It would appear that the much-feared US-China trade war has been averted, in light of the recent joint statement issued by the world’s two largest economies. In it the two sides agreed that China would reduce trade surpluses with the US; buy more US agricultural and energy products; expand trade in manufacturing goods and services; encourage two-way investment; and continue dialogue, reported Asia Times (Thailand). The fact of the matter is that a US-China trade war was never an option because of the huge risk it would bring to both countries. Sadly, however, ideology, particularly in the US, will likely keep the conflict alive. Why a trade war is not an option If one were to examine the US-China economic relationship thoroughly, President Donald Trump’s threat of a trade war with China and claim that he can win it is more fantasy than real. Large numbers of US brands – from Apple iPads to Ivanka Trump shoes – are designed in the US but produced in China, indicating the two economies are “joined at the hip.” So if Trump were to follow through with his threat of imposing tariffs on US$150 billion worth of Chinese “imports,” consumer prices in the US could go up to that of the tariff rate or higher. His daughter Ivanka might be the first to curse him. Trump’s promise that jobs would return to US soil would be hollow. One, US firms would likely relocate to other low-wage countries. Two, even if the jobs were to return, they would likely be short-term because companies would automate and innovate to remain competitive, given relatively high US wages and stringent environmental and labor standards. China is also the world’s supply-chain hub, according to the International Monetary Fund, producing most of the parts needed by US manufacturers such as Boeing and General Motors to complete the production process. According to Boeing, Its 737, 777, 747, 787 and 767 planes all use parts produced in China. Moreover, many US states and cities vow to continue forging closer economic ties with China with or without Trump’s blessing. Alaska Governor Bill Walker, for example, is leading a large delegation to China, seeking trade and investment opportunities. In this regard, Trump’s trade war with China might not turn out the way he expects in that under the US constitution, state rights are prominently enshrined. Trump’s U-turn on banning the sale of US semiconductors and chips to the Chinese technology giant ZTE might be to protect US firms rather than a “concession” to China. For example, not able to sell 60% of their production to ZTE, US companies such as Qualcomm, SanDisk and Skyworks stand to lose a big chunk of business, which could force them to reduce production and lay off workers. Political theater? In light of the deliberations mentioned above, there is reason to believe that Trump’s trade-war threat is more political theater than real, a message he probably sent Xi Jinping during their private conversations. To seek re-election, Trump must fulfill his 2016 campaign promises. What’s more, his supporters and opponents alike are convinced that China is the “bad guy,” cheating and “eating America’s lunch.” Thus getting “tough” on China could bring him huge political dividends. Trump might also be aware that China would not concede to his unrealistic if not ridiculous demands – reducing the trade deficit by US$200 billion by 2020, not proceeding with the “Made in China 2025” industrial policy, not retaliating against tariffs and dropping its technology-transfer requirements. However, in keeping with the US tradition of blaming someone else for the problems it causes, Trump will blame China if a deal is not struck during Commerce Secretary Wilbur Ross’ visit to China next week. Rocky US-China relations ahead US-China conflicts over trade (and geopolitics) may be far from over, for a number of reasons. One, China and the US appear to have different interpretations of the May 19 joint statement. Chinese Vice-Premier Liu He, who headed the Chinese delegation, said China would buy from the US as long as the products “pleased” Chinese consumers, implying that US goods must be competitive in terms of price and quality and consistent with China’s industrial strategy. He also stated that China would be buying from other nations to sustain the country’s long-term economic health and stability. The head of the US delegation, Steven Mnuchin, on the other hand, said the US expected China to buy huge quantities of agricultural products and natural gas. The demands that China drop technology transfer as a condition of doing business and the government terminate the “Made in China 2025” industrial policy are unlikely to be met. Two, there are powerful or influential constituencies in the US that are wary of China’s rise or gain from an adverse US-China