China Supply-Side Push Into Trade War
Back in 2014 I penned this post The Logic of Strategy: Yuan Devaluation and the Road to Trade War. I had the order of events wrong and didn’t realize how deeply the United States is controlled by a hostile ruling class that hates the American people, but the general trend is still happening because the same ruling class wants the China-Russia alliance out of the picture.
They have to bring back manufacturing, otherwise they cannot hope to fight a war. Economically, it would be like the Empire of Japan vs USA 1942 where there’s an early chance at knocking out the industrial power, otherwise an extended war is game over as the economic powerhouse smothers the opponent with drones and missiles. Trump presents the nationalist, America First side with tariffs and onshoring being more of a peaceful move and not a prelude to war with China.
Meanwhile, China is ramping production with advanced manufacturing despite the lack of domestic demand.
Mish: A Big Deflationary Push From China But Will Biden or Trump Allow That?
For decades, China had two ways to hit its GDP targets, a property bubble and exports.
But the property bubble has permanently collapsed as have the State Owned Enterprises SOEs that fueled the bubbles.
China desperately needs measures to support consumption, instead it goes back to the wll one more time with exports. It’s a move that cannot work
Most coverage on China misses a few key facts about the country. Not Mish, but I repeat here because the conventional wisdom is wrong.
First, the currency is supported, not suppressed. Yuan would tumble if it floated.
Two, China doesn’t want a large consumer economy. Policymakers refuse to rebalance the domestic economy in favor of households. This flows into trade policy.
Third, China isn’t a low-cost manufacturer anymore. There are more industrial robots in China than in the USA. The U.S. is actually third behind Japan, with South Korea close behind. Adjusted for GDP, the U.S. is an embarrassment.
Fourth, China’s capital account is still effectively closed. The government obviously fears massive outflows otherwise it wouldn’t have this policy. Almost all mainstream analysts ignore this and talk about China rebalancing, increasing consumption, etc. all of which flies in the face of a closed capital account.
In conclusion, China’s going to do what it has always done: growth via low-cost exports.
I disagree with his later argument that tariffs benefit no one. Tariffs are a great way to raise revenue for a massive nation such as China or the USA, particularly when they have excess labor and below their potential production frontier. They are not import-substitution policy, but a tax. A tax reform package that offsets taxes on labor and capital in the domestic economy would be best, but that’s not possible with the current deficits.
Additionally, there is no way out of the coming crisis for the USA. The choice is between mitigating collapse with policy shifts that slow and flatten the transition, such as tariffs that onshore manufacturing over time, or run the debt up until it all blows up into a massive depression that exceeds 1929-1932.
There’s no stopping onshoring because the America First nationalists want to develop the U.S. economy and the anti-American ruling class wants to dominate the world, necessitating a trade or kinetic war with China. There’s no one else remotely credible as a political alternative. There is no other movement, although the populism around America First could morph over time.
More imminently, China’s market rallied of the hole but has since consolidated and starting forming potential topping pattern. That pattern is also banging up against the 200-day moving average. The nightmare scenario for the Federal Reserve is China takes off and drags commodities higher, triggering an inflationary boom right as the next U.S. President comes in and proposes his own inflationary boom plan.
The alternative is China rolls over first and helps trigger a brief deflationary crash.
Too bad the Fed didn’t do its job and slash its balance sheet when it had the chance. This all could’ve ended in early 2023 had they really put the squeeze on in 2022 with bigger bond sales that steepened the long-end, triggering the normalization of the rate curve, a recession and correction of the housing market.