China Will Respond To Donald Trump

August 1, 2019

After the trade negotiations there was slight amount of formality whereby US trade representative Robert Lighthizer, US Treasury Secretary Steven Mnuchin, and China's Vice Premier Liu He shook hands and parted ways. However the real story was told by Lighthizer whose demeanor seemed rattled simply because he had to explain to his boss that there was absolutely no development in the trade deal. Lighthizer's stone cold face did not hide China's Vice-Premier Lie He's laughter and contempt in this whole fiasco surrounding the trade deal with the United States.


Even before the trade representatives were supposed to be in Beijing, many of the Chinese representatives from the Communist party were laughing at Trump. Their official statement indicated that the Fed's rate cut is a slap in the face to the US President. It was the first rate cut in a decade and seemingly foolish for Trump who has been boasting about how great the US economy has performed. Before the rate cut, Trump sent out for tweets claiming he "got China back on its heels, and the United States is doing great." He also indicated that the "Trump Tariffs" are costing China millions of jobs.


China knew that there wasn't going to be any trade deal, after all, they even scoffed at it. They knew Trump did not want a mutual trade deal with China; he simply wanted to make China the scapegoat and to subsequently increase tariffs on the remaining $300B worth of Chinese goods. Sure China is buying a bit of American agricultural products, but they're not hellbent in giving the US more business when they fully knew that Trump would retaliate on the $300B worth of goods no matter what.


There are no winners in a trade war. With globalization, it's nearly impossible to decouple the American and Chinese economies. Trade frictions between the world's largest economies has damaged both sides and the whole world. This is another reason why cooperation leads to mutual benefits and why confrontation only leads to mutual destruction. China knew that the rate cut was a desperate measure used by the Fed to combat fears of a looming recession.


Trump blames everyone. He blames the Fed for not giving corporate America a deeper cut in interest rates. He blames China for not making a deal with him. He even blames Republicans for not pushing the need for a trade deal. The reason why he is blaming Republicans is because if there's no trade deal with China, he can blame the Republicans rather than himself. The truth is, America's political system as a whole is dysfunctional. After all, the economic expansion in the US in the last decade has largely been fueled by the Fed's actions to pump liquidity into the US market rather than "Trumponomics." Sure, Trump's tax cuts injected some money into the economy, however the Republican loss of the House in the 2018 midterm elections means that the US government will have a hard time agreeing with Trump's agenda.


The only thing this Fed cut does, and trust me there's going to be more cuts, is allow corporate America to roll over debt and buyback more shares of their respective companies to boost the fake economy. China controls most of the global supply chain for semiconductors and rare earth minerals. It will take an enormous amount of time for many of these corporations to come back to the United States or find new supply chains elsewhere. The best paradigm is that China is the largest consumer of beef and pork products in the world. American farmers can not sell pork and beef to India, nor can Japan consume volumes equivalent to that of China. Once you lose these markets you never get them back, and the American farmer ends up with the most to lose.


Trump may have collected $49 billion in tariff revenue, but he had to pay $16 in reparations to farmers that have lost business as a result of his move. Five months from now, American farmers will not only feel more pain from these tariffs, but the subsequent loss of the great heritage American farmers built for the United States. Trump may go around telling the uneducated "swamp" that he's collecting a lot of money from these tariffs, however the reality is that this is only the beginning.


China made it clear before the trade negotiations that no one is in a position to dictate to the Chinese people. This in itself means that China can not dictate to the American people with respect to their will and economic progress. That means US multinationals will have very limited resources in gaining access to the Chinese consumer. If Trump thinks he can rewind economies and make China poor again, that's simply not going to happen. More countries are becoming predators and are eyeing China's consumer buying power fully knowing the potential this can reward their economies with.


China will retaliate because all the cards are out on the table now. There is no flush draw here. These two countries, whether you blame Trump or China, have devastating impacts on the global economy. Both will suffer, but one economy has to remain resilient and be willing to take economic pain. The country that proceeds to sustain the most pain will end up as the winner. These two economic behemoths that hinge on capitalism as the main driver of their economy rely on one thing: familiarity breeds contempt.


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