The Truth About The U.S.-China Trade War

By David Stockman  |  August 19, 2019

The word on Bubblevision, again, is that Trade War negotiations have taken on a more upbeat tone. BTFD!

Of course, in keeping with recent rhythms, the Tweeter-in-Chief is regaling us with his brand of economic wisdom. And the stock market is well in the green today. None of that means a resolution to the U.S.-China conflict is on the horizon, as Chris Scott notes in a special briefing he’s prepared for us.  

Chris, as I noted last week, comes to Deep State Declassified after a two-year stint as U.S. editor for the Hong Kong-based Asia Times. Before that, he was a foreign policy researcher on Capitol Hill. He also lived in East Asia for nearly a decade.

My view of the Middle Kingdom is perhaps less sanguine than Chris’s. As I’ve often noted, China today is a command-and-control, debt-ridden house of cards that can only be kept aloft with massive, increasing, and evermore coercive state intervention.

Trump’s hawks, including U.S. Trade Representative Robert Lighthizer and the K-Street corporate lobbies he represents, are pushing to take the state out of the economy. Their goal is to invest in the China’s alleged high growth without the inconvenience of Beijing’s “Red Rules,” including joint-venture technology-sharing.

That’s a sheer impossibility at this late stage of the game.

Yes, Xi will try to wait out the Trump for 2020.

It’s not down to geopolitical savvy. These nasty tyrants can’t imagine letting go of power. And they’d likely be dead if they did. As Chris intimates in his remarks about China’s current perspective on the U.S., Xi’s mandarins are at least as incompetent as Trump’s.

Both parties are negotiating from positions of weakness.

Now, here’s Chris’s take on the most consequential geo-macro issue confronting the world.

How The U.S.-China Trade War Reached a Point of No Return

By Chris Scott

We’re all getting tired of asking the question, “Will the US and China ever reach a trade deal?”

The answer is “no,” and it always was going to be “no,” for reasons I explain below.

But, first, I want to take Wall Street, along with its financial news spokespeople, to task for getting this wrong at every turn.

Wrong Turn After Another

Trump is right to challenge China. But, in his execution of this colossal task, he’s been taking cues from people who fundamentally misunderstand the world’s second-largest economy.

To make matters worse, Beijing has been taking its cues from the same sort of “expert.”

First, it was “there will be a comprehensive trade deal because it’s in both countries’ interests.” When talks fell apart the first time, it became “there will be a temporary, limited deal to keep things from spiraling out of control.”

Wall Street analysts are now acknowledging that it is, essentially, a “Forever Trade War.” But they can’t let go of their misguided optimism that some sort of truce is coming.

Just today, a series of “broken record” headlines attributed today’s bounce, at least in part, to U.S.-China trade hope.

The reality is the relationship between Washington and Beijing has reached a point of no return.

For one thing – and let me be clear: there is a 99.9% chance this will happen – Xi Jinping is going to run out the clock at least until the 2020 election.

The Point Of No Return 

China’s president has no reason to hand Trump a political win amid his hotly contested battle for re-election. Even if Democratic presidential candidates were promising a hard line against China (they aren’t, really), there’s every reason to expect any of them would be more predictable than Trump.

And Xi has gotten political cover to ride this one out. Basically, what was initially seen by some in the Middle Kingdom as a welcome way to force market-oriented reforms is now viewed as an attempt to contain the country’s rise. Trump himself, along with a vocal circle of China hawks in Washington, has at various points openly said this is the goal.

The ban on sales of critical technology to Huawei – China’s greatest commercial success story – really hit this point home for the Chinese.

So, the so-called “liberals” in Beijing (the people who want more market reforms and less Communist Party control) have moved from supporting Trump’s pressure to standing firm on Xi’s side. They represented the tiny sliver of a challenge to Xi.

This relates to the fundamental misunderstanding about China’s politics. Hawks in Washington have been convinced that Xi is weak, that he’ll fold for fear that a protracted trade war will tank China’s economy. The financial news punditry has also largely parroted this line. Allianz’s Mohamed Al-Erian is still convinced this will be Trump’s “Reagan” moment.

This couldn’t be further from the truth.

Chinese people have been hungry for a strong leader for a generation. They see Xi as just that. Chinese government officials, academics, and the public at large are genuinely confident that their country can weather the storm.

For the time being, it doesn’t matter if they are right or not.

China’s In The Dark

To add insult to injury, the Chinese have no clue about the dynamics in the U.S., either. For years now, China’s elite have seen America as a waning power in the late stages of terminal decline. In meetings with U.S. trade and military officials, Chinese policymakers chuckle to themselves about America’s persistent confidence.

The kind of unregulated risk-taking that led to the 2008 financial crisis and even the election of Trump himself – a salesmen with no government experience the Chinese see as representing the dangers of democracy – are just a few of the inherent flaws seen from Beijing. They also see Trump as weaker than he really is and expect him at every turn to give in to shore up the economy.

In fact, they were thrilled that Trump won the election in 2016 and never thought he’d follow through on trade threats. They’ve also had their heads in the sand regarding just how much support there is in America for challenging China.

What About China’s Flagging Economy?

The mainstream consensus is that China has been trying to restructure from a fast-growing, low-value-added manufacturing economy to a service-oriented one, focused on its massive domestic consumer market.

Another way to look at it is that China got its huge measured GDP by burying itself in debt and malinvestment. And this “conversion” is a Wall Street word that probably elides the fact that it’ll take a recession/depression to get from point A to point B.

Still, as far as they’re concerned, this trade war is a headache that is exacerbating real risks but is not an existential threat. It’s only accelerating a trend toward lower growth and less dependence on exports. But, as far as consequences, it’s not much more than that.

Again, for now, it doesn’t matter whether they’re wrong. They have plenty more tools to stimulate their economy in the short term. Maybe their economy will blow up due to a mountain of corporate debt and a real estate market rife with speculation.

That’s what China shorts in the U.S. have been predicting for decades.

But it’s not going to happen before the 2020 election.

People, Get Ready…

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR