The US has entered a new Cold War, in which the Peoples Republic of China (PRC) is the primary antagonist, having replaced Russia as America’s existential threat. For twenty years, American presidents have thrown whiffle balls, which the Chinese – using Louisville Sluggers – crushed into grand slams. With the Trump presidency, America has finally decided to play hardball with the PRC, specifically on trade.
As of this writing, every media outlet is debating the merits and outcome of the “trade war” as if that is the sum total of the “war” between the USA and PRC. To be sure, the tariffs are a big deal: my own industry is currently suffering the consequences. However, trade “battle” is a more accurate term, because defeating PRC’s trade tactics is but a means to defeat China’s endgame: military and economic hegemony. That endgame is unacceptable, because the “open” US should not be replaced by the “closed” China as the cutting edge of science, technology, engineering and medicine.
I have spent eighteen months of my life (between 1993 and 2012) working in the PRC, observing firsthand forced-technology-transfer tactics. The PRC “encouraged” ethnic Chinese from open economies (such as Taiwan and Singapore) to move labor-intensive manufacturing (e.g. furniture and apparel) to south China in the early nineties. Within ten years, native-born Chinese had learned what they needed to launch locally owned competition, and the PRC “discouraged” foreign-owned competition out of China.
A short tutorial on forced-technology transfer: the Taiwanese began producing American-style furniture in 1978, quickly adopting and perfecting low-cost manufacturing. By 1988, high demand and a small labor pool meant Taiwan was no longer the low-cost Asian producer; so, the Taiwanese took their know-how to Indonesia, Malaysia, Thailand and the Philippines. By 1998, everyone had moved to south China, where the PRC offered sweetheart deals on real estate and labor, plus export incentives.
At the top were the Taiwanese owners with expertise. Below were native-born middle managers, earning MBAs in furniture manufacturing and marketing, surrounded by best-in-class, foreign-owned support factories (e.g. hardware and finishing materials). By 2003, the furniture industry’s critical mass was in south China – not North Carolina. By 2008, the Taiwanese were mostly out of China. In their place were locally owned facilities managed by native-born Chinese.
This scenario has been repeated in industry after industry, and today the PRC is hoping to leapfrog the USA in two big ways. First, they want to surpass America as the go-to source for science, technology, engineering and medicine; primarily, in the growth markets of artificial intelligence and 5G telecom. Second, they want to replace America as the Sugar Daddy to the developing world; indebting third world nations with Chinese development loans in exchange for captive markets for PRC products. If successful, the world will enter a dangerous era of Chinese economic and political hegemony.
Sadly, Presidents Bush and Obama did not care about job losses and ruined communities in fly-over America. It is charitable to describe them as free-trade suckers who were pre-occupied (war on terror and banking/housing crisis). Fortunately, growing discontent in much of America elected Donald Trump. Love him or hate him, President Trump is tackling the biggest threat to America – one that should have been pre-empted by his two immediate predecessors.
As a practical matter, Trump is wise to challenge the PRC in a trade battle now to avoid military conflict later. Macroeconomics suggest Beijing – not Washington – is mis-reading the competitive landscape. Chinese hardliners believe the US is economically dependent upon China. This is not surprising in light of China’s rapid economic growth and absence of outside news sources. Actually, the USA and PRC are currently economic co-dependents. The Trump team knows negotiations turn on reality and suspect Chinese hardliners are over-playing their hand – – because America is the bigger and stronger economy.
Trump’s team does not fear the so-called nuclear option (i.e. China uses its substantial treasury holdings to ruin the US dollar). Right now, China holds $1.12 trillion of $22 trillion in outstanding US debt (17.7 percent of US debt held by foreign governments). China would struggle to move its $1.12 trillion out of the US bond market. US Treasury securities are in reality a substitute for cash. They are the world’s means of exchange, because the US has the one currency the world uses for the huge transactions of investments and global-debt payments, as well as oil and other commodities.
To America’s advantage, the world’s central banks would gladly buy China’s holdings of US Treasury paper, because the size and liquidity of the US bond market makes it so attractive to central bankers, who need assets that can be quickly sold to stabilize their country’s currencies. To China’s disadvantage, if they converted their dollar surplus into cash, those funds would deposit in major global banks in the EU and Japan, who would then happily buy low-risk treasury bonds. In short, the USA needs China’s trade and finances less than the PRC needs the US dollar surplus.
If Beijing devalues the yuan, it could easily cripple the PRC economy, which is already saddled with massive private and public debt and is currently dependent upon exports to the US. Trump’s economic team knows this and believes the US is better positioned to win a trade battle with China. In 2018, 24.5 percent of China’s exports ($555 billion) went to the US. In comparison, only 7.2 percent of US exports ($179 billion) went to China. To be sure, the new round of tariffs on PRC imports will hurt the average consumer.
The media is grossly ignorant of the details of close-quarters trade combat. For example, Chris Wallace of Fox News challenged Trump’s claim last Sunday that China was paying the tariffs. I know firsthand that Trump’s point is accurate: PRC manufacturers are cutting prices by as much as 16 percent to hold onto American business. Furthermore, I have observed firsthand an outsource stampede out of China into Vietnam and other low-labor countries.
If you love America but hate Trump, stand with the President in this battle. If you love truth, justice and the American way, stay with the President on this quest. America is, by and large, an open and honest free-market that is overwhelmingly consumer-driven – regardless of what Alexandria Ocasio-Cortez or Elizabeth Warren say. Chinese economic hegemony will be a very bad thing for America and the global economy. This is not a drill!