to steer a middle course with gradual financial reform and gradual limits on shadow banking. I’ve previously predicted that this gradual policy would not work because the credit situation is so extreme that even modest reform would slow the economy too fast for comfort.

That’s exactly what has happened. China has already flip-flopped and is easing up on financial reform.

That works in the short run but just makes the credit bubble worse in the long run. China may soon resort to a combination of a debt cleanup and a maxi-devaluation of their currency to export the resulting deflation to the rest of the world.

It is probably the best way to avoid the social unrest that terrifies the Chinese Government.

When that happens, possibly later this year in response to Trump’s trade war, the effects will not be confined to China. A shock yuan maxi-devaluation [5] will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks).

I hope President Trump knows what he’s getting into.

Regards
Jim Rickards
for The Daily Reckoning

Y –

I had previously discussed China’s economic options at length in [5] and China’s ‘nuclear’ option to deal with trade wars with the US. The trade situation since the post was written has evolved as expected.

Update on the Trade War

As at 4th April 2018, China has imposed a 25% tariff on 106 US made products totalling US$50 billion including planes, cars, soybeans and chemicals. as retaliation for 2nd round US tariffs. The 2nd round tariffs from both countries remain only threats at this stage. [6]

Even before today, one factor behind the S&P 500 Index’s sharp fall drop this week was China’s ambassador to the U.S., Cui Tianka’s, recent indication that China wouldn’t rule out the possibility of scaling back its purchases of Treasuries in response to tariffs imposed by the White House. This was widely interpreted as a weakening of the Trump administration case for tariffs.[7]

– Y

Citations
[1] https://dailyreckoning.com/trade-matter-survival-china/
[2] https://dailyreckoning.com/real-purpose-tariffs/
[3] https://en.wikipedia.org/wiki/Tiananmen_Square_protests_of_1989
[4] https://dailyreckoning.com/central-banks-killed-free-trade/
[5] /forums/topic/us-asia-pivot-to-china-the-impossible-trinity/
[6] https://www.zerohedge.com/news/2018-04-04/here-full-list-106-us-exports-china-targeting
[7] https://www.zerohedge.com/news/2018-04-04/financial-markets-war-other-means

[CarnageParticipant 22113]

Come on, turn the Trade war into a real war, the sooner the better, I wanna see SHTF, before I die.

To those following me, be careful, I just farted. Men those beans are killers.

[JB BooksParticipant 3182]

Take a deep breath and relax a little. China hasn’t actually imposed their sanctions and it wouldn’t be the end of the world even if they did. Our President is trying to level the overall playing field and China is testing us. It’s not surprising. So, the very likely end result will be that there will be some kind of deal worked out.

We just don't realize life's most significant events while they're happening. Back then, I thought, "Well, there'll be other days". I didn't realize that that was the only day. - "Moonlight" Graham

[GregB0Participant]

Thanks for a fantastic, well researched post Yumbo. It will be interesting to see if the agriculture sector will continue to be on the firing line without any support from the Government.

​"​My father didn't tell me how to live; he lived, and let me watch him do it.​" - Clarence Buddinton Kelland

[It’sallbsParticipant]

Carnage wrote:

turn the Trade war into a real war,

Well some say WW3 is already underway because much of it is being fought through propoganda, cyber attacks etc and any actual fighting will be brutal but very short.

http://www.leavemeansleave.eu

[Y_Participant 4591]

GregB0 wrote:

Thanks for a fantastic, well researched post Yumbo. It will be interesting to see if the agriculture sector will continue to be on the firing line without any support from the Government.

Thank you Sir. The agricultural production will survive but the owners will change hands. The oligarchs and banks will repossess the bulk of businesses that will be hit by these trade wars. The former owners will become workers to pay their debts.

And so we re-invent feudalism as a pit stop on the road to true communism.

[GregB0Participant]

Y_ wrote:

The former owners will become workers to pay their debts.

A recent article regarding USA ag owners stated that 80% were 60 years of age or older and those currently working on the farms for them were under 30 years of age. This generational gap, and the loss of significant resources, will absolutely ensure that the majority of farm land leaves the hands of families and winds up in the hands of the Ag industry conglomerates.

Thanks again Yumbo.

​"​My father didn't tell me how to live; he lived, and let me watch him do it.​" - Clarence Buddinton Kelland

[GregB0Participant]

It’sallbs wrote:

Well some say WW3 is already underway

The Cold War has always been WWIII and will continue as long as there are technological societies, regardless of the name of the combatants. The absence of armed conflict between the Industrialized nations just masks the fact that was is ongoing.

We help Nation X, they oppose our attempts in Nation X and escalate issues in Nation Q as a result. International Politics 101, since the days of Rome.

​"​My father didn't tell me how to live; he lived, and let me watch him do it.​" - Clarence Buddinton Kelland

[narwhalParticipant]

I don’t really see this as a ‘new’ trade war. We have not had actual free trade with the Chinese in decades since they effectively had tariffs on our goods already, not to mention stealing tech, currency manipulation, etc. What this really is the US finally attempt to fight back.

IMO though, there really is no such thing as free trade as governments are involved in business in any way. Even if there were no tariffs between the US and China, it would still be an unequal playing field since businesses in the US are under a different tax structure and regulations than China is. It’s these taxes and regulations (and cost of doing business type expense) that iphones are made in China, not the US.

On a related subject, the US government screws things up even when subsidizes industries. I haven’t looked at it in years, but it’s my understanding that the Federal government still subsidizes the corn industry. That subsidy allows the US farmers to sell corn to Mexico cheaper than it’s own farmers…putting it’s own farmers out of work. The lack of work feeds into the drug cartel industry, which in turn causes the drug problem back in the US.

Ok. Then do it.

[Anonymous 42]

This is gonna be a GREAT TIME to purchase used SHIPPING CONTAINERS! Just wait for them to pile up and cost more to store than to just give away!

I got my eye on that s~~~! A couple for storage and one buried for a root cellar/fallout shelter! connect it to my basement with a hidden tunnel!

[Y_Participant 4591]

narwhal wrote:

I don’t really see this as a ‘new’ trade war. We have not had actual free trade with the Chinese in decades since they effectively had tariffs on our goods already, not to mention stealing tech, currency manipulation, etc. What this really is the US finally attempt to fight back

The periods where trade is agreed between countries with recognised trade barriers and tariffs is the ‘no-war’ status quo. There is no such thing as a no-tariff trade pact. The WTO manages these agreements and disputes as amicably as possible – in favour of which country bribes it the most.

Where one country breaks the status quo on a trade agreement and implements unilateral sanctions – which is then reciprocated and from there sanctions start to escalate – that is (the start of) a trade war.

The US cheats – China cheats – EU cheats – EVERYONE cheats.
The question is not which country cheats – but can they get away with it. Cheating just means one party managed to outwit the other. There is no ‘fair’ – here or anywhere else.

narwhal wrote:

IMO though, there really is no such thing as free trade as governments are involved in business in any way. Even if there were no tariffs between the US and China, it would still be an unequal playing field since businesses in the US are under a different tax structure and regulations than China is. It’s these taxes and regulations (and cost of doing business type expense) that iphones are made in China, not the US.

I recommend the article by Charles Hugh Smith on the citation list [4] very highly. There is really no such thing as a China or US product anymore. Mobile capital has made globalist (free trade) and isolationist (protectionist) theories of trade irrelevant.

narwhal wrote:

On a related subject, the US government screws things up even when subsidizes industries. I haven’t looked at it in years, but it’s my understanding that the Federal government still subsidizes the corn industry. That subsidy allows the US farmers to sell corn to Mexico cheaper than it’s own farmers…putting it’s own farmers out of work. The lack of work feeds into the drug cartel industry, which in turn causes the drug problem back in the US.

The intention of subsides and loans is to force small business owners into debt and then into forced liquidation of their assets so that big business can take over.

The economic system is always about wealth transfer to the oligarchs. There is no such thing as capitalism – we’ve been had for a long long time.

[Y_Participant 4591]

Anonymous wrote:

This is gonna be a GREAT TIME to purchase used SHIPPING CONTAINERS! Just wait for them to pile up and cost more to store than to just give away!

I got my eye on that s~~~! A couple for storage and one buried for a root cellar/fallout shelter! connect it to my basement with a hidden tunnel!

You ROCK bro’

[Faust For ScienceParticipant 22521]

China and the rest of the world believe they can continue to bleed the U.S. indefinitely of wealth without consequences.

At a annual $500 billion dollar trade deficit with China, the U.S. has nothing left to lose with a trade war with China.

Those bitching about this are likely profiting from this thief and they are afraid they are going to lose everything over this trade war.

[Faust For ScienceParticipant 22521]

Y_ wrote:

GregB0 wrote:

Thanks for a fantastic, well researched post Yumbo. It will be interesting to see if the agriculture sector will continue to be on the firing line without any support from the Government.

