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Understanding Phase II of the U.S. -vs- China Trade Confrontation….
President Trump has moved into Phase II of the U.S./China confrontation. Part of that confrontation is to use the inherent weakness of the Chinese economy against them. To understand the weakness is to understand the China ‘One-Belt / ‘One-World‘ economic trade strategy. Here’s an outline of the economic battle-space we are witnessing.
People often talk about the ‘strength’ of China’s economic model; and indeed within a specific part of their economy –manufacturing– they do have economic strength.
However, the underlying critical architecture of the Chinese economic model is structurally flawed and President Trump with his current economic team understand the weakness better than all international adversaries.
Lets take a stroll and discuss.
China is a central planning economy. Meaning it never was an outcropping of natural economic conditions. China was/is controlled as a communist style central-planning government; As such, it is important to reference the basic structural reality that China’s economy was created from the top down.
This construct of government creation is a key big picture distinction that sets the backdrop to understand how weak the economy really is.
Any nations’ economic model is only as stable (or strong) as the underlying architecture or infrastructure of the country’s economic balance.
Think about economic strength and stability this way: If a nation was economically walled off from all other nations, can it survive? …can it sustain itself? …can it grow?
In the big picture – economic strength is an outcome of the ability of a nation, any nation, to support itself first and foremost. If a nations’ economy is dependent on other nation for itself to survive it is less strong than a nation whose economy is more independent.
Most Americans don’t realize it, but China is an extremely dependent nation.
When the central planning for the 21st century Chinese Economy was constructed, there were several critical cultural flaws, dynamics exclusive to China, that needed to be overcome in order to build their economic model. It took China several decades to map out a way to economic growth that could overcome the inherent critical flaws.
Critical Flaws To Exploit:
♦Because of the oppressive nature of the Chinese compliant culture, the citizens within China do not innovate or create. The “Compliance Mindset” is part of the intellectual DNA strain of a Chinese citizen.
Broadly speaking, the modern era Chinese are not able to think outside the box per se’; because the reference of all civil activity has been a history of box control by government, and compliance to stay (think) only within the approved box. The lack of intellectual thought-mapping needed for innovation is why China relies on intellectual theft of innovation created by others.
American culture specifically is based around freedom of thought and severe disdain of government telling us what to do; THAT freedom is necessary for innovation. That freedom actually creates innovation.
Again, broadly speaking Chinese are better students in American schools and universities because the Chinese are culturally compliant. They work well with academics and established formulas, and within established systems, but they cannot create the formula or system themselves.
♦ The Chinese Planning Authority skipped the economic cornerstone. When China planned out their economic entry, they did so from a top-down perspective. They immediately wanted to be manufacturers of stuff. They saw their worker population as a strategic advantage, but they never put the source origination infrastructure into place in order to supply their manufacturing needs. China has no infrastructure for raw material extraction or exploitation.
China relies on: importing raw material, applying their economic skill set (manufacturing), and then exporting finished goods. This is the basic economic structure of the Chinese economy.
See the flaw?
Cut off the raw material, and the China economy slows, contracts, and if nations react severely enough with export material boycotts the entire Chinese economy implodes.
Insert big flashy sign for: “One-Belt / One-Road” HERE The Chinese economic model requires them to have a strategy for sustainability. That is why they have the One-Belt, One Road plan.
Again, we reference the earlier point: Economic strength is the ability of a nation to sustain itself. [Think about an economy during conflict or war] China cannot independently sustain itself, therefore China is necessarily vulnerable.
China is dependent on Imports (raw materials) AND Exports (finished goods).
♦The 800lb Panda in the room is that China is arguably the least balanced economy in the modern world. Hence, China has to take extraordinary measures to secure their supply chain. This economic dependency is also why China has recently spent so much on military expansion etc., they must protect their vulnerable interests.
Everything important to the Chinese Economy surrounds their critical need to secure a strong global supply chain of raw material to import, and leveraged trade agreements for export.
China’s economy is deep (manufacturing), but China’s economy is also narrow.
China could have spent the time to create a broad-based economy, but the lack of early 1900’s foresight, in conjunction with their communist top-down totalitarian system and a massive population, led to central government decisions to subvert the bottom-up building-out and take short-cuts. Their population controls only worsened their long term ability to ever broaden their economic model.
