Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Price 2021 Roadmap - 22nd Jan 21
Why Biden Wants to Win the Fight for $15 Federal Minimum Wage - 22nd Jan 21
Here’s Why Gold Recently Moved Up - 22nd Jan 21
US Dollar Decline creates New Sector Opportunities to Trade - 22nd Jan 21
Sandisk Extreme Micro SDXC Memory Card Read Write Speed Test Actual vs Sales Pitch - 22nd Jan 21
NHS Recommends Oximeter Oxygen Sensor Monitors for Everyone 10 Months Late! - 22nd Jan 21
DoorDash Has All the Makings of the “Next Amazon” - 22nd Jan 21
How to Survive a Silver-Gold Sucker Punch - 22nd Jan 21
2021: The Year of the Gripping Hand - 22nd Jan 21
Technology Minerals appoints ex-BP Petrochemicals CEO as Advisor - 22nd Jan 21
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

War Gaming the US-China Trade War

Politics / China US Conflict Sep 14, 2019 - 11:54 AM GMT

By: John_Mauldin

Politics

By Justin Spittler: People respond to incentives. So do national governments. This is foundational to both economics and geopolitics.
Carefully examining each side’s incentives can illuminate how a conflict will end. No one has infinite choices. They choose from limited options.

That applies to the US-China trade war, which is right now one of our top economic issues. So let’s think through what the players really want, and what each can actually do.


Outrageous or Flexible?

To begin, let’s note that the US and China really have two disputes.

One is about trade, the other is a struggle for military and technological dominance. These overlap. So knowing which drives any particular decision is hard. But for now, I’ll talk mostly about trade.

The first problem is that Donald Trump leads the US side. Understanding what he really wants from China is, well, difficult.

Often, he makes outrageous demands China could never accept. Possibly this is a negotiating tactic. Asking for the moon lets the other side think itself lucky to give anything less than the moon. And if that’s all you need, then you win.

But other times, US demands seem more flexible. We just want China to play fair, respect the rules, and open the Chinese market to US companies, just as the US is open to Chinese imports.

Underlying this is the fact Trump is a politician who wants to get re-elected. To do that, he needs to keep his base support. The base wants him to look tough against China. This limits his negotiating options.

Yet he also needs to keep the economy stable or growing. An extended trade standoff doesn’t help.

The one thing Trump can’t do is let China win. He needs Beijing to give him at least the appearance of significant concessions.

Excess Capacity

Xi Jinping doesn’t have to run for re-election, but he has a billion+ mouths to feed. He needs a growing domestic economy.

To date, much of that growth has come from building infrastructure and industrial production capacity. Someone has to buy what China produces with all that capacity—if not Westerners, then people in China.

Opening China to foreign competitors, as Trump demands, is inconsistent with Xi’s requirements. George Friedman of Geopolitical Futures explained in a recent analysis:

The Trump administration has used tariffs to try to force the Chinese to open their markets to U.S. competition. The problem is that the Chinese economy is in no position to accept such competition. The financial crisis severely affected China’s export industry as the global recession reduced the appetite for Chinese goods. This hurt the Chinese economy greatly, throwing it off balance in a crisis that still reverberates in China today.

China’s main solution to this problem has been to increase domestic consumption – a task that has proved difficult because of the distribution of wealth in China, the inability of financial markets to massively increase consumer credit, and the positioning of Chinese industry to target foreign, rather than domestic, consumers. Selling iPads to Chinese peasants isn’t easy.

Allowing the U.S. to access the Chinese market would have been painful if not disastrous. The Chinese domestic market was the only landing pad China had, and U.S. demands for greater access to it were impossible to meet.

If George is right, then we have the proverbial irresistible force meeting an immoveable object. Trump can’t reduce his demands. Xi can’t accept them.

Also, China’s government is communist. It allows some competition and other capitalist activities, but the kind of open markets that exist in the US are incompatible with China’s objectives.

That makes stalemate the likeliest near-term result… which is what we’ve seen.

This may explain why the US-China trade “negotiations” keep breaking down. They aren’t real negotiations. Agreement is impossible, but it serves both sides to look like they’re making progress.

Presenting that appearance is critical because the US and Chinese governments aren’t the only players here. Others are in the game, too.  

Rational Choices

Business leaders are also part of this. What are their incentives?

They want to generate profits. That means making wise investments in new products and markets.

If, for instance, you lead a US manufacturer, the amount you invest in developing a new product depends on the number of potential buyers. That number is bigger if you can include China.

Likewise, your production costs depend on the availability and price of Chinese components.   

When both those conditions are in doubt—as they are right now—then you have less incentive to invest in that new product.

You might use the cash that would have gone toward hiring workers and building new facilities to, say, repurchase your own stock. At least you’ll make shareholders happy.

That’s a perfectly rational choice, given the circumstances. But it has consequences.

The longer this drags on, the less confident businesses become, and the more reluctant they are to make growth investments. Eventually, it adds up to recession.

That is the outcome even if everyone involved—CEOs, Trump, and Xi—keeps doing what is reasonable to them, given their incentives and limitations.

Conclusion: This trade war has no off-ramp, so it will likely get worse, not better.

The Great Reset: The Collapse of the Biggest Bubble in History

 New York Times best-seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could trigger in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

By Justin Spittler

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules