China Plays a Long Game and Moves Forward While Trump Pushes America Back to the 19th Century
While White House reporters investigate who added a Sharpie line to a hurricane map, a huge global story is developing that bodes badly for the economic welfare of Americans for decades to come.
China is using Trump’s gratuitous trade war to expand its economic, diplomatic and military influence. And it is succeeding, diminishing America’s influence, especially in the Western Pacific and India. The long-term cost to America in lost opportunities and ultimately diminished economic growth will be catastrophic.
These days China can reduce its reliance on America, which takes only one-fifth of its exports. It is also trying to build enough confidence in its stability to make the yuan a second world currency, perhaps eventually supplanting the dollar. A shift away from the dollar would have enormous negative consequences for Americans.
Last month China abruptly cheapened the yuan, allowing the price to rise to more than seven to the dollar. That broke a decade-long understanding, negotiated in the early days of the Obama administration, that kept the price under seven. The drop in the value of the yuan makes Chinese goods less expensive for Americans while imports from the United States will cost the Chinese more, encouraging a shift to suppliers from other nations.
Trump’s erratic behavior needlessly injects uncertainty into business decisions, while the Chinese communists promote their stable leadership and long-term perspective to build strong commercial alliances.
Trump’s erratic behavior needlessly injects uncertainty into business decisions, while the Chinese communists promote their stable leadership and long-term perspective to build strong commercial alliances. Even Australia, America’s most loyal lapdog ally, is pivoting toward Beijing.
Viewed from an Asian perspective, Trump’s economic nationalism is not weakening, but breaking American commercial ties with China.
Trump tweeted an order in August that American firms leave China. While that is unlikely, Trumpian efforts to decouple the world’s two largest economies has become a hot topic in Asia. The simple truth is that China no longer needs America to buy its goods.
China Looks Ahead, Trump Backward
Team Trump is taking America back to the era of industries freely fouling the air and water and, in a new policy initiative, waste money on billions of kilowatts every month by using inefficient 19th Century incandescent light bulbs that the George W. Bush administration moved to retire in 2007. Trump wants to burn more coal, but has not succeeded.
In contrast, China looks forward. It wants to restore its position, before the Industrial Revolution, as the planet’s richest country. China accounted for one-third of global output in 1820.
The calculating and highly educated communist dictators in Beijing are lowering trade barriers, cutting tariffs with other countries and strengthening their 16 existing trade alliances. Simultaneously, they are applying petty rules to complicate American business operations in China, squeezing profit margins of American companies there.
Americans must endure crazed rants from a know-nothing leader who makes up claims that China bears the burden of tariffs when in fact the tariffs are a tax on American consumers. The cost is expected to be $1,000 per household and could rise to $1,500 annually, J.P. Morgan-Chase warned in August.
While Trump must face voters in 2020, the rulers in Beijing are accountable to no one. That allows them to make economic decisions with decades-long time horizons. (The same applies to maintaining power by using surveillance, social control and prisons for Muslim Uyghurs and other dissidents.)
Beijing is investing in the future, redirecting China’s economy toward a clean, smart and technological future, Congress was told this summer.
“The Chinese government has indicated its desire to move away from its current economic model of fast growth at any cost to more ‘smart’ economic growth, which seeks to reduce reliance on energy-intensive and high-polluting industries and rely more on high technology, green energy, and services,” the Congressional Research Service reported in June.
China, at the same time, is shifting away from what Trump calls “beautiful coal” to the wind power that Trump falsely claims causes cancer and blackouts, crazy ideas debunked in a video by a Danish lawmaker.
China leads the world in wind power with nearly three times the generating capacity of the United States. Electricity from wind now costs less than coal even without counting the costs of climate disruption. Over time, this will give China another competitive advantage over American manufacturers.
America Crumbles While China Builds
Candidate Trump promised to rebuild America’s crumbling infrastructure. Yet after more than a thousand days in office has yet to accomplish anything in terms of just improving maintenance of our public furniture, much less building new and better roads, rails, dams and sewage treatment. Trump’s failure to produce anything on this front makes our economy less efficient.
