Trade War with China

China is living up to the 90-day truce that President Xi Jinping and U.S. President Donald Trump reached during their meeting in Argentina on December 1. In the last few days, it purchased over 1.5 million metric tons of soybeans and suspended an additional 25-percent tariff on U.S.-made vehicles and parts and 5-percent duty on 67 other auto items for 90 days, from January 1 to March 31 in 2019.

The 3-month period reflects the duration of the tariff. Should an agreement not be reached by the end of the truce period, the trade war would resume or even escalate. Trump vows to raise the 10-percent tariff on the 200 billion U.S. dollars' worth of Chinese “imports” to 25 percent and might impose duties on another 267 billion U.S. dollars of products from China.

China will undoubtedly retaliate, rescinding the tariff suspension on U.S.-made vehicles and imposing other measures.

Ending U.S.-China trade war is crucial

Ending the trade war is crucial, particularly for Trump. U.S. stock market prices dived in large part because most of the “imports” are U.S. goods made in China. In this regard, the tariffs amount to raising taxes on U.S. industrial and consumer goods, leading to higher production costs and final product prices.

The response from U.S. businesses and consumers were harsh and swift, reducing investment spending and turning the House of Representatives over to the control of Democrats. Indeed, Trump lost most of the Rust-Belt and food-belt states that elected him in 2016.

Chinese factories, particularly those set up to make or assemble goods – electronics, parts, toys, etc. – destined for the U.S. market, would downsize or even close because it might be difficult to find alternative markets.

Because of an increasingly interdependent and interconnected world, continuing or escalating the trade war could put the global economy and security at risk.

Moreover, the Mueller investigation into allegations that Trump's campaign conspired with Russia to influence the 2016 presidential election has heightened with the indictment of Trump's former lawyer Michael Cohen. The Democrat-controlled House of Representatives would most likely investigate Trump's alleged tax issues and other questionable acts.

Last but not least, the presidential election cycle is just around the corner. Should the economy suffer because of his trade war, Trump's re-election for a second term could fizzle.

Thus, he needs a “good” trade deal with China. Perhaps as a way to improve his re-election fortunes and getting a good deal from China, Trump indicated that he would intervene in the Meng Wanzhou extradition case if it would serve national security interests or help close a trade deal with China.

Why China suspends additional tariffs on U.S.-made autos and parts

President Xi Jinping is right in saying that trade wars hurt everyone. He has history on his side. For example, it was partly due to protectionism that turned a recession into the Great Depression in the 1930s. In passing the Smoot-Hawley Tariff Act in 1930, the U.S. hiked tariffs, forcing trade partners to engage in tit-for-tat exchanges, culminating in further declines in economic activities.

he U.S.-China trade war might create a bigger problem for the world than the Great Depression because the economies are much larger and more interconnected than those of the 1930s.

It is perhaps in this context that China extends the “olive branch,” not necessarily a sign that it is losing the trade war to the U.S.

U.S. response to China's gesture

It would be a mistake for the U.S. to view China's 90-day suspension of additional tariffs on its automobiles and parts as a sign of weakness and terminate the talks unless the country “capitulates.” China would be harmed, but it does have huge economic and financial war chests to cushion the economy from crashing.

One, the Chinese government is one of, if not the richest, in the world, having state-owned banks and enterprises making huge profits, and possessing over 3 trillion U.S. dollars in foreign reserves, just to list a few.

China also has a huge domestic market with strong purchasing power. With around 1.4 billion consumers, most of whom have little debt, they could supplant the U.S. market. Consumption, in fact, has increased over 7 percent yearly.

Last but not least, the Belt and Road Initiative (BRI) would be another outlet for China's industrial capacity. Trade between China and the over 80 participating countries reached over 5 trillion U.S. dollars in the past five years, and the number will grow with more and more countries joining the BRI.

However, whether the U.S. will take a more realistic approach in negotiating a trade arrangement to end the trade war is uncertain. There are some in the U.S. government and groups with the ability to influence policies to want nothing less than total Chinese “capitulation” on U.S. demands. As it is indicated in past articles, the trade war is about China's rise, particularly in the economic and technological realms.

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solarz said:

There is no bubble, the prices are driven by the low interest rate.

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Germany's IT watchdog has expressed scepticism about calls for a boycott of Chinese telecoms giant Huawei, saying it has seen no evidence the firm could use its equipment to spy for Beijing, news weekly Spiegel reported Friday.

"For such serious decisions like a ban, you need proof," the head of Germany's Federal Office for Information Security (BSI), Arne Schoenbohm, told Spiegel, adding that his agency had no such evidence.

Huawei has faced increasing scrutiny over its alleged links to Chinese intelligence services, prompting countries like the United States, Australia and Japan to block it from building their next-generation, super-fast 5G internet networks.

The US has put pressure on Germany to follow suit, Spiegel wrote.

Schoenbohm said BSI experts had examined Huawei products and components from around the world.

They had also visited Huawei's newly opened lab in Bonn, where German clients can inspect the firm's cyber security measures and the software behind its products.

But some observers raised eyebrows at the BSI's apparent dismissal of cyber security risks concerning Huawei.

"I believe it's wrong to suggest that the concerns about Chinese espionage are unfounded and easy to detect," telecom security expert Ronja Kniep told AFP.

"Even if Huawei has no official relationship with the Chinese government, that doesn't mean Chinese services aren't using the company and its technology as vehicles for espionage."

All three of Germany's main mobile network operators use infrastructure provided by Huawei, Spiegel pointed out.

The Chinese firm is also the brand behind some of Germany's most popular mobile phones.

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gelgoog said:

The people who produce oil from tar sands in Alberta, Canada, are starting to go belly up.

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US shale oil producers might be next. The guys who own the refineries are making all the money. This might get to Standard Oil 2.0.

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PiSigma said:

Lol Bloomberg knows nothing about oil in Alberta. For one, it's not tar sands. It's called bitumen oil sands. All the integrated oil companies are doing great, I expect a decent bonus this year.

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Air Force Brat said:

Good for you Brother! keep pumping that "black gold"!

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PiSigma said:

Hell yeah! All the hippies complaining about oil are hypocrites. They atill drive to or take a bus to their stop drilling rallies or stop pipelines. Type on computers made with plastic parts. Use government services paid for by oil companies royalties.

The problem with hippies and socialists is they eventually run out of other people money.

There are only two ways to generate wealth. The first is resource extraction or growing food. The second is producing good people need by manufacturing. Technology development that supports the improvement in the efficiency of the two activities above or advancement of it also add value by being part of the primary and secondary industries.

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China. That one word summons up images of everything from faraway mystical lands, the Silk Road (original version), exotic foods and more. What it also does these days is bring to the fore thoughts of trade wars, tariffs, a technological giant and emerging superpower with the economic and military might to challenge the traditional global powers, at least in regional affairs if not truly on the international stage yet.

We’ve covered a quite a bit about Sino-US relations since President Trump came to power with a particular focus on how the current situation affects the technology world from a pricing and investment perspective. For this article, we look at the current situation and how we got here, as well as delving into some of the detail from a source discussing the possibility to decouple traditional tech from Chinese manufacturing. Finally, we take a look at some of the ramifications from both an investment and consumer perspective of the possible outcomes. For the juicy PC hardware gossip, do skip the following sections and scroll down to “The Source Discussion” section.

Primer – Recent Chinese Economic History
China, referred to even now as a communist country has had a vast amount of human capital at its disposal for a long time. However for much of its recent history has led a relatively isolated life economically with swathes of the country dedicated to farming and not much else. Following the 2nd world war, the Communist Party in China took significant advice from the former Soviet Union to help develop the economy into a centrally managed, socialist-style with the objective of improving efficiency via investment in heavy industry. Still significantly focussed on agriculture but in a more organised manner than had been previously.

In the late 1950’s to mid-1960’s however, China became frustrated by the lack of efficiency it saw as evidently brought about by the highly centralised command structure of the Soviet economic model and decided to go its own path, particularly after poorly planned water control infrastructure combined with poor weather culminated in an agricultural crisis which saw millions of people die from starvation. This ultimately led to decades of slow but steady reform to incorporate many of the modern mechanics of Western capitalism into the Chinese economy, albeit still with a heavy focus on central oversight if not absolute control.

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The Cultural Revolution – Not China’s greatest moment…
During its period of significant self-discovery and adjustment, China remained apart from most of the global economic free-trade movement, probably for the best considering it was only in the 1980s that the government liberalised commodity pricing by allowing prices to be set via supply and demand rather than central decision. A crucial piece of legislation which paved the way to the efficient allocation of resources which most of the world now takes for granted.

I’m obviously glossing over huge amounts of history here, but the most important point to note was that this all led up to the liberalisation of the Chinese economy, culminating in its eventual ability to join the World Trade Organisation in 2001, a lengthy process which saw China first engage with regional trade organisations as its economy gradually opened up. WTO entry finally saw China allow a degree of foreign investment and a commitment to multilateral trade and the international rules based system of governance which in some ways has been under attack in recent years.

Even prior to WTO official entry, US-Sino trade had been gradually increasing as US and other international corporations sought access to China’s huge consumer base, however WTO entry was to secure the next generation of Chinese growth. With a commitment to multilateralism and ongoing foreign investment and trade of its own taking place, the world figured that it was time to take advantage of the extremely cheap labour in a relatively stable part of the world and subsequently foreign investment in China as well as domestic industry began driving huge levels of sustained economic growth which many have commented as being the largest and most consistent engine for global growth and the reduction of poverty with economic growth since the 90s generally being in the high single to low double digits territory year in, year out.

Outcome – Chinese Liberalisation
Of course, it’s relatively easy to drive economic growth when you are moving farmers whose economic output is counted in terms of bowls of rice they eat into cities to work in factories. A successful example of capitalist, economic trickle down (which generally works well in the early stages with varied results in later stages). However, as China has grown economically, it has also become more expensive to outsource to, coupled with the fact that the Chinese economy is still not as open as many would like.

“The undeniable truth is that the western world has come to rely on Chinese manufacturing and this is evident in the fact that over the last few decades”
What began as a trickle of raw material production for cheap has resulted in an avalanche of high-technology outsourcing since even though China is not as cheap as it once was, it’s still significantly cheaper to produce high technology there than it is in the west with higher and more expensive standards of living needing to be maintained by employees. From a corporate perspective, it was an absolute windfall. Outsource to China, costs go down, prices stay the same (or even creep up) and profit margins go up (or losses decrease). Outsourcing to a foreign land doesn’t come overnight of course. Relations need to be struck, commercial engagements agreed, contracts signed, facilities built, people hired and trained, supply chains committed to and more.

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What this means inevitably is that a huge amount of western economic output is now tied to the outsourced model. While it’s relatively easy to move manufacturing of say fabric from China to Indonesia or other up and coming low-cost labour nations (note I said relatively easy, not easy), the technology industry has a bigger problem. Technology manufacturing requires significantly more training and supply chain management/integration than raw commodities and this is where we are now. Western companies, driven by the valid capitalistic model to seek out the most efficient means of production to compete with others and remain profitable have thrown every single virtual egg into the basket of outsourcing where costs can be cut over the last 30+ years. This is the kind of economic integration which doesn’t get unpicked overnight and indeed, even if it were to be attempted to begin to decouple, would those jobs be “onshored” back to the primary country of business? Unlikely, as our source will tell us later.

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