Thank you Sir. The agricultural production will survive but the owners will change hands. The oligarchs and banks will repossess the bulk of businesses that will be hit by these trade wars. The former owners will become workers to pay their debts.

And so we re-invent feudalism as a pit stop on the road to true communism.

This is why the globalists want to take the guns from the people because the U.S. is on the verge of a class warfare revolution.

[PistolPeteParticipant 27143]

WOW once again we have all been schooled. I only have one tiny contribution. One of the other results of the No Trading With the Enemy Act of 1917 was it left Springfield Armory off the hook–legally.

Background. In the Spanish American war US troops were armed with the Krag–Jørgensen rifle. The Spanish were armed with a relatively new version of the Mauser. Frankly the Krag was inferior to the Mauser and as a result the Krag was dropped and the military adopted the Springfield 1903,which used a copy of the Mauser bolt action.

Springfield didn’t bother paying Mauser any sort of royalty, or licensing; they just ripped it off. Mauser of course sued them in US court and they were going to win BUT along came WWI and the act of 1917, the suit against Springfield was dismissed and to add insult to injury when US troops arrived in Europe in 1917 they were armed with the Mauser pattern rifle to use against the very Germans who designed it.

Anyway thank you again Yumbo for schooling all of us once again.

[Y_Participant 4591]

It’sallbs wrote:

Well some say WW3 is already underway because much of it is being fought through propaganda, cyber attacks etc and any actual fighting will be brutal but very short.

You are quite right. There are four stages economists agree on. Currency wars, Trade Wars, Diplomatic Wars and then Shooting Wars – in that order with possible overlaps.

The current cycle starting with a Currency War is widely believed to have started when Obama in 2010 C.E. started a weak US dollar policy to kick-start the US export market.

The Trade War was fully realised about July 2017 when the US passed one of the toughest economic sanctions against the Russian Federation (ostensibly for terrorist acts and other evil deeds).

This has progressed to a possible US Diplomatic War / Shooting War showdown on three fronts – North Korea / China, Iran / Russia or Russia / China.

The Shooting War usually starts to mask failure of economic policies. This stage is coming but no one knows exactly when.

You can ask MGTower or any spare containers he may have.

[Y_Participant 4591]

PistolPete wrote:

Anyway thank you again Yumbo for schooling all of us once again.

Very kind of you. It’s mutual bro’ – I have learned heaps from your posts and others as I go along too.

[Ranger OneParticipant 16836]

Anonymous wrote:

This is gonna be a GREAT TIME to purchase used SHIPPING CONTAINERS! Just wait for them to pile up and cost more to store than to just give away!

I got my eye on that s~~~! A couple for storage and one buried for a root cellar/fallout shelter! connect it to my basement with a hidden tunnel!

Shipping containers are designed to be stacked on each other, not to be buried in the ground. My shelter is going to be concrete and cinder blocks, and will only cost $3-4,000. (it will be 24’x10′, with a 40’x3′ tunnel/underground gun range).

All my life I've had doubts about who I am, where I belonged. Now I'm like the arrow that springs from the bow. No hesitation, no doubts. The path is clear. And what are you? Alive. Everything else is negotiable. Women have rights; men have responsibilities; MGTOW have freedom. Marriage is for chumps. If someone stands in the way of true justice, you simply walk up behind them and stab them in the heart-R'as al Ghul.

[Y_Participant 4591]

Faust For Science wrote:

This is why the globalists want to take the guns from the people because the U.S. is on the verge of a class warfare revolution

You are right as usual – I see gun control as THE key item that needs to be carried out before the real fun begins.

[Ranger OneParticipant 16836]

I think it is important to note that when people act worried about a trade war, they are ignoring the effects of a “trade surrender”. The default mode of the US government since it has been in the palm of globalists has been “trade surrender”.

We simply refuse to fight back, and call that “free trade”.

Countries that are ruled by people that aren’t globalists are less willing to sell their own people out and thus will have advantages over societies governed by traitors.

All my life I've had doubts about who I am, where I belonged. Now I'm like the arrow that springs from the bow. No hesitation, no doubts. The path is clear. And what are you? Alive. Everything else is negotiable. Women have rights; men have responsibilities; MGTOW have freedom. Marriage is for chumps. If someone stands in the way of true justice, you simply walk up behind them and stab them in the heart-R'as al Ghul.

[Author]

Posts