relationship. The renowned US scholar Graham Allison is said to have drafted a State Department report complaining that China uses “debt diplomacy” to gain influence in the Asia-Pacific region. Whether the insinuation is true, Allison opined that China and the US might not be able to escape the “Thucydides Trap” in his book Destined for War: Can America and China Escape the Thucydides Trap? Allison is not alone on the issue. Another prominent scholar, Chicago University’s John Mearsheimer, shared Allison’s view, suggesting China’s rise would not be peaceful. Indeed, many US think-tanks – the Council on Foreign Relations, the American Enterprise Institute, and others – are sending similar messages, that China is “aggressive” and “neocolonialist.” The US neoconservative or anti-China crowd, some of whom hold senior positions in the Trump administration, might be determined to make China an enemy, if for no other reason than making their rhetoric a self-fulfilling prophecy. Peter Navarro was reported to have had a heated dispute with Mnuchin on how to deal with China. John Bolton has said he wants a “two-China” policy or at the very least increased official government and military exchanges between the US and Taiwan. Donald Trump himself has hinted that he might follow through with his anti-China rhetoric. For example, he repeated his accusation that China has been “ripping off” America for years. Another example is the expectation that he will blame Xi Jinping if his summit with Kim Jong-un scheduled for June 12 in Singapore is cancelled. It does not seem to matter that it was United States’ insistence that a US-South Korea war exercise involving more than 100 jet fighters and bombers and more than 12,000 soldiers was responsible for Kim canceling a high-level meeting scheduled between South and North Korea. Another contentious issue that will keep US-China conflicts open is the intention by the US Congress, identifying China as a “pre-eminent threat,” vowing to hold meetings on Chinese influence in the US over the coming months. With this mindset, any attempts to sell technological goods to China and Chinese investments in the US will be barred, making deficit reduction more difficult. History will tell that the US does not allow any nation, friendly or otherwise, to challenge its global dominance or take actions that are not in America’s interest. For example, Trump threatened sanctions against European nations if they continued to do business with Iran. The US is even threatening Germany and Russia if the two nations proceed with building the Nord Stream 2 gas pipeline. US-China conundrum China must have done something right for the US to be so upset with it. The demonization of China has been relentless, blaming China for everything that goes wrong in America, rising poverty, losing manufacturing jobs, the list goes on. Trump even tried to blame China for the possible cancellation of his June 12 meeting with Kim Jong-un, suspecting Xi Jinping had something to do with the North Korean leader’s change of heart on rapprochement between Pyongyang and Seoul. But blaming China will not solve America’s problems, nor will it deter the Asian giant’s rise without risking a nuclear holocaust. Therefore, the US has no choice but to negotiate with rather than mount a “regime change” plan against China. In short, a war (trade or military) is very unlikely between the world’s two largest economies. But their relationship will be rocky, zigzagging between cooperation and competition. *** Donald Trump’s plan to make the American economy great again is deceptively simple: wrestle jobs, market share and indeed the future back from China. But what if the U.S. president, in the process, morphs America into Japan? – reported South China Morning Post (Hong Kong). Three decades ago, Trump the real estate mogul railed against Japan-style tariffs and a zero-sum view of economic relationships. Japan, in the midst of its own economic boom, had “systematically sucked the blood out of America” and American manufacturing, he said in a 1989 “Morton Downey Jr. Show” interview. “They have gotten away with murder. They have ended up winning the war.” Now, it’s China that is “raping” America, in Trump’s telling. When Trump told “Good Morning America,” in November 2015, that the Chinese “want to take your throat out, they want to cut you apart,” his comments smacked of déjà vu to Japanologists. “It’s the greatest theft in the history of the world,” he said of Beijing’s trade barriers in May 2016. Just last month, he fired off a tweet, charging “STUPID TRADE” with China, and another one slamming Beijing for “playing the currency devaluation game.” But ironically, as Trump girds for economic battle with China, he is making many of the same mistakes Japan made in the mid-1980s, leading to its current stagnation. Rather than opening the economy, embracing new ideas and technologies, and welcoming competition, Trump has pushed protectionist gimmicks, currency manipulation and tax cuts aimed at the 1 percent—an approach that risks walling off the United States from a global economy racing forward. Becoming more like Japan might not sound so bad on the surface. With some of the highest living standards anywhere, ultralow crime, top-rate infrastructure and humankind’s longest lifespans, the country hardly seems a cautionary tale. Japan’s economy, though, is another story. Twenty years of negligible growth and deflation have shackled Japan with the world’s largest debt burden, some of the lowest interest rates and a stimulus addiction that is deadening innovation. More than anything, Japan’s economy today is stuck. Japan, thankfully, has gotten a boost lately, due to buoyant demand from China, the United States and Europe; Japan‘s economy has grown about 1 percent, on average, over the past several months. But even as the country is still experiencing its longest expansion since the 1980s, wages have stagnated. That’s because for 20 years now, rather than lower trade barriers, increase productivity, and rekindle innovation by modernizing education and training, Japan has relied on the now-obsolete 1980s economic model that originally propelled it to top global status: yen devaluations, fiscal and monetary stimulus, bailouts for industries like banking and steel, lower taxes, higher tariffs and non-tariff barriers as well. This, oddly, is the future Trumponomics is courting as it seeks to transport America back to a simpler time when upstarts like China weren’t reordering global trade. His strategy has three prongs. First, there is the $1.5 trillion tax cut Trump signed in December, which he argued would put more money back into the pockets of individuals and businesses. Second, on January 24, Treasury Secretary Steven Mnuchin declared dead Washington’s 23-year-old strong dollar policy. While Mnuchin tried to walk back his comments, they fit with Trump’s campaign-trail comments about a “too strong” dollar “killing us.” (Indeed, the yen’s 2 percent gain against the dollar this year suggests traders are bracing for a weaker dollar, and China’s yuan is up 2 percent this year.) Third, and most importantly, Trump is trying to siphon jobs and investment from China. In March, his administration rolled out tariffs on steel (25 percent) and aluminum (10 percent), announced about $150 billion in levies on Chinese goods and issued vague threats of more to come. Despite Mnuchin’s statement over the weekend that a trade war is “on hold” as negotiations continue, the administration’s next move is unclear, and Asia is still bracing for more hits to come—both in terms of tariffs and a weaker dollar. For all his chest-thumping about low unemployment and stock gains, Trump isn’t getting under the hood of an economy being challenged by nimbler upstarts such as China, India and South Korea. None of Trump’s policies will increase U.S. productivity, reduce inequality or pressure executives to raise salaries. After Ronald Reagan’s tax cuts in the 1980s nor George W. Bush’s in the 2000s, companies prioritized share buybacks, dividends, paying down debt, and mergers and acquisitions—not wages—and Trump’s cuts offer no incentives for executives to fatten paychecks or move jobs to America. Moreover, none of Trump’s policies seeks to repair crumbling infrastructure, cap runaway government borrowing or stabilize health care markets. Washington isn’t doing much to invest in education, ensure that tech-heavy industries have their pick of global talent or prepare the workforce for the real threats to U.S. workers: automation and artificial intelligence. The jobs Trump seeks to claw back from China—lower-wage manufacturing slots that the workers can’t do competitively because of higher wage and benefit levels—are gone forever. To even try to get them back is futile. Awakening America’s animal spirits to meeting China’s challenges requires bold structural change. Instead, Trump is following Japan’s playbook—in dangerous ways. He blames China for stagnant U.S. wages, not unlike how Japan has long blamed China. But draconian tariffs on China would ignore the scope of Washington’s 102 trade deficits with other economies around the globe. These many imbalances reflect inadequate domestic savings that will only grow more inadequate with America’s budget deficit thanks to the tax cuts passed in December. In the 1980s, Japan developed its own revenue-shortfall troubles, which, over time, left Japan with the world’s largest debt burden relative to the gross domestic product. As U.S. debt imbalances grow, Trump’s protectionist turn could boost borrowing costs. That raises another lesson from Japan, notes Yale University’s Stephen Roach, a former chairman of Morgan Stanley Asia: the dangers of a country becoming “overly dependent on asset appreciation as the sustenance of growth.” Rather than creating growth from the ground up with startups and new higher-value-added industries, Trumponomics relies almost exclusively on an asset-appreciation scheme akin to Japan’s three decades ago, particularly via stock market gains. Trump has also dropped hints that the Federal Reserve should go easy on interest rate hikes. But in the 1980s, Japan’s easy-money policies fueled asset bubbles—which ultimately burst. Another Japan-like mistake Trump is making is bombarding an economy that doesn’t need it with short-term stimulants. Trump’s tax cuts toss a large burst of stimulus at an economy already at full employment. Overheating risks abound. “The U.S. strategy is seriously flawed,” Roach warns. Japan saw how similarly flawed policies could backfire, as its go-go 1980s ended with an epic crash. Tokyo’s so-called Minsky moment—when a debt-fueled boom comes to a nasty end—shocked fans of Harvard professor Ezra Vogel’s 1979 best-seller, Japan as Number One. By 1990, when then-Congresswoman Helen Bentley, a Maryland Republican, lamented that America was “rapidly becoming a colony of Japan,” the tide had already turned—Japan was entering its “lost decades.” By 1992—when Michael Crichton’s novel Rising Sun, about a shadowy network of Japanese chieftains asserting economic hegemony, was flying off bookshelves—Japan was reeling from bubbles gone awry, experiencing a sequel of deflation, massive stimulus and huge bank bailouts. By 2011, China had surpassed Japan to become the No. 2 economy after America. Japan is still dealing with the manifestations of a two-decade economic funk, most obviously deflation. Since 2000, the Japanese government has treated falling consumer prices as the cause of weak consumer and business confidence, but it’s really a side effect. The end of Japan’s credit-fueled boom left companies bloated, overextended and unable to sustain the profit growth of the 1980s. As caution set in, investment and wage growth slowed markedly. A steady downshift in sentiment across economic sectors ate away at pricing power and consumption. Even today, Japan remains Exhibit A for the limitations of the trickle-down ethos at the root of Trumponomics. In December 2012, Prime Minister Shinzo Abe rolled out his own three-pronged revival scheme. The first phase—ultralow interest rates—weakened the yen and propelled asset prices higher. Construction ahead of the 2020 Tokyo Olympics comprises the fiscal-loosening portion of Abe’s plan. But a deregulatory big bang, the third and by far most vital phase, has barely materialized. While Abe’s team has strengthened corporate governance, it has been glacial about moves to loosen labor markets, catalyze a startup boom, empower women in the workforce and slash bureaucracy. With history’s most aggressive monetary easing regime and a weaker yen, Abenomics boosted asset prices, making the wealthy richer as wages have stagnated. As president, Trump appears to have merely replaced Beijing in the sinister role in which Trump himself cast Tokyo in the 1980s. In doing so, he risks doing more to make China great again—rather than America. The White House forgets that the United States is now a services economy; exchange rates aren’t the panacea they were more than 30 years ago. It ignores, too, how China is investing hundreds of billions of dollars in becoming the next Silicon Valley. President Xi Jinping is also striving to dominate renewable energy, AI, robots, software, fintech, self-driving vehicles and space exploration. Trump, by sharp contrast, is refocusing on coal, cutting emissions standards for Detroit and repelling foreign talent. He is punting on structural reforms, Japan-style, needed to step up America’s game against China. Today, Japan muddles along, thanks to a high-savings culture and deep social safety nets. But could most U.S. households withstand 10 to 20 years of negligible growth and flat wages? The United States might have a hard time keeping it together in the event of a lost decade. Taxes have already been slashed, and there’s little scope to cut borrowing costs. The risks would seem less dire if Trump weren’t dragging America back to 1985 to beat a China gearing up for 2025. The way Trump is going, “great” is destined to refer to America’s debt burden, the magnitude of the asset-market correction to come, and the gap between the 1 percent and everyone else. We’ve seen this movie before. It doesn’t require Japanese subtitles to know it could end badly for Trump’s America.
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