TRADE WARS ARE THE WARS OF THE 21st CENTURY, AND AMERICA WILL LOSE THAT ONE
TRADE WARS ARE THE WARS OF THE 21st CENTURY, AND AMERICA WILL LOSE THAT ONE !
The Trade War initiated by Donald Trump with China will prove to be just another aspect of the secular shift of global leadership from the USA to China.
As was the case with North Korea, the outcome will not be what America expected, but exactly the opposite, it will re-inforce China’s economic dominance and Donald Trump has just offered Xi Jing Ping a golden opportunity to show China’s clout on the world economic scene.
And the US stands to lose that war !
Imposing US$ 60 Billion of tarifs and singling out China and Japan while excluding Europe and the rest of the world was not the best way to reduce America’s trade deficit.
Moreover, it amounts to clear declaration of war in times where wars are no longer waged with military force but with economic power.
As was the case with North Korea, the Trump Administration made spectacular announcements and used a very loud and aggressive rhetoric, flexing muscles and trying to solve issues by intimidation, and as was the case with North Korea, China remained much quieter and refrained any escalation, until now !
Their initial announcement of US$ 3 Billion sanctions against US products last week was just an opening shot, an indication that it would not remain passive while keeping the door opened to negotiations and peaceful resolution of the problem.
But Donald Trump aggressive tone led to much more drastic actions today, and the tone of voice of the Chinese newspapers and Government officials show that China is extremely upset. And you do not want to upset the Chinese, Trust me !
China is not going to stay there and Donald Trump is now facing the difficult choice of a humiliating turn-around or the prospects of Chinese actions that will end up extremely damaging for the US economy at large. Unfortunately, Donald Trump already went too far !
People may not be aware of it, But the young Donald TRUMP was a fierce critic of Japan in the 1980’s at a time where all the products sold in the world were made in Japan. His adult life and professional experience as a New York real estate deal maker did not expose him to the realities of China’s changes and China’s culture, and Donald Trump does not seem to realize that what is happening is a profound change in the world leadership with momentum that the US cannot stop.
The USA are no longer the dominant economy of the world. The rise of Europe, Japan, and so many emerging markets is making China far less sensitive to the US than would have been the case 20 years ago, but the US is extremely sensitive to what is becoming, and by far the world’s largest economy of the world.
In our recent post SELL AMERICA BUY CHINA, THE BIG SECULAR SHIFT IS NOW , he made the case for the urgent need fro investors to Sell the overvalued US equity market and Buy the undervalued Chinese market. Our timing was perfect and Donald Trump’s trade war has just accelerated the phenomenon.
China, of all cultures, is not one to be confronted by force and threats, and certainly one where losing face is the worst that can happen.
Anyone believing that China will remain put or abide by the American diktats is living in Cuckoo Land.
And China has a lot of weapons to play with, and most will be extremely damaging for US corporations and the US economy.
First, China may instruct its airlines to gradually stop buying Boeing airplanes. This was just done today by China imposing 25 % tariffs on US made planes, killing BOEING’s competitiveness against AIRBUS.
We did not expect it to happen that fast and it illustrates how angry and determined the Chinese are.
China’s own aviation industry is now coming of age and this is a great opportunity to encourage Chinese airlines to shift from US built aircrafts to Chinese built aircrafts.
China is, by far, the largest and the fastest growing market for the aviation industry. 487 million domestic and international journeys made last year in China, according to data from the Civil Aviation Administration of China (CAAC). Even more impressive is how quickly the market is growing. The number of trips made last year increased by 15 %, according to CAAC.
The surge in air travel has been fueled in large part by middle class Chinese who are spending billions on domestic and foreign vacations. With a population of 1.4 billion, the trips add up: Analysts predict that China will surpass the U.S. as the world’s largest commercial aviation market by 2030.
As recently as last September, Boeing estimated that the country will need a trillion dollars worth of new airplanes over the next two decades, including more than 5,100 of the same size as the Chinese made C919. Most of that money would have been destined for bank accounts at Boeing and Airbus.
Donald Trump just offered China the opportunity to shift that money faster towards the new competitor on the block. With 168 seats, the C919 competes directly against the Airbus’s A320 and Boeing’s 737–800. Tough luck Boeing and its workforce…
Second, China may start making it more difficult for US-made cars to be sold in China. Technological requirements, certifications, communication, safety reports will all be part of the arsenal that can be used to impose Soft tariffs rather than confronting the hard ball game.
There again, China happens to be the world largest market for vehicles and the fastest growing one. It is also the fastest growing market for Electric vehicles, one of the strategic priorities of GM and Ford for their future.
Curtailing the access of their market to US manufacturers will have devastating consequences for the US car industry in the long term, and there again, it will accelerate the shift of Chinese consumers towards locally-made brands and accelerate the investment initiatives of Chinese car-makers in Europe and Asia.
Though luck Detroit and its US workforce…
Third, China may start making it more difficult for Apple to sell its iPhones in China, based on security concerns, and it may also make it more difficult for Apple to source components in China.
There again, China is the largest an fastest growing market for smartphones and laptops and HuaWei would love the opportunity to take a larger slice of the market.
Tough luck Silicon Valley and its workers …
Fourth, China WILL make it more difficult for US banks to enter the Chinese Market, precisely at a time where China announced it would allow foreign banks to operate in the domestic market and where it officially opened the 24 Trillion domestic payment market to foreign firms.
This was one of the most strategic and most important priority of the US banking system and they had been lobbying for years if not decades to get to this very juncture. Slowing down the process, imposing disclosure rules, capital ratios and management requirements that go against the US regulatory environment and banking culture is extremely easy to do and US banks would miss the boat of what is to become the largest banking market in the world.
Tough luck Goldman Sachs, JP Morgan, wells Fargo and Bank of America, and their US workers …
But besides all these examples of targeted soft sanctions, China has extremely powerful macro-economic tools at its disposal and these will have massive repercussions on the US economy and on the US standing in the world economy at large.
The first is a legal action at the WTO that will either end up in a humiliating condemnation of the United States of America, the Champion of free capitalism, for restricting free trade and free capitalism, or the opening of a legal Pandora Box that will question the entire construction of the free-trade environment that has benefitted the world for the past 40 years and that will ultimately favor China by eliminating its obligations to open its own market, the largest consumer market of the world. China announced today that it was filing a lawsuit at the WTO !
The second, is the offloading of the US$ 1.1 Trillion of US treasury bonds held by China as part of their foreign exchange reserves and reduced participation in new issuance of US Treasury debt. And it so happens that is is taking place at the exactly the time where china was scratching its head to reduce it foreign exchange reserves without upsetting the markets or its trading partners.
Donald Trump just gave China a golden opportunity to speed up the process while blaming theUS for it.
China has a thousand years of refined punishments and giving lessons to rogue citizens. We would not be surprised to see China using its huge holdings of US bonds to punish Donald Trump at a time where the financing of the US Budget deficit is already a huge concern.
A simple announcement would send US Government bonds plummeting !
Fasten your seat Belts in Bonds and Buy the Chinese Yuan !
The ultimate impact will be a global increase in US interest rates and therefore higher financial cost for US corporations and less Growth and less jobs for Americans at large.
Confronting the next world largest consumer market and your largest creditor nation in NOT a successful strategy… and anyone thinking that Donald Trump offensive will be without lasting consequences does not really understand China.
Finally, the most un-intended consequence of this trade war will be to accelerate the secular rise of the Chinese currency and the generalized use of the Chinese currency that we have been predicting all along !
On March 21st, China announced that it will permit foreign companies to access its $27 trillion payments market, further opening up the world’s second-largest economy. Foreign players can now start applying for payment licenses and will be treated the same as local firms, encouraging the use of the Yuan in foreign trade with China at the expense of the Us currency.
Premier Li Keqiang promised to protect the intellectual property of foreigners investing in its economy, as China seeks to counter the U.S trade war. Allowing foreign firms to enter the payment market with defined regulations helps boost innovation, creates a fair environment for competition, and improves the services of payment providers, the central bank said in the statement.
China’s payment firms processed 169 trillion yuan ($27 trillion) of transactions in 2017, a nine-fold surge from 2013,
according to the central bank. China has issued more than 260 non-bank payment licenses to local firms with online transactions accounting for over 80 percent of the total processed value in 2016, according to the industry’s annual report.
A second aspect of the acceleration of the use of the Yuan in global portfolio was highlighted last week in a UBS report.
China bonds will likely attract $3 trillion of inflows by 2020 after their inclusion in major bond indexes, according to UBS Asset Management. “We say to a lot of investors, even if you’re not interested in investing in China onshore bonds, please research this because everything you own has to get sold as funds allocate more money to China,” said Hayden Briscoe, head of UBS fixed income, Asia-Pacific at the asset manager, which managed 776 billion Swiss francs ($811 billion) as of Dec. 31.
China’s regulators have been opening the world’s third- largest bond market to global investors. Bloomberg LP said
Friday it will add China’s yuan-denominated bonds to the Bloomberg Barclays Global Aggregate Index over a 20-month period starting April 2019. The inclusion of the nation’s bonds would bring cash into the country from yield-hungry investors from New York to London. Other bond indexes will likely follow suit,
according to UBS Asset.
China’s currency got a boost earlier this week as yuan-denominated futures started trading on the Shanghai
International Energy Exchange Monday. President Xi Jinping has pledged 100 billion yuan ($16 billion) of funding for his “Belt and Road initiative.” As usage of the yuan rises, that will create reserves which will need to be invested in China’s financial markets.
“Ever since the global financial crisis, China has been proactively trying to move to the renminbi,” said Briscoe. “They have now started settling oil trading in renminbi, which is a major step.”
Donald Trump’s Trade war has just given China the opportunity to accelerate decisively the shift of China to the Yuan, and this will have a lasting impact on the capability of the USA and of US corporations to fund their deficit and financial needs.
Unfortunately, as we have argued as early as 2014, this is the end of the US world dominance and the beginning of China’s world dominance, America will lose this war, and China has everything to gain from it !
And it may start reflecting immediately in the relative value of their stock markets as can be seen in the chart below !
As an illustration of this very fundamental change, we would like to share here a video of Zhang WeiWei of Fudan university that says it all and will help people understand better what is taking place in China and why we are Selling the US and Buying CHINA ( see SELL AMERICA, BUY CHINA THE BIG SECULAR SHIFT IS NOW ).
We have developed many time in the past why the Chinese Model of governance could prove to be superior to the US model and why the Chinese believe it is… Please listen to it ! it is worth your time .
© Mechelany Advisors
Originally published at Mechelany Advisors.
