More than Money: The Sino-U.S. Trade War
This novella looks at the trade war, the history, the factors, the reasons, the actors, and the likely results of the G20 meeting, Sino-U.S. trade war, and their economies. It will explain the natural difficulties in a significant trade deal. This article also explains the barriers to both sides; it isn’t in the interest of either country to agree to this.
Listen to any economic or political commentator. The Economist (2019a) laments that the American buyer is paying the tariff, rather than the Chinese supplier. Another economist laments that tariffs on Chinese companies hurt the U.S. companies who are partnered with the Chinese (Economist, 2019c). “Tariffs are taxes” pines one economist. The trade war may have started about money, and about the trade deficit. It has become something so much more than that. This can potentially turn into a death struggle between the American and Chinese states, Presidents, and way of life.
Trump put it remarkably simply: “President Xi…is for China. I’m for the U.S.A” (Economist, 2019a). He isn’t wrong, and people must see the trade war for what it is; not a war of bullying by Trump, or an act of aggression from Xi, but a war where two countries have reached the natural end point of co-operation in their political and economic systems, and are doing what is best for their country.
There is a term called the Thucydides Trap; when one power becomes powerful, it threatens the established great power, and there can only be war. An American scholar found this was true 11 out of 15 times in history (Rudd, 2015).
Some people may say “Surely globalisation means there cannot be war?” The time period of greatest connectedness in economies and globalisation was 1914; the year that World War 1 started (Rudd, 2015). As such, we must carefully look at the facts.
Part One: Dramatis Personæ
To fully understand the story so far, we must see the cast members and their backgrounds, as well as a rough outline of the plot so far.
President Donald Trump
Peter Zeihan (2019a) summarised President Trump as “the glory, the horror of [Trump] is at his core, he’s got a really good point”. The Dalai Lama said that Donald Trump lacked moral principles; he also said that his successor can only be woman if she is attractive (Lyon, 2019).
The globalisation that Trump detests don’t serve U.S. interests economically; it was never supposed to. It was designed to lure countries from the Soviets at the cost of U.S. subsidies to other countries (Zeihan, 2019a).
Trump has removed every staff member who spoke against him; Comey (FBI), General “Mad Dog” Mattis (Sec. of Defence), Priebus/Tillerson/Cohen/McMaster/General Kelly (Chief of Staff) (Zeihan, 2019). Consider; Trump from 2017-2018 was the controlled, restrained version of himself. We now have trade war, tariffs with Mexico and China, maybe bombing the Iranians Trump.
He ran in 2016 against China. His policies were quite simple:
1) Build the Wall
2) Make America Great Again
3) Bring back jobs
Trump doesn’t care about other countries. As such, he has no reason to follow the pre-established rules. America must benefit or he will “kick over the board”. This isn’t necessarily a bad move for him; if he loses, well, he doesn’t care anyway. As long as America does well (Zeihan, 2019b).
With an upcoming election in 2020, Trump needs to be seen as strