Trump’s China Trade War Gaslighting: Will There Evah Be a Deal?

Trump has been up to what he seems to like to do best: whipsawing those who might be affected by his plans. On Friday, he put Mr. Market and huge swathes of Corporate America in a tizzy by retaliating against China’s tariff increases. China announced that it would impose new tariffs on $75 billion of US goods and the restart of tariffs on autos and auto parts. Trump tweeted that he would increase tariffs on Chinese goods already subject to tariffs: the $250 billion at 25% would go to 30% on October 1and the $300 billion at 10% would go to 15% in phases, on September 1 and December 1. Trump also “hereby ordered” US companies to pull out of China, suggesting that he’d rely on the International Emergency Economic Powers Act of 1977.

Then, as most of you have likely heard, Trump made remarks at the G-7 summit that we widely interpreted as an indicator that he’d back off again, by admitting to regrets about how the trade spat was going. When the press took up that line, Trump doubled down, with the White House releasing a statement that Trump’s sole regret was not raising tariffs higher.

Needless to say, the all-too-typical Trump to-ing and fro-ing made for an easy target. From the Washington Post:

Former treasury secretary Lawrence Summers, a veteran of the Clinton and Obama administrations, said the White House’s conflicting statements were just the latest in a string of mixed messages that had made it impossible for people to understand its agenda.

“Deeply misguided policy and strategy has been joined for some time by dubious negotiating tactics, with promises not kept and threats not carried out on a regular basis,” Summers said in an interview. “We are at a new stage now with very erratic presidential behavior and frequent denials of obvious reality. I know of no U.S. historical precedent.”

And despite rousing himself to make a show of his resolve, the Administration did back down on one part of Trump’s Friday missives, that of “ordering” US companies to get out of Dodge, um, China. From the Wall Street Journal:

Aides to President Trump said Sunday he has no plans to invoke emergency powers and force companies to relocate operations from China…

“What he is suggesting to American businesses,” [economic adviser] Mr. [Larry] Kudlow said, is that “you ought to think about moving your operations and your supply chains away from China and secondly, we’d like you to come back home.”…

Treasury Secretary Steven Mnuchin also weighed in, telling “Fox News Sunday” that the president didn’t have plans to invoke emergency powers to force U.S. companies out of China.

“I think what he was saying is he’s ordering companies to start looking,” Mr. Mnuchin said.“

The Journal also pointed out that Trump might have trouble forcing companies to exit:

Both Messrs. Mnuchin and Kudlow said that the president could theoretically force U.S. companies to leave China by invoking a law known as the International Emergency Economic Powers Act of 1977, or IEEPA….

According to the Congressional Research Service, IEEPA can be used to deal with “any unusual and extraordinary threat” outside the U.S. “to the national security, foreign policy or economy of the United States, if the president declares a national emergency with respect to such threat.”…

The president is required “in every possible instance” to consult with Congress before exercising authorities granted by IEEPA, and to specify in a report to lawmakers why the circumstances constitute a threat and why the actions are necessary, CRS said in a briefing paper on the law issued earlier this year. The president must submit follow-up reports every six months….

Rod Hunter, a partner at Baker McKenzie and expert on international trade, said Mr. Trump could declare a state of emergency and issue the order, but that doesn’t mean it will stand.

“Congress could effectively override such a decision, and private parties would certainly challenge the action as an unconstitutional takings, a violation of due process rights and beyond the statutory authority granted to the president by Congress,” Mr. Hunter said in an email.

Mind you, just like Brexit, there is a way to do what Trump wants to do that would not be so destructive and shambolic. Trump’s China policy appears to be intended to make American more economically self-sufficient so as to improve the prosperity of US workers, as well as curb a competing imperialist.

But as we’ve described at some length in earlier posts, restoring America’s manufacturing capabilities isn’t just a matter of weaning itself off cheap Chinese imports. The US has ceded a tremendous amount of know-how, from the factory floor on up. Getting that back is a generation-long undertaking, requiring commitment to a national strategy that would include significant government investment in fundamental research, renewed emphasis on education, including much cheaper higher education and vocational training for those that aren’t suited or inclined to go to college, and a reorientation of government spending and subsidies to favor productive sectors over the connected. Not only would it be difficult to get any Administration to embrace open industrial policy, particularly one that would break a lot of rice bowls (such as in our hugely wasteful arms industry and our bloated financial sector), maintaining it beyond even a two-term Presidency would be an even taller order.

But where is the Trump tariff cage match likely to wind up? Given how often Trump has backed off when Mr. Market has had a hissy, most commentator appear to have assumed before Friday’s tit for tat that Trump would back down, if nothing else, in the form of allowing a lot of exceptions, and the US and China would find a way for Trump to get enough concessions from China that he could declare peace with honor.

That assumption looks to be incorrect. New Deal Democrat sent us the latest post from China Law Blog, written by lawyers who specialize in Chinese law with an eye to helping businesses get set up and operate in China. The post by Dan Harris is every bit as firm as its headline: Repeat After Me: There Will be No US-China Trade Deal. It also contains a good summary of key developments and detail on the various goods targeted. Key sections:

The US-China Trade War Is and Will be the New Normal

I hate to say we told you so, but for nearly a year, WE TOLD YOU SO.  Since October, 2018 we have been all but screaming at anyone and everyone who has product made in China and sold into the United States to get out of China fast, if at all possible. We say this and we set out the below timeline to prove this not so much to show that we have been right all along, but to try to convince you that we are right when we now say there will be no resolution to the US-China trade war for a very long time and you need to act accordingly.

The below is our timeline/proof of our having predicted a straight-line decline in US-China trade relations…

But what should you make of President Trump’s ordering US companies to immediately start looking for an alternative to China? He can’t really do that, can he? No, but in many respects this is exactly what Trump has been doing since the U.S.-China trade war began. Trump cannot literally require American companies to pull out of China, but he can and has made it so difficult that they all but have to leave China. And this is what most of the international lawyers and international trade lawyers at my firm have come to believe has been Trump’s plan all along.

Every step of the way, Trump has made it all but impossible for China to make a trade deal with the United States, which is why this blog has been consistently clear that there will be no trade deal between the United States and China. If the US-China trade war/cold war were really about trade imbalances, it would have ended long ago with China buying more soybeans and Boeing airplanes from the United States. But from the very beginning, the U.S. has demanded China stop stealing IP and open its markets for foreign companies, and there is just no way China will agree to either of these things. Lead negotiator Robert Lighthizer is without a doubt smart enough to have known this all along. All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well. In June, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants this decoupling, as well.

This latest Trump “order” does not have the force of law, so in that respect it is not an order at all. But in most other respects it is. This order indicates Trump’s passionate desire to rid the United States of what he sees as the China scourge. More importantly, it is yet another clear signal that he will continue to escalate this war with China until such time as he considers the United States to be victorious. The fact that Trump issues this “order” amidst rising recession fears only highlights how ending U.S.-China trade is at the top of his to-do list.

So in terms of what this means for your business, it means that you must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.

I’m persuaded by this point of view because these writers have adopted the perspective that we’ve found to be very useful in other geopolitical negotiations, which is to look at the bargaining position of both sides and see if there is any overlap. If there isn’t, there won’t be an agreement unless one of both parties makes a significant concession.

One reason that other observers have likely missed what the China Law Blog discern is that there’s an Anglo-American tendency to assume that differences can be settled and a deal can be had. But as Sir Ivan Rogers pointed out with Brexit, and you have similar dynamics with the US and China, there aren’t precedents for trade deals where the two sides want to get further apart rather than closer. Sir Ivan is of the point of view that the desire to disengage makes it much harder to come to terms.

The critical part of the China Law Blog’s reading is that the Trump Administration is deadly serious about its two big asks, intellectual property and market access. It’s credible to attribute that to Trump’s US Trade Representative, Lighthizer. As Lambert put it, Lighthizer is the closest thing this Administration has to a Jim Baker. Lighthizer started at Covington & Burling, then served in the Regan Administration as Deputy USTR before going to Skadden. Lighthizer is as fierce a China hawk as they come and has a long history of saying that the entry of China into the WTO was at the expense of US jobs (see here, for instance) and even making a full-throated defense of protectionism.

A part of the trade spat that hasn’t gotten the attention it warrants and seems to confirm the China Law Blog’s thesis is the arm-wrestling over China’s fetanyl exports to the US. It’s not hard to see that this is an inherently important issue, since as I understand it, fentanyl is so potent that it is very easy to overdose on it, making it markedly more dangerous than other addictive drugs. In other words, the high death rate of fentanyl may make reducing supply a more effective strategy than it normally is in “the war on drugs”. Substitution with just about any other controlled substance would be less dangerous. And if Trump were to make a dent in this problem, it would serve as a PR offset to some of the costs of his China strategy, like lost soyabean exports.

In April, China made a concession to the US by designating all fetanyl products as controlled substances, in the hope that that would reduce shipments to the US. The DEA has stated that China is the main source of US fentanyl. Fentanyl accounted 18,000 overdose deaths in 2018, one fourth of the total. If you count all synthetic opioids, the toll rises to 28,000. China nevertheless claimed even then that fentanyl shipments to the US were “extremely limited”.

On August 2, Trump said Xi had welshed on his promise to halt fentanyl shipments. China objected, saying it had made “unprecedented efforts” and the US was to blame for its opioid crisis. On August 21, the US sanctioned three Chinese individuals it depicted as drug kingpins, eliciting more unhappy noises from China.

Fentanyl featured in the escalation on Friday, and it could conceivably serve as the basis for a national emergency threat (even though, per the discussion earlier, it would have good odds of being overturned). One of Trump’s four tweets urged US carriers to do more to halt shipments arriving from China or other destinations (Mexico is believed to be a route for the entry of Chinese fentanyl to the US).

In other words, it’s not clear where this row ends, but there doesn’t seem to be a path to depressurization, much the less resolution.

Update 5:00 AM EDT: Just as this post went live, the Wall Street Journal reported Trump Says China Called U.S. to ‘Get Back to the Table’ After Latest Tariff Spat. Trump is still hostage to Mr. Market, so it’s awfully useful for him to talk up negotiations. From the story:

President Trump said China called U.S. officials on Sunday evening and said “let’s get back to the table,” a day after the White House said the president regretted not escalating tariffs further on Chinese goods.

Speaking to reporters alongside Egyptian President Abdel Fattah Al Sisi, Mr. Trump called the discussions a “very positive development.”….

The Chinese government didn’t immediately respond to Mr. Trump’s remarks or to requests to corroborate the president’s account of a phone call having taken place. Chinese government officials have repeatedly said that Beijing wants to negotiate differences on trade. On Monday, Beijing’s lead trade negotiator, Vice Premier Liu He, told a conference that China still wants to continue trade talks with the U.S. following heightened tensions in the past few days.

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  1. john bougearel

    9:50pm Live Squawk
    Chinese Vice Premier Liu: We Are Willing To Resolve The Trade Dispute With The US Via Calm Negotiations
    -We Are Resolutely Opposed To An Escalation Of The Trade War Which Is Not Beneficial To The US Or China

    Chinese vice premier #LiuHe:#China willing to address trade disputes with the #US via negotiations;
    China has sufficient policy tools to maintain economic growth.

    1:56am Live Squawk posted by Squawk at 1:59 am CT, Front-running the tweet began at 1:55am) (And what the hell is Trump Tweeting for at 2am from his bedroom?)
    US Pres Trump: China’ Xi Is A Great Leader, Welcomes His Desire For A Deal And For Calm

    US Pres Trump: China Called US Trade Negotiators Last Night And Want To Come Back To The Negotiation Table

    US Pres Trump: China Called, Wants To Restart Trade Talks

    US Pres Trump: We Have Had 2 Calls With China, They Want To Make A Trade Deal
    We Will Start Shortly To Negotiate, I Think We Will Make A Deal

    2:03 am
    US Pres Trump: We Will Start Shortly To Negotiate, I Think We Will Make A Deal
    -China Does Not Want To Lose Its Supply Chinas
    -We Are Going To Start Talking Very Seriously With China

    2:19 am – Live Squawk posts at 2.27pm
    China’s Foreign Ministry Spokesman Geng: US Tariff Move Violates Osaka Accord $ES_F $USDCNH $GC_F #OOTT
    -US Maximum Pressure Will Not Work -China Resolutely Opposed To New US Tariffs

    China’s Foreign Ministry Spokesman Geng: Will Take Actions To Safeguard Rights If US Persists $USDCNH $ES_F $NQ_F $GC_F #OOTT
    -Will Take More Steps To Protect China’s Interests If US Enacts The New Tariffs

    China’s Foreign Ministry Spokesman Geng: US China Decoupling Will Lead To Market Chaos

    China’s Foreign Ministry Spokesman Geng: Others Will Fill US Vacancy If It Leaves
    -Decoupling Will Not Resolve Trade Issues

    China’s Foreign Ministry Spokesman Geng: Not Aware Of US China Weekend Phone Calls

    Sidenote for those keeping score w Mr Market. At 950pm, the Nasdaq took off to the upside on Liu’s desire to “resolve.” The rally ran out of steam and drifted back to the 950 pm lows by 150am. Then Trump starts tweeting and the market screams higher this time, largely ignoring the Negative Feedback and push-back from China’s FM.

    Now riddle me this: Why is Trump tweeting at 2am from his bed? It’s just another sign of his “erratic behavior” as Larry Summers put it.

    The way Trump lashed on Friday was Stunning, to say the least. By midday, with jaw wide open, knowing Trump would be tweeting again after mkt hours, I quit and left the office shaking my head and went out for a hike.

    On Friday, Trump’s tweets almost immediately followed Powell’s speech at Jackson Hole. He was so livid and frothing at the mouth, he tweeted something to the effect “As usual, The Fed did NOTHING! Who is the bigger enemy, the Fed or China?” You see, Trump is fighting a war on two fronts, China and the Fed. And it is not likely coincidence that the rate hike cycle did not begin in earnest until Dec 2016, immediately as Trump took office. So, his war with the Fed has been ongoing since he stepped into office.

    Nor is it any coincidence that the Fed has been triggering some of Trump’s erractic behavior. The Fed held a meeting on FOMC Wed May 1st. Over that weekend, Trump announced a second round of tariffs. On Wed July 31st, the Fed cut rates 25 bps. Not enough for Trump. So, the following day, Trump announces a 3rd round of tariffs.

    Then, this past Friday, Powell gives the usual milktoast speech at Jackson Hole, and this royally pissed Trump off. He was all ears, and quite reactionary when he didn’t hear what he wanted to hear.

    At 9:40 am, Friday Trump tweeted. “As usual, the Fed did NOTHING!. It is incredible that they can speak without knowing or asking what I am doing, which will be announced shortly.” Shortly thereafter, Trump tweeted that American companies are “hereby ordered to immediately start looking for an alternative to China, including bringing your companies home and making products in the USA.”

    At 9:49 am Trump continued: “ Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our intellectual property…and they want to continue. I won’t let that happen! WE don’t need China, and frankly, would be far better off without them. The vast amounts of money made and stolen by China from the US year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies home and making your products in the USA. I will be responding to China’s Tariffs this afternoon. “

  2. PlutoniumKun

    On August 2, Trump said Xi had welshed on his promise to halt fentanyl shipments. China objected, saying it had made “unprecedented efforts” and the US was to blame for its opioid crisis. On August 21, the US sanctioned three Chinese individuals it depicted as drug kingpins, eliciting more unhappy noises from China.

    I can’t help thinking that the Chinese would appreciate the irony that post Brexit they may be able to force the British to buy their surplus opiates, sorry ‘fentanyl’ as part of any trade deal.

  3. Chauncey Gardiner

    Oh, Goody!… “The Chosen One” vs. Sun Tzu”…. wonder who the winner will be? Golly, I hope those low latency stock and futures markets computers with the word algos that respond in nanoseconds to tweets by the various parties aren’t overheating. Fascinating to see the pushback at 3 am in stock index futures. Evidently Chairman Mao was right… “Politics rules all.”

    1. MyLessThanPrimeBeef

      More powerful, I believe, though not necessarily old than the Art of War is Dao De Jing.

  4. DSB

    In May I had a conversation with a long-time friend. My friend works for a global manufacturer with a household name. He has helped oversee construction of plants around the world. He helps source components from around the world. He told me that “everybody’s moving out” (of China).

    The ones who can have not waited for Trump’s message of Friday.

      1. drumlin woodchuckles

        No. Only to other low-wage and etc. producers.

        It would require a policy of several decades of re-industrial policy( within the resource constraints of a resource-depleted and heating-up world) and the firm and patient Protectionist Trade Management to defend a modestly re-industrializing America from economic production aggression from overseas.

      2. RBHoughton

        The idea that there are factories all over Vietnam, Thailand, Cambodia, etc., with road/river access to ports and airports is only approrpiate in an English-language newspaper in the west

    1. Fazal Majid

      They were already moving out to Vietnam, Indonesia, India et al. because of Chinese wage appreciation. The problem is, MBA types believe anything they don’t understand must be easy, and industrial know-how is anything but, which is why companies have been reluctant to migrate, but Trump has forced them to.

  5. The Rev Kev

    A few short years ago they had the Trans-Pacific Partnership being negotiated. This was nicknamed the “everybody but China” pact as that was its mission – to cut China out of the Pacific. Add to that the “Pivot to Asia” introduced by Obama which was to militarily threaten China and the writing was on the wall for China. They were to be boxed in and shut down. Trump may be the front man now for this effort but all the China-hawks have come out of the woodwork to be let loose in the government.

    I suppose that the plan is to force US companies to bail out of China and relocate to places like Vietnam, India, Bangladesh, etc. But the question is whether these countries have the infrastructure to support these new factories? Do they have a trained, educated workforce to man these factories? Is there a will to move to such places? As far as those countries are concerned, these new companies could be seen as a two-edged sword. Yes they will bring investment and opportunities in those countries. But how will they know if a Trump or someone like him later on will not order those factories out if there is a dispute or if the US demands that those countries change their laws and open themselves up to financial exploitation? Trump is demanding the same of China right now. And will Trump demand that all the other western countries move out of China?

    I have mentioned before the idea of a multipolar world and I believe that we re seeing it now in action. The US and its vassals will be one pole and another one is forming around China, Iran and Russia. I doubt that the EU will be another as they are following what Trump orders even if reluctantly. There may be another factor. For centuries we have had an economy predicated on growth but I suspect that by the end of this century will will have one based on contraction due to climate change and depletion of resources. Better strap in. It could be a bumpy ride.

    1. Susan the other`

      This is all pretty interesting. More theater than trade. And the reason is that there is no demand. Demographics has a lot to do with it as well. It might not make any difference now how much a company can cut costs by moving to SE Asia because nobody will be very eager to buy more crap anyway. And manufacturing cannot up and move cheaply if they have to reinvent and retool their processes to make them more environmentally acceptable. It’s a sea change. And a tap-dance.

    2. drumlin woodchuckles

      I don’t believe that “cut out China” was ever the goal of TPP. The goal of TPP was the destruction of national economic sovereignty and the rolling abolition of national and regional environmental/ safety/ wages and hours/ etc.laws within countries and sub-country regions. One of the TPP methods for reaching that goal was the International Korporate Kangaroo Kourts to enforce “investor rights” against national, regional and local sovereignty and survival.

      When TPP was becoming a hard sell, ” cutting out China” was fake-introduced as an implausible “national security” excuse to try to re-justify TPP in the minds of people who knew very well what the real Corporate Globalonial Plantation Overlord’s agenda of TPP really was.

      1. The Rev Kev

        When I think about it, you are probably right. Same with the Transatlantic Trade and Investment Partnership too. Cutting out China would just have been the icing on a corporate-dominated world cake. Sort of like a two-fer.

    1. grizziz

      So, if the facts as given above are reconfigured, all it would take is for the Chinese producers of synthetic opioids to pay the US patent holders their due. Problem solved!…All kidding aside, the demands to get intellectual property paid for requires a very pliant judicial system to actually recognize that an idea should be rightfully owned by a person.
      Individual agency is a product of ‘enlightenment’ thinking which opened the pathway for an idea to be the creation of a person who willed the idea into existence. A few steps later, a corporation becomes a person and then a group of people can somehow own a single idea and be able to rent that idea out. To think that the Chinese would accept this cockamamie/historically embedded/English common law idea would be to deny their own culturally based motivated reasoning.
      I don’t know how this situation will be resolved, but it is quite laughable that the diversion through tariffs of IP revenues which in US legal logic should be paid to Corporations is actually going to go to the US Treasury.

      1. MyLessThanPrimeBeef

        I believe the idea of intellectual property has existed in China for a long, long time.

        Even while artists and artistans in the West remained anonymous and did not sign their names to their works, Chinese valued and collected works by famous calligraphers.

        One of them was Wang Xizhi, who produced the most famous work in Chinese art history, his ‘Orchid Pavilion Preface,’ which was sought by one of the most powerful Chinese emperor over that last two or three thousand years, Taizong of the Tang dynasty, who tricked it out of Wang’s descendant, and evetually buried it in his imperial mausoleum, the size of a small hill, which one can visit today, near Xian.

        1. kgw

          Off by a bit more than a hair…The method that the Chinese use to learn to paint those stunning landscapes is to start by copying the originals. That is how it’s done.

          In a cultural geography class I took at UCLA 40 years ago, the Prof said the argument between diffusion and independent discovery had turned out to be a red herring.

    2. Synoia

      Chronic use of meth, a highly addictive stimulant, can cause paranoia, visual and auditory hallucinations and delusions, studies have shown.

      Seems to be heavily used in DC.

      But the DEA has found the gap is being filled by Mexican and Latin American drug cartels that had primarily dabbled in heroin and cocaine trafficking….Officials also warn that because of more cocaine production in South American countries including Colombia, they expect to see larger shipments at the Mexican border.

      It’s just business….relocating out of China, as Trump demands.

    3. Yves Smith Post author

      I don’t know what the precursors of synthetic opiates are, but you are making a very big assumption that may not be accurate. China is the major and in many cases the sole provider of quite a few US medications and/or their active ingredients. That may be the case with synthetic opiates; the supply coming via Mexico, as we indicated, is claimed to originate in China.

      We’ve posted on this a couple of times. For instance, in 2018:

      The big message of Gibon’s and Singh’s book is that the US relies on China for the production of active ingredients in drugs and in many cases, of the medications themselves, to the degree that we would have a public health crisis if supplies were interrupted. As Gibson said on C-SPAN:

      Many people that we spoke to, both former government officials and some in industry said that if China shut the door on exports, within months, pharmacy shelves in the United States to be empty, and hospitals would cease to function.

      And don’t assume generics king India would step into the breach. India gets many of the active ingredients for its pharmaceuticals from China. Gibson forecasts that China will overtake India in generics manufacture within a decade.

      As Gibson explains, the US no longer makes its own penicillin, in part because China dumped penicillin in 2004, driving the last US plant out of business.

      The medications where the US relies on China include heparin, a blood thinner that among other things is used for IV drips. No heparin, no IV treatments. Due to the difficulty in tracing the source of drug company ingredients, the authors could make only case by case investigations, but they China production to be critical for treatments for Alzheimer’s HIV, depression, schizophrenia, cancer, epilepsy, and high blood pressure.

      Dependency is not the only risk. US drug companies shifted production to China not just to save cost but to escape regulation. The FDA has only limited access to Chinese factories, with the Chinese having well over 700, yet the FDA able to inspect only 15 a year on average. As Gibson said on C-SPAN:

      The FDA is trying to get inspection on site in China. The Chinese have severely restricted the number of inspections that they will allow and the whole program has become completely ineffective.

      And the Chinese are often less than cooperative. Gibson describes even then how the agency has been directed to a Potemkin facility, as in the goods were made somewhere else…and the FDA was not able to figure out where. Similarly, reports presented by the health authorities to the FDA is understood to be as reliable as Chinese economic data.

      1. clarky90

        Scott Adams (Dilbert) referred to Fentanyl as an actual Weapon of Mass Destruction. It is is a lethal, concentrated nerve agent that uses FedEx/USMail as its delivery vehicle. Ironically, the victims (and our entire society) pay for this poison- just as a Chinese family is billed for the bullet used to execute their loved one.

        Many years ago, I lost my dear brother to suicide. He was a drug addict….

        This is an important topic.

      2. RBHoughton

        Very glad to see that post. To my recollection the Canton Trade Fair since 1960s has been the a source of basic chemicals that western pharmaceutical companies buy to make their expensive goods.

      3. Ian Perkins

        I don’t know much about the production of opioids and their precursors either. But if China were to cease production, wouldn’t that be a big reason for international drug gangs to try their hand at it? The street price of fentanyl is said to be in the order of $1 million per kilo.

  6. Ptb

    “All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well”

    That is about right, and I do not doubt that this is the desire of Trump’s negotiating team. Nor do I doubt that they can easily steer talks to fail as described (by asking for concessions on market access favorable to the US side, AND by refusing to back down on Huawei etc).

    However, while effectively forcing a decoupling of China and US is straightforward, controlling its speed is not. Pull the plug too fast (which China can threaten to accelerate), and some big US companies eat it. While Lighthizer and friends may be willing to pay that price, it will make a lot of others very nervous.

    Then, perhaps more importantly, is forcing the rest of the world to follow suit (or else there is no point). JP, ROK, DE (the high tech suppliers besides US) all trade at least as much with China as US. The world market buying Chinese made goods is also bigger than the US. It would take some skillful diplomacy to make it happen. This is not only beyond the level of the Trump admin, but I would say all US administrations since the year 2000, with the Iran deal maybe the only exception I can think of.

    China will end up defending itself by getting the overly aggressive and self-discrediting Team Trump reelected. By openly provoking a small proxy conflict for example. Trump gets to do his Ronald Reagan act, which is what his audience wants. It will be a weird political symbiosis. (an oversized personality can’t survive without a suitably inflated enemy, and Joe Biden is no Hillary Clinton. The media will play along – such drama is the only thing keeping them in business now.)

    Anyway, if there is a counterbalancing force to prevent this, I would think it is wall street.

    1. Synoia

      The Chinese have control currently.

      The US is trying the regain control.

      The issues to be addressed is supply chains, as Yves keeps pointing out.

      As long as China supplies the nuts and bolts (fasteners) they have control.

  7. Frank Little

    Apparently the US federal workers pension plan has started investing in index funds which include some Chinese companies that have been in Trump & Co’s target list. From the FT this morning:

    The letter — a copy of which was seen by the Financial Times — said an impending investment shift by the FRTIB would mean that about $50bn in US government pensions becomes exposed to the “severe and undisclosed” risks of being invested in selected Chinese companies.

    The letter, dated August 26, was copied to senior US officials including Mike Pompeo, US secretary of state, and Steven Mnuchin, Treasury secretary.

    “The Federal Retirement Thrift Investment Board made a short-sighted — and foolish — decision to effectively fund the Chinese government and Communist party’s efforts to undermine US economic and national security with the retirement savings of members of the US Armed Services and other federal employees,” Mr Rubio told the Financial Times.

    One thing I remember from early on in this dispute was the US wanting more opportunities to invest in the Chinese market beyond just exports/manufacturing. If pension funds are getting involved I would think that private investors would like to do the same thing, which would make long-term decoupling more difficult, especially if US businesses also want to sell things to people in China even if those things are made elsewhere.

    As always your post was very informative and helpful and I certainly believe that pulling the US out of China is the goal of this whole trade dispute. I just wonder if things like this will put a damper on their plans.

  8. Carolinian

    there doesn’t seem to be a path to depressurization

    How about Trump not being reelected? Is some sort of cold war with China an across the board establishment obsession or confined to the Republicans and Trump?

    1. Synoia

      The Blob has realized that their delusion that free trade would enable US control of everything, including China, has failed.

      The Chinese saw the trap and both avoided it and built theo own trap, stripping the US of manufacturing capability.

      The US has lost capability. I’m not positive but the F35 and Littoral shops appear to reveal a high degree of incompetence.

      One capability the US lost, a self-inflected wound, was the evisceration of Global Telecom leadership, by the destruction of AT&T and its Bell Labs an Western Electric divisions. Ignoring both the promised of digital communications (via fiber optics), and the Cell Phone, both technologies visible on the tech horizon in the early 80s, and ignored by the US’ successful anti-trust action against AT&T.

      The failing of only having a financial policy, and not an industrial policy.

      1. Carolinian

        Sounds like you are saying no Trump, no trade war?

        Of course the rub is that if the US really did try to replace all of China’s manufacturing then we might need those immigrants that Trump is trying to keep out. I’m not sure Americans–young ones at least–are willing to go back to the Arsenal of Democracy past. Factory work is hard work and often boring work. Perhaps what Trump really has in mind is replacing China with Vietnam and other Asian countries–the cheap labor without the Great Power challenge.

        1. Left in Wisconsin

          The young ones I know would absolutely go back into factories if they had any confidence that the jobs would be secure and have decent wages and benefits. (Notice the car factories in the south have no shortage of workers.) The problem is that everyone knows – because they have seen it for the last 40 years – that a manufacturing job in the US exists only until such time some corporate yahoo says, “Sorry, we’re moving (or closing).” And people rightly want more control over their lives than that.

          This is actually the one thing I give Trump credit for pursuing. But, not only is corporate “America” not on board with re-shoring; the entire political infrastructure of this country is committed to “free trade” in which countries with higher-than-Chinese labor costs are by definition not competitive in manufacturing.

          1. Carolinian

            I know someone at our local car factory who has done quite well for himself. I’m also told the line work is hard work. If you aren’t physically fit you don’t become a permanent hire.

            But it wouldn’t all be car factories. Our local industry used to be textiles and that was very low paying not to mention brown lung inducing. In fact the post Civil War South served as a kind of “off shoring” for those Northern mill owners who moved down here. My neighborhood is named for one of them.

            Guess I’m saying we shouldn’t be too rosy tinted about how the onetime manufacturing US functioned. Those earlier tycoons were quite ruthless. And their heavily European immigrant workforce of the time was often quite desperate. The populace is in a different place now.

            1. MyLessThanPrimeBeef

              If the title of the article cited above is correct (…the new normal…), then the team that can be patient wins, eventually.

              I believe the victory will go to ‘water.’

        2. MyLessThanPrimeBeef

          As a good-but-not-perfect goal, spreading it around to many countries (Vietnam and other Asian countries) is less risky than reliance on just one.

          Another progressive president (or two, etc) can come along and refine it to be a little closer to perfection.

      2. inode_buddha

        A lot of people were telling the Blob 40 years ago that it would fail. It was kind of obvious after all. I blame it on hubris and stupidity caused by greed.

  9. parisblues

    “But as we’ve described at some length in earlier posts, restoring America’s manufacturing capabilities isn’t just a matter of weaning itself off cheap Chinese imports. The US has ceded a tremendous amount of know-how, from the factory floor on up. Getting that back is a generation-long undertaking, requiring commitment to a national strategy that would include significant government investment in fundamental research, renewed emphasis on education, including much cheaper higher education and vocational training for those that aren’t suited or inclined to go to college, and a reorientation of government spending and subsidies to favor productive sectors over the connected.”

    AMEN, Yves! This is what any “business roundtable” worth its salt would be doing.

    1. MyLessThanPrimeBeef

      It takes a village of those on the left and on the right. As of now, Trump has set it up for a progressive to come in implementing

      1. renewed emphasis on education, including much cheaper higher education,
      2. orientation of government spending and subsidies to favor productive sectors

      All we need is for some candidates to tie the two steps together.

      “Not just, but also (a commitment to a grand strategy),” meaning carrying Trump’s ‘not just’ a step forward.

      That would require acknowledging Trump’s first step though.

        1. False Solace

          Investment can be done by the federal government. If China can subsidize their industry so can we. The 0.1% are sitting on a giant pile of dollars only because they got bailed out by the feds in 2008. Their money is a sham, they don’t invest in anything, they are worse than useless.

        2. Chauncey Gardiner

          Lambert provided this link under “MMT” a couple days ago. While it might be desirable for other reasons, IMO the 1943 essay that Stephanie Kelton mentioned below suggests that policy would be unnecessary.

          We should talk about Functional Finance. Abba Lerner put forward the approach in the 1940s. He explicitly offered it as an alternative to the more timid pump-priming approach expounded by people like Alvin Hansen. Here’s the seminal paper.
          — Stephanie Kelton (@StephanieKelton) August 23, 2019

    2. DHG

      I’m not interested in being impoverished with all American made products unless my SS is doubled as that is what the price of the products would be if not more. Americans demanded cheap products and refused to pay Americans a decent wage. Well here we are with the result.