While American passenger rails are slower than during the Civil War, China’s official news agency brags about the expansion of its 18,000-mile network of high-speed rails that whisk people across its vast territory. More than six times as many Chinese ride trains each year as Americans, where 94% of rail traffic is on local commuter trains.
While American roads deteriorate, China builds highways that last because the pavement sits atop deep foundations that will smooth rides for decades. Again, over time that confers economic advantages on China.
That brings up a story you won’t hear Donald Trump crow about, denounce or even mention on a tweet.
Bond investors can double their income by selling the U.S. 10-year bond and then buying 10-year Chinese bonds.
Right now, every U.S. government note and bond is paying interest at, or less than, inflation. That means negative interest rates for holders, especially after income taxes and transaction costs for buying and selling are considered. Chinese bonds are risky, but they are also drawing a slow but increasing level of purchases from Americans and others, as The Wall Street Journal reported last year and many finance publications have tracked since.
America Falls to No. 2
China is already the world’s largest economy, one-fifth larger than the United States when measured on a Purchasing Power Parity basis, which compares prices for the same goods in different countries.
As its economy has matured, China’s economic growth rate has slowed. Still, China’s economy is expected to continue growing much faster than America’s until 2037, when we can anticipate a long period of parallel growth, the Congressional Research Service reported in June.
While Trump ran for office claiming he would rev up the economy, pay off the national debt in eight years and would negotiate such great deals that Americans would get tired of winning, none of that has happened. Indeed, the annual budget deficit is now nearly $1 trillion a year and will stay that way for a decade under current policy.
Under Trump, real Gross Domestic Product growth has averaged 1.2% per quarter, well below the 1.6% average since 1947. He promised voters up to 6% growth before inflation, which would mean about 4% real growth, a promise he reiterated after assuming office. Clearly, he has failed at the promise, which was ludicrous, just another of the con jobs he has run his whole life.
Right now the American economy is slowing and may already be in recession, in good part because of the erratic interference with trade ordered in Trump tweets.
“Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far…. better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing. your companies HOME and making your products in the USA,” he wrote in a series of Aug. 23 tweets.
China’s economy is slowing too, as is the rest of the world. German manufacturing, for example, is stagnant and may soon shrink slightly.
Near Term Economic Issues
In the short run, say through the end of 2020, all signs point to Trump continuing to lose his trade war with China, while the self-perpetuating dictatorship in Beijing can force the Chinese people to endure hardship to achieve long-term communist party goals.
The Institute for Supply Management says new orders are at a seven-year low. And its purchasing managers’ index dropped in August to 49.1, well below the level of 50 which is the border between growth and shrinkage in the American economy.
In a billion little ways, the Chinese authorities can complicate American business interests in China. Strict enforcement of rules, inspections, delays in approving the movement of goods are just a few examples.
The American Chamber of Commerce in China (AmCham) sells an annual American Business in China White Paper. The June edition warned that the business outlook for American firms in China had moved from cautious optimism to cautious pessimism.
The American government website export.gov offered this harsh assessment of how China now treats American firms, but without mentioning Trump:
“AmCham reports that American businesses in China faced headwinds arising from inconsistent and generally unfavorable interpretation of regulations, rising costs of doing business, increased competition from Chinese competitors, and regulatory compliance risks. AmCham’s 2019 survey found that over half of its member companies experienced an increase in non-tariff barriers in 2018.
“Despite significant Chinese government efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about lengthy and opaque administrative procedures, especially with respect to permits, registration, and licensing…While foreign firms largely continue to report profitability in China, their profit margins are shrinking.”
The lesson in all this: Trump will continue his crazy-making behavior, like the Sharpie line across Alabama to justify a nonsense claim about Hurricane Dorian, but what we should watch more closely are the ways that Trump, however unintentionally, is helping China reach its goal of becoming the dominant global power.
Featured images: “Birds Nest, Home of the People” and “Glorious CCTV Tower” were part of a 2013 exhibit of modern propaganda art commissioned by British ex-pats Nick Bonner and Dominic Johnson-Hill and painted by North Korean artists. Bonner is a co-founder of Beijing’s Koryo Tours, which specializes in travel to North Korea and other “rather unusual destinations.”