China’s options for retaliating against tariffs are limited by its own economy
nytimes.com
nytimes.com
I feel this is what is occurring now in the USA. The Chinese are eating the tariffs and will continue until there is no more room to maneuver. At that point US companies will probably eat some of the tariffs by reducing profit. Eventually the consumer might have to pay a little more but that isn't a guarantee. The consumer could luck out and pay what they were always paying.
During the 2008 melt down, all our factories agreed to work at cost as long as we continued to buy so they could keep the work force employed. The Chinese are very tough and very willing to do whatever it takes to stay in the game.
It turns out that all the cost is in marketing and distribution. And for asian manufacturers the internet era has decreased those costs a ton. They can outsource them to eg. western youtube price arbitragers and focus completely on volume to maximize their government subsidy.
this is where i expect steve bannon’s idea of favoring bilateral deals instead of large trade blocks (ASEAN, TPP etc) to backfire
in the end china will probably just find other ways to adjust and world economy starts splintering
(personally, i was no fan of tpp because of the non-democratic arbitration clauses, but i also think bringing the world together under harmonious and consistent trade relations is extremely important for peace and stability)
Open markets work best when there is a common peaceful order, and an enforcer of it. US used to be, and largely continues to be such an enforcer, but not in the China's area of influence.
1. https://www.counterpunch.org/2019/07/19/china-and-the-swine-...
"But Trump’s obsession with interest rates stems from a larger concern — boosting economic growth. He only wants the Fed to lower rates so U.S. banks will put some of their $1.4 trillion in reserves to work in the economy. A huge sale of U.S. Treasuries by China would have a similar effect: As interest rates on Treasuries began to rise, banks would use some of their reserves to buy more Treasuries. That spending would put more cash into the wider U.S. economy and stimulate growth.
There is a second, somewhat related, effect of a sale of Chinese bonds: It would drive down the value of the dollar. When China sells U.S. bonds, it receives dollars in exchange. The Chinese could use those dollars to buy other U.S. assets, but the whole point of selling Treasuries is for China to divest from all U.S. assets.
That means the Chinese would need to exchange their dollars for some other currency — euros, pounds or even the yuan. Putting so many dollars on the foreign-exchange market would weaken the value of the dollar. The effect would be to drive up the price of foreign imports for U.S. consumers and drive down the price of U.S. exports." [1]
1. https://www.bloomberg.com/opinion/articles/2019-05-13/u-s-ch...
From above: "The effect would be to drive up the price of foreign imports for U.S. consumers and drive down the price of U.S. exports."
What would this do? It would make Americans buy American products. It would make the world buy American products. It would make American companies invest in US manufacturing, rather than overseas.
What does massive economic growth do for the US? Pays down the national debt fast.
I feel the same as you about the TPP. The implementation might not have been great but the idea was good. We need to band together with our smaller allies to negotiate effectively with China.
It hurts China, but it does not mean China has to retaliate because it would hurt China customers as well. If China's leaders are wise, they would focus on the economy boost instead of playing this child game with another Child.
The question monetary value, but where widgets are physically made made. This simple realisation eludes so many "China Experts" in the West.
Were Beijing to pull an inverse Huawei ban on any company in the West, that company would be dead in a few months no matter what it is. It can crash US stock market, pension funds and assuredly secure the non-election of Trump for the second term.
China is fully capable of economic retaliation against US and can genuinely make it hurt, but it chooses not to because people in Zhongnanhai have no guts for that.
What surprised me most in recent months is that out of all people, the criticism of Xi's overly conciliatory tone with Washington is now coming from people whom you can call Chinese industrialists class. This criticism is quite strong worded, emotional. I never ever saw somebody so up on social ladder here being so openly critical of Xi before.
Another sentiment from a forum quite popular by industry oldtimers is beyond unflattering, pretty much a personal rant on Xi, so I can't say the source. The point was that Xi, a very insecure man, and the elites of his generation, were unable to resist influence of Trump's powerful ego, and that they are plainly frightened by him.
From my own view, this is indeed the case. It is hard to explain to somebody who live in the West how it works, but I'll try my best here:
See, that generation of people were risen in the culture dominated by the social class of "Big Men," and all of their social programming and mental processes work around one attaining, securing, maintaining, extracting benefits from, giving or forcefully taking that "Big Man" status from somebody.
