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Why China Won't Back Down In Trump's Trade War

Trade War

A bump from Donald Trump’s thump on Mexico’s head is causing the US stock market to swell this week. Trump tariffied the market last week because his new threat against all things Mexican seemed to say Trump might use tariffs as leverage to get anything he wants. Agent Orange apparently got what he wanted — though it remains unclear whether he got anything that wasn’t already in the offing, but he says he did — so the market’s knock on the head is healing this week.

All par for the course in a market that is smoking rope anyway. Soon enough, however, we return to the market thinking it is all about China, and China is an entirely different syndrome than a Mexican border problem that Mexico was already helping with. It’s also a different tariff war than one in which tariffs have already been implemented, negotiated and removed months ago.

It may have been a bit nerve-wracking to some that Trump was willing to risk blowing that up; but I suspect it was just a case of the president pulling out his new favorite trump card. It was a safe bluff. How hard would it be to wring enough out of Mexico to say he got what he wanted, regardless of how little he got, when he never stated specifically what he wanted in the first place? A reasonable question, I think, given that the president has also been unwilling so far to state what it was he got that was any different than things that had already been largely agreed to.

Perhaps time will tell that he got something seriously worth the threat, but by then the newsfeed will have moved on down the ticker tape anyway.

I put no stock in a China trade deal

China is a different problem for the stock market than Mexico was because of how long the market has denied the truth about that particular Trump Trade War. Months of denial have left the stock market with a lot of distance still to correct if China doesn’t capitulate, which the market is doing reluctantly in fits and starts. Mexico was a blip by comparison.

The market finally fell in May after months of rising because it started to become clear there will be no Chinese trade deal in the near future. (It was always clear here, but most of the market willingly believed the president’s every tweet because it wanted to believe.) Prior to May, the market had been rising for months on Trump’s hot air about the Chinese deal coming soon because it had little other reason to rise. The Fed was not backing down rates as the market hoped it would, and the economy was not cooperating with the president’s MAGA plan. Economic numbers were starting to retreat.

The only thing that changed in May was that Trump walked away from a China deal he had been touting, and China started talking as tough as Trump. The market trembled in fear. That demonstrated that the market had been stupid in that a large number of self-deceived investors chose to believe against all evidence that Trump was telling the truth every time he said a deal was likely imminent with China. Trump never offered any evidence to back up what Trump was saying. All that mattered was that he was saying it. (If you cannot trust your president, who can you trust?) All evidence was actually to the contrary in that every statement from the Chinese has been saying repeatedly they would not capitulate to Trump.

Markets that rise on their own self-deception tend to crash spectacularly when reality wins the day, so I upped my economic predictions for the year to include another market crash, stating that the bear cub born in December is “coming out of hibernation and is about to grow up.” (Confession, it is really all part of the extended crash that I said a couple of years ago would start in 2018 and would take a couple of years to play out.)

May became a mere foreshock of what is yet to come when Trump’s breaking of China in the White House started to look like a fight he might not win. (Wait until you see what happens when the new higher, broader tariffs kick in and it becomes clear he has not won it now that he has built up such a huge promise that he will and that it will be quick and easy.)

I believed that, if the stock market hit the same high ceiling as it did twice in 2018, it would fall again, and it did in May as the ceiling ripped the balloon and let some hot air out. So, the market has not disappointed my expectations. It did the stupid thing I was sure it would do.

The economic picture was slowly deteriorating; there was no evidence at all that the Chinese were softening, and TheRump had been holding out the same bait for months to tantalize willingly gullible investors to keep believing China was about to deal (like Lucy holding out the football to Charlie Brown and pulling it away again and again).

The higher the market levitates on nothing but hopium, the harder it falls. May gave us a month-long taste of what the market will do in the months ahead. There is a lot more of that to come now that the market bid back up just because a Mexico deal happened and because jobs look bad, but Mexico was nothing but a blip out of nowhere in the first place. Related: Big Tech Bounces Back After Regulatory Worries

(When I started writing this article I said that the Mexico trade threat was “really only meaningful if it turns into something longer-lasting than a blip as China has, which I don’t think the Mexicans will let happen.” Before I could finish writing the article, the blip faded and the market took relief in that; but the China problem remains as large as ever.)