It takes a population of young avg-skilled workers to do the hard work of building a raw material infrastructure. Mine workers, dredge builders, roads and railways, bridges and tunnels etc. All of these require young strong bodies. The Chinese cultural/population decisions amid the economic builders precluded this proactive outlook; now they have an aging population and are incapable of doing it.
This is why China has now positioned their economic system as dependent on them being an economic bully. They must retain their supply chain: import raw materials – export finished goods, at all costs.
This inherent economic structure is a weakness China must continually address through policies toward other nations. Hence, “One-Belt / One-Road” is essentially their ‘bully plan’ to ensure their supply chain and long-term economic viability.
This economic structure, and the reality of China as a dependent economic model, also puts China at risk from the effects of global economic contraction. But more importantly it puts them at risk from President Trump’s strategic use of geopolitical economic leverage to weaken their economy.
Nuance and subtlety is everything in China. Culturally harsh tones are seen as a sign of weakness and considered intensely impolite in public displays between officials; especially within approved and released statements by officials representing the government.
Historic Chinese cultural policy, the totalitarian control over expressed political sentiment and diplomacy through silence, is evident in the strategic use of the space between carefully chosen words, not just the words themselves.
China has no cultural or political space between peace and war; they are a historic nation based on two points of polarity. They see peace and war as coexisting with each other. China accepts and believes opposite or contrary forces may actually be complementary, interconnected, and interdependent in the natural world, and they may give rise to each other as they interrelate to one another. Flowing between these polar states is a natural dynamic to be used -with serious contemplation- in advancing objectives as needed.
The Chinese objective is to win, to dominate, using economic power.
Peace or war. Win or lose. Yin and Yang. Culturally there is no middle position in dealings with China; they are not constitutionally capable of understanding or valuing the western philosophy of mutual benefit where concession of terms gains a larger outcome. If it does not benefit China, it is not done. The outlook is simply, a polarity of peace or war. In politics or economics the same perspective is true. It is a zero-sum outlook.
Therefore, when you see China publicly use strong language – it indicates a level of internal disposition within Beijing beyond the defined western angst. Big Panda becomes Red Dragon; there is no mid-status or evolutionary phase.
♦U.S. President Donald Trump and the U.S. economic team fully understand this dynamic and fully understand the inherent needs of China.
When you are economically dependent, the ‘bully plan’ only works until you encounter a ‘stronger opponent’.
A stronger opponent is an economic opponent with a more broad-based stable economy, that’s US.
President Trump, Commerce Secretary Ross, Treasury Secretary Mnuchin and U.S. Trade Representative Lighthizer, Economic Adviser Peter Navarro and NEC Chairman Larry Kudlow represent the first broad-based national team of economic negotiators who know how to leverage the inherent Chinese economic vulnerability.
Every American associated with investment, economics and China would be well advised to put their interconnected business affairs in order according to their exposure.
President Trump will not back down from his position; the U.S. holds all of the leverage and the geopolitical economics must be addressed. President Donald Trump and his team are entirely prepared for this.
Donald Trump has been discussing this for more than three decades. We are going into economic combat with China!
China’s objective is conquest. China’s tool for conquest is economics. President Trump’s entire geopolitical strategy, using economics in a similar way, is an existential threat to China’s endeavor. Communist Beijing calls the proverbial DPRK shots.
President Trump is putting on a MASSIVE economic squeeze.
♦Squeeze #1. President Trump and Treasury Secretary Mnuchin sanctioned Venezuela and cut off their access to expanded state owned oil revenue. Venezuela needs more money. China and Russia are already leveraged to the gills in Venezuela and hold 49% of Citgo as collateral for loans outstanding. China and Russia now need to loan more, directly.
♦Squeeze #2. China’s geopolitical ally, Russia, is already squeezed with losses in energy revenue because of President Trump’s approach toward oil, LNG and coal. Trump, through allies including Saudi Arabia, EU, France (North Africa energy), and domestic production has influenced global energy prices. Meanwhile Russia is bleeding out financially in Syria. Iran is the financial reserve, but they too are energy price dependent and President Trump is now putting pressure on Iran vis-a-vis new sanctions.
♦Squeeze #3. In 2017 Trump and Secretary Tillerson, now Secretary Pompeo, put Pakistan on notice they need to get involved in bringing their enabled tribal “extremists” (Taliban) to the table in Afghanistan. Pakistan’s primary investor and economic partner is China. If U.S. pulls or reduces financial support to pressure Pakistan toward a political solution in Afghanistan, China has to fill void. [NOTE: Last month the World Bank began discussions about a financial bailout for Pakistan.]
♦Squeeze #4. China’s primary economic threat (competition) is next door in India. President Trump has embraced India as leverage over China in trade and pledged ongoing favorable trade deals. The key play is MFN (Most Favored Nation) trade status might flip from China to India. That’s a big play. It would have massive ramifications.
♦Squeeze #5. President Trump launched a USTR Section 301 Trade Investigation into China’s theft of intellectual property. This encompasses every U.S. entity that does manufacturing business with China, particularly aeronautics and technology, and also reaches into the financial services sector.
In March of 2018 U.S. Trade Representative Robert Lighthizer completed a section 301 review of China’s trade practices. [SEE HERE] Section 301 of the U.S. Trade Act of 1974 authorizes the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce. However, as talks with China progressed, President Trump shelved the 301 action to see where negotiations would end-up. The May and June, 2018, negotiations between the U.S. and China provided no progress. The 301 review of China is now pulled back off the shelf, and President Trump assembles his trade-war strategy. The 301 tariffs/sanctions are currently being worked out with U.S.T.R Robert Lighthizer.
♦Squeeze #6. President Trump, Secretary Ross, Secretary Mnuchin and USTR Robert Lighthizer are renegotiating NAFTA. One of the primary objectives of team U.S.A. is to close the 3rd party loopholes, including dumping and origination, that China uses to gain backdoor access to the U.S. market and avoid trade/tariff restrictions. [China sends parts to Mexico and Canada for assembly and then back-door entry into the U.S. via NAFTA.]
♦Squeeze #7. President Trump has been open, visible and vocal about his intention to shift to bilateral trade renegotiation with China and Southeast Asia immediately after Team U.S.A. conclude with NAFTA renegotiation. [Current discussions with Japan are ongoing]
♦Squeeze #8. President Trump has positioned ASEAN (Association of Southeast Asian Nations) as trade benefactors for assistance with North Korea. Last year the KORUS (South Korea and U.S.) trade deal was renegotiated. The relationship between ASEAN nations and the Trump administration is very strong, and getting stronger. Which leads to…
♦Squeeze #9. President Trump has formed an economic and national security alliance with Shinzo Abe of Japan. It is not accidental that North Korea’s Kim Jong-un fired his last missile over the Northern part of Japan. Quite simply, Beijing told him to. However, President Trump engaged directly with Kim Jong-un and has removed much of the ability of Beijing to leverage the DPRK nuclear threat for economic benefit.
Add all of this up and you can see the cumulative impact of President Trump’s geopolitical economic strategy toward China. The best part of all of it – is the likelihood China never saw it, meaning the sum totality of “all of it”, coming…. at first. Now they do, and they are not quite sure how to respond.
Each time China takes aggressive action (red dragon) China projects a panda face through silence and non-response to opinion of that action;…. and the action continues. The red dragon has a tendency to say one necessary thing publicly, while manipulating another necessary thing privately. The Art of War.
President Trump is the first U.S. President to understand how the red dragon hides behind the panda mask.
It is specifically because he understands that Panda is a mask that President Trump messages warmth toward the Chinese people, and pours vociferous praise upon Xi Jinping, while simultaneously confronting the geopolitical doctrine of the Xi regime.
In essence Trump is mirroring the behavior of China while confronting their economic duplicity.
President Trump will not back down from his position; the U.S. holds all of the leverage and the issue must be addressed. President Trump has waiting three decades for this moment. This President and his team are entirely prepared for this.
The Olive branch and arrows denote the power of peace and war. The symbol in any figure’s right hand has more significance than one in its left hand. Also important is the direction faced by the symbols central figure. The emphasis on the eagles stare signifies the preferred disposition. An eagle holding an arrow also symbolizes the war for freedom, and its use is commonly referred to the liberation fight of righteous people from abusive influence. The eagle on the original seal created for the Office of the President showed the gaze upon the arrows.
The Eagle and the Arrow – An Aesop’s Fable
An Eagle was soaring through the air. Suddenly it heard the whizz of an Arrow, and felt the dart pierce its breast. Slowly it fluttered down to earth. Its lifeblood pouring out. Looking at the Arrow with which it had been shot, the Eagle realized that the deadly shaft had been feathered with one of its own plumes.
Moral: We often give our enemies the means for our own destruction.
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