In eyes of such people, somebody like Trump may indeed look like a very "top dog" person, more so than even Xi himself. And it is Xi's insecurity that pushes him to seek engagement with Trump, to show his peers that he "can talk on equals even with a big bad boy like Trump."
If he were to break off that engagement, and if he would've lashed out on Trump, many of his peers would've seen that as him going on defensive, and admitting his inferiority to Trump, as if he was skulking away from Trump's intimidating presence.
China can't do any of that because it would harm their own economy far more (what remains of their industrial / trade trust would vaporize further) and it wouldn't likely kill the company they target (unless it was a small hyper dependent company). The US move against Huawei works particularly well because of the US partners willing to go along with it as a group; the same is true of US sanctions. China has very few allies and few global levers.
Plus, the US would respond very harshly and China knows that. China isn't a gentle flower, it isn't avoiding hammering strategic US companies out of the goodness of its heart; it isn't attempting that maneuver because it knows the cost is too high for itself.
The US is one of the least trade dependent nations:
https://en.wikipedia.org/wiki/List_of_countries_by_trade-to-...
And: https://i.imgur.com/7JIIX8Q.jpg
On imports + exports as a share of GDP, the US ranks #6 in the world as least dependent, with those two items making up 27% of the US GDP. China is at 40%. Germany is 87%, France is 63% and the UK is 62% by comparison.
The US is also, essentially, entirely energy self-sufficient, with Canada's help. Something China is nowhere near being. The US could shut off China's access to foreign oil and a lot of coal supply very easily and it would grind up their economy.
Let's run the hypothetical though. Ok, do it to Microsoft, Google, Facebook and Oracle. Those are three of the five largest US companies and four of the largest tech companies.
Might as well also hit Netflix, Adobe, Intuit, Salesforce, Workday, ServiceNow, Uber, Lyft, Twitter, Snap, Pinterest, Slack, Dropbox, etc.
Also Exxon, Chevron, ConocoPhillips, Occidental, Phillips 66, Valero, Marathon, EOG.
Run it against JPMorgan, Citi, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, BlackRock, NY Mellon, Fidelity, Vanguard, etc.
Next up do Visa, PayPal, Mastercard, Discover, Amex, Square, Stripe.
Then do it to Pfizer, Amgen, Merck, AbbVie, Gilead, Bristol-Myers Squibb, Biogen, Eli Lilly.
Maybe Lockheed, Raytheon, Northrup and General Dynamics.
How about Comcast, AT&T, Verizon, T-Mobile / Sprint.
Also McDonald's, Yum Brands, Kraft, Mondelez, Coca Cola, Pepsi.
Total result: barely a scratch overall, if that.
Few of these companies, many of which are among the largest corporations on the planet, have a critical (threat-of-death type) exposure to China. A few would lose 5-10% of their businesses and life would continue just fine.
This is the fundamental mistake China made by keeping its economy so restricted and locked down to foreign companies. Most of the US economy doesn't have a critical dependency on China. That's also why the large China tariffs are having near zero inflationary effect and that will continue to be the case. The only serious effect it's having is that it's pushing manufacturing out of China, which was one of the goals.
Also fortunately Taiwan != China
I'll invert your argument. China can close all trade with USA tomorrow, and it will only be few percents of its GDP gone. Trade is not as big part of Chinese GDP as most people think, and trade with US is even smaller.
Moreover, do you think that China has any trust to loose to begin with? Even 10 years ago, the biggest headache of an MNC in China was plain theft and petty extortion by low tier officials. If those companies had a chance to move elsewhere, they would've done so years ago.
They plainly have no alternative.
> and it wouldn't likely kill the company they target (unless it was a small hyper dependent company). The US move against Huawei works particularly well because of the US partners willing to go along with it as a group; the same is true of US sanctions. China has very few allies and few global levers.
China does not need allies to pull that out. Just any widget around has part/material/labour that is passing through China at some point. China can say companies to stop selling parts to server makers selling to, say, Google, and Google would not be able to do a thing about that. It is humanly impossible to recreate all and every critical component that goes into a computer these days apart from Chinese supply chains.