China will trump Trump

Just as China is a different problem for the stock market than Mexico was, it is a different problem for Trump than Mexico was. China has stated clearly and repeatedly it has no intention of backing down to Trump, while Mexico indicated it was trying to do all it could to back down. I see no reason not to take China at its word as much as Trump would like China to take him at his word about how far and how hard he is willing to push with ever worsening tariffs.

Damaging the US economy until the next election would appear to me to be China’s smartest stragtegy. It wants to end US hegemony around the world anyway, so why not inflict some damage now, even if now moves the plan up a few years? After all, hanging on in a tariffed world through the present election cycle would seem a short wait for a nation that has endured impoverishment for thousands of years.

Mexico had no particular reason to want to damage either the US or Trump, but China certainly does. It has been demonstrating that for years with efforts to tear down the petro-dollar and turn the yuan into a global currency that can replace the dollar and with its huge military build up and its more assertive territorial claims in the South China Sea.

China believes Trump wants to keep China from becoming great again. Trump imposes the US in the way of Xi’s own great China dream — his One Belt One Road plan. So, China is never going to capitulate to Trump’s terms. That means the market is full of hopium and has to fall.

That bigger picture not withstanding and looking purely from a trade standpoint, the Chinese would far rather wait out Trump for a year and half than capitulate and get stuck for decades with a far worse economic situation than it has had.

Finally, figuring out what China will do is not hard because China keeps saying as much again and again. China published a government white paper on June 2nd, titled “China’s Position on the China-U.S. Economic and Trade Consultations” in which it gave the following summary of the current dispute:

Historical records confirm that China’s scientific achievements and technological innovation are not things we stole or forcibly took from others; they were earned through self-reliance and hard work. Accusing China of stealing intellectual property to support its own development is an unfounded fabrication. Accusations of forced technology transfer are baseless and untenable. Every country has its own matters of principle.

On major issues of principle, China will not back down. During consultations, a country’s sovereignty and dignity must be respected, and any agreement reached by the two sides must be based on equality and mutual benefit. Both China and the US should … respect each other’s development path…. China strongly opposes the recent US move to increase tariffs and must respond to safeguard its lawful rights and interests. China has been consistent and clear on its position that it hopes to resolve issues through dialogue rather than tariff measures. Related: The Stock Market Bulls Still Have Room To Run

China will act rationally in the interests of the Chinese people, the American people, and all other peoples around the world. However, China will not bow under pressure and will rise to any challenge coming its way. China is open to negotiation but will also fight to the end if needed.

Does that sound like China is willing to back down to Trump? Sure, it can be argued they are just bluffing, but I say, “Dream on.” China has, as it said “been consistent and clear” on that message for a year.

China’s golden age

Another sign that China is digging in for a long war and moving ahead with its longterm goal of terminating US hegemony can be seen in the actions of China’s treasury. China has been substantially and openly ramping up its gold purchases all year in order to detach as much as possible from the US dollar.

China extended its gold-buying spree, adding to reserves for a sixth straight month, as the protracted trade war with the U.S. hurts growth expectations and boosts demand for a portfolio diversifier. The People’s Bank of China increased its bullion reserves to … 15.86 tons, after almost 58 tons of gold were added to the nation’s stockpile in the five months to April. The rise reflects the government’s “determined diversification” away from dollar assets, Argonaut Securities (Asia) Ltd. analyst Helen Lau said…. “It’s a diversification away from the U.S. dollar, particularly given the trade tensions and the potential technology cold war that’s evolving,” said Bart Melek, global head of commodity strategy at TD Securities.

China is limited, of course, in how fast it can ramp up its buying because its own actions raise gold prices. ($1,329.60 on Monday.) If it lifts the price of gold with all its buying, when it stops buying, the value of its gold will decline due to China’s own reduction in global demand. China, however, is easing along in this at a good clip. China also does not want to crash the value of its dollar holdings before it has largely exited them.

What is notable is that China is being quite audible about its current gold-buying; whereas, it has maintained radio silence on the subject of gold for years … as if it wants to make sure the US notes where it is heading.

If you want to believe this is the face of a man backing down or bluffing, go ahead at your own peril. I think this is a man who sees and believes in a new golden age for his country, and Trump’s path won’t get him there. I think Xi would rather deal with these battles later when China is even stronger, but Trump won’t let him do that either. So, the war has been waged, and its not going away.


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