  10. Dao Gen

    Trump is delusional. Of course he wants manufacturing to return to the US, but he is unwilling to invest in a serious reindustrialization program of the type Yves mentions. So that is not his primary goal. He is likely being influenced by Bannon’s Sinophobia and by the Pentagon’s unrealistic wish to somehow, hope against hope, contain China and prevent it from becoming an equal and then a more powerful and richer country than the US. The current leadership of the US military seems to be unrealistic and think they can force China not to be what it is naturally becoming. They unrealistically and narcissistically look at the world as either unipolar or a disaster. The entire security state leadership was born or came of age after WWII and knows nothing but US unipolar dominance. Anything else is “unnatural.” The neocons who have infested the White House believe the same thing. None of them have really tried to understand what the world will actually look like even 25 years from now, when China will probably be clearly stronger and richer than the US. They are also in the position of a J D Rockefeller or any other monopolist who tries to squash any company that dares to try to compete as an equal.

    So for Trump, economics is also a power struggle, tinged with a strongly macho sense of rivalry. China is an emerging existential threat, an underhanded, tricky commie challenger who must be defeated. And Trump projects, imagining that China will be just as imperialistic and arbitrary as the US has been, especially after 1991. It would be unacceptable, he seems to think, to be on the receiving end of what the US has been doing to other countries all these years. He also seems to truly believe in manifest destiny and feel that China and Hwawei have no *right* to be more technologically advanced in any areas than the US. Thus, like the neocons, he believes economics should be used as a lever for regime change in China. He seems to believe that the Chinese, like the Iranians, will rise up and overthrow their respective governments if only the US can inflict enough economic pain on them. In China’s case, he seems to want to force China to deconstruct its whole concept of a vigorous public sector and its many government-led economic policies as “unfair” or as “cheating.” This is code for wanting or even demanding regime change. So the whole “two spheres” theory may be off. Trump doesn’t seem to want to decouple from China simply for the sake creating two different economic spheres. He wants to make China feel more and more economic pain, enough pain to cause social unrest and eventually revolution. But this is delusional neocon wishful thinking. For the neocons, at least, decoupling would be necessary before any war could be waged with China should economic war fail. With Bolton and Pompeo in the White House, who knows what Trump thinks about a war with China for the sake of “saving the unipole.” Because of Russia, however, the US can’t nuke China. There is no real solution for Trump unless he fires Bolton and Pompeo and listens to his constituents. Listening to MMT would also help.

  11. DHG

    The agenda is money and nothing more. Those in the know position themselves in the market then the tweet comes out and vice versa, they are cleaning up on the down and subsequent up moves.

  12. VietnamVet

    Donald Trump’s election and Brexit were direct response to transfer of Western middle-class wages to Chinese workers since China joined the WTO thanks to Tony Blair and Bill Clinton. Barrack Obama and David Cameron stayed the course. But since the exploding inequality and corruption revealed by the 2008 economic crash are unaddressed; western governments lost consent of the governed. If taken to the logical conclusions, Donald Trump’s and Boris Johnson’s policies will devastate their economies by rising prices on populations already burdened by unpayable debt. To reverse the downward fall, democracy and the rule of law must be restored. Otherwise, greedy oligarchs will inevitable escalate the resource wars across a world that is becoming uninhabitable.

  13. Jake

    Why does this post assume people around the world would want to buy american products?? Seems like without force its hard.

  14. ObjectiveFunction

    Another terrific and highly topical post, Mme. Yves, many thanks, and 100% consistent with my boots on the ground here in SE Asia. A few high level observations, fwiw:

    Vietnam, with its Confucian ethic and disciplined no-nonsense regime hell bent on passing Thailand and keeping pace with south China, is completely saturated and spoiled for choice right now. Same thing in Thailand: Japan and Korea have a natural edge here, along with a few Western multinats who have been there a long time and know how to get things done.

    Other ASEAN destinations offer low cost pliant workforces bringing a range of unskilled (assembly, stitching), high school (skilled trades) and university (engineers, chemists etc.) – the latter skill sets being more or less correlated to the proportion of ethnic Chinese (or Indians). But from a foreign locator POV, these countries are also hobbled by a ‘rusted triangle’ of still patchy infrastructure, inefficient/arbitrary government and grasping local oligarch/landlords (e.g. the ‘local partner’). Malaysia is the best of this bunch though not risk free, and Indonesia and the Philippines good at first look but by fsr the most frustrating in practice.

    Cambodia and Myanmar are too new to the global economy to play in anything above textiles, agri and basic assembly.

    Disclaimer: I make no economic or ethical judgments here, btw; in every one of these countries there are some people at all levels earning more than their parents ever dreamed, while countless others live precariously day to day in a squalid world of hazardous day labor, with no safety net or social contract beyond what they can arrange for themselves.

    For further reading on this and related topics, I can’t recommend Jeff Snider enough. He demystifies the gigantic global flood of hot money that is sloshing around the globe scrambling for yield and among other things debunks the ballyhooed farsighted mandarins of Beijing. They are corrupt, grasping opportunists along with the rest of them.

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