> Plus, the US would respond very harshly and China knows that. China isn't a gentle flower, it isn't avoiding hammering strategic US companies out of the goodness of its heart; it isn't attempting that maneuver because it knows the cost is too high for itself.
Sure, that's the thing, it will be the biggest trade battle ever. The current administration is too soft bodied to even contemplate fighting.
But they have no other option to win this trade war. If Xi has no guts for that, my feel is that somebody will either force him, or do that for him.
> The US is one of the least trade dependent nations:
This is an illusion. USA is one of nations most dependent on Chinese light industry goods. Just any everyday item, and household good on US shelves comes from China. Many kinds of essential components and materials for US domestic industry are near 99% imports.
For example, US may simply be left without half of all kinds of plastics on the market. China has near 100% monopoly on a lot of plastic types,especially higher performance ones. And people were saying that Dow Chemicals was ruling the world...
There are less domestically manufactured everyday goods in US than even in Russia or the Gulf countries.
Surely, USA has banks, funds, and law companies, but does it have manufacturers of trousers?
The next decade on the other hand could be catastrophic for the US though because depending what rhetoric trends in the US the rest of the world will be looking to insulate itself from that political environment.
China can import as much energy as it wants from Central Asia and Russia, it chooses not to because Saudi oil is cheaper.
China also is not as dependent on fossil fuels, due to extensive rail links between their major cities. Its just convenient to use jet planes, also the CCP actively wants to create a Boeing alternative.
If we do end up in a situation that becomes an existential threat to CCP:
- China would aggressively dump US treasuries.
- China stops exporting rare earths that even the US military depends on.
- China starts importing Iranian crude ( providing navy escort ).
- Chinese nationals are forced to sell their holdings in the US.
All of these things would cause a major financial crisis in the US, the Baby Boomers do not have the stomach for it and would vote Trump right out.
Anyway, you are right, the US doesn't depend on trade.
But 44% of US corporate sales happens overseas. A shutdown of global trade would be quite bad for the Chinese, but it would be worse for the "richest nation on earth".
> This is the fundamental mistake China made by keeping its economy so restricted and locked down to foreign companies. Most of the US economy doesn't have a critical dependency on China.
Why should the Chinese open their economy to US companies without getting something big in return ? US firms are not entitled to free access to anything outside their borders.
We know what Facebook, Google can do to a country, it's better for humanity if US companies are not given completely access to every market.
You're wrong about that. You're talking about the S&P 500, not all US businesses (most US businesses have very little overseas exposure in fact). China is a modest fraction of that S&P 500 44% figure. Further, as noted previously, the US doesn't benefit from or require global trade nearly as much as China (which is also highly dependent on an inflow of dollars to fund its economy).
China currently has a serious dollar based debt problem with its corporations. The Chinese economy requires constant, large inflows of USD. The US is the exact opposite, it has almost no foreign currency debt dependency. And it has zero dependency on the Yuan.
The US is highly self contained in all regards, including its wealth. Its sole major weakness is the consumer junk that people buy at Walmart, mostly from China. Fortunately, the US can replace China with three dozen other countries that would love to start making those easy-to-replace goods, like $60 microwaves (which can easily be made in Mexico or Vietnam). This trade & manufacturing shift is happening right now and will continue.
> China would aggressively dump US treasuries.
Which would do almost nothing. China represents a now trivial part of the US debt picture. Each year that goes by that position becomes ever less important. The Fed could very easily replace China's holdings with a round of QE. The US isn't lacking for demand on its debt, especially while $13 trillion in global debt yields nothing.
> China stops exporting rare earths that even the US military depends on.
The US has begun the process of using the Defense Production Act, which enables the US military to spend money and allocate resources to fix this problem as it sees fit. China has maybe a year to utilize rare earths to any impact, after that it's likely to be permanently removed as a trade weapon. China already made a mistake by hinting at rare earths as a weapon, the US is going to preemptively correct the issue.
Rare earths are plentiful and the US has two domestic mines capable of production near-term (one of which is active right now). There are multiple domestic processing facilities set to be built in the next couple of years. The US military will begin expediting all of that. It wouldn't take more than a year if it were necessary. Further, it's only a small subset of rare earths that the US has a strong need for, narrowing the problem considerably.
Rare earths is among China's least potent threats against the US. If they make the mistake of trying to use it, the US will permanently break their hold over that market (something that Japan almost single-handedly accomplished previously, while having a far smaller economy and far less ability to force outcomes than the US; the US would smash China's global rare earth market share, it would only take a few billion dollars in annual spending for a few years by the US military to do that; an easy move on a national security basis).
> Chinese nationals are forced to sell their holdings in the US.
That would hurt China and benefit the US. It would be ideal for asset prices in the US to decline slightly (they're extremely high right now). Regardless, Chinese nationals do not hold enough US assets to substantially impact US asset valuations.
> All of these things would cause a major financial crisis in the US
None of those would have any serious impact at all.
> China also is not as dependent on fossil fuels, due to extensive rail links between their major cities.
China's demand for oil is increasing, not declining. Their overall power production from coal is increasing, not declining. They've merely been simultaneously increasing their share of renewables. Over the last ten years their oil demand has increased by 50%. They're currently consuming roughly as much coal as all the rest of the world combined.
It makes them exceptionally vulnerable to an external energy shock from fossil fuels. They're incapable of meeting their own energy supply needs in the next 30 years.
I don't remember any major panic about it, and not even a spectacular NASDAQ crash due to that.
I see that a trade war is a war of attrition, but I don't see US industry as more vulnerable than Chinese in this regard.
Huawei (or any smartphone company) has no alternative to chips that license US technology.
US-made chips are necessary for high-performance computers; there is no China-made Xeon or Power9. But this is not smartphone stuff.
Re Google: ad sales in China did not stop, but Google received no revenue from that huge market then.
[0]: https://www.theverge.com/2019/5/22/18635326/huawei-arm-chip-...
I don't think either side wants to take such drastic action though.
This is what the US did to Huawei. Huawei was already effectively banned from selling in the US market, and it didn't impact them that badly. They could still sell in China, Europe, India, Africa, etc. But being sanctioned by the US meant that they couldn't buy from critical suppliers, meaning they wouldn't even be able to manufacture their products in the first place.
The reason why China hasn't retaliated against a company like Apple, which would be devastated by any Chinese sanctions, is that long term, such a move would scare off other companies. Everyone would try to limit their supply-chain exposure to China, just as Chinese companies are now trying to do with the US.
> “We don’t know how to deal with this either,” Tu Xinquan, the president of the China Institute for W.T.O. Studies at the University of International Business and Economics.
> “Is he a sane person at all?” Professor Tu said of the latest move by Mr. Trump. “It’s quite surprising. Didn’t the White House just announce that the trade talks were constructive?”
I'm afraid that Beijing still did not realise that all of the above is pretty much planned. Trump will keep "nightmaring" them, keeping them tense, showering them with unending negative publicity of them keeping failing the trade talks time and time again, while propping up his profile.
Things like this keep showing just how inept and naive are the people making the Chinese elite class.
In a sharp contrast, Chinese business elites are the real sharks, all very sharp people.
Sooner or later, this will end up in conflict in between the two.
Could it be that Trump knows this and is pushing for it?
What you're asking (whether Trump knew this as a consequence and pushed for it) would be much more like deep strategic thinking. I don't think that's his style.
Previously the US has been run by people who are the scrupulously honest, diligent, forthright types. And anybody who was willing to get a little aggressive walked all over us. Trump totally flips that dynamic around. He is the guy who is aggressive, belligerent and unpredictable. As much as he may be a reprehensible human being, I’ve been on the other side of the table from people who negotiate like this and it’s refreshing to have one of them in America’s corner.
I cannot imagine these journalists lack this very basic knowledge, which makes me think they are being deliberately deceptive in their framing.
[1] https://www.reuters.com/article/us-imf-worldbank-china/china...
[2] https://www.forbes.com/sites/douglasbulloch/2016/10/12/prote...
"Eschew flamebait. Don't introduce flamewar topics unless you have something genuinely new to say. Avoid unrelated controversies and generic tangents."
I agree that "they started it!" won't make for a very interesting discussion, but talking about which facts the press focuses on, and which it ignores, could be.
Shoehorning a pre-existing grievance into the thread is exactly how we get repetitive flamewars. I know it feels more important, but it always feels that way, and that feeling needs to be resisted if we're to have curious discussions about new things. The art of being a good commenter involves focusing on the specific new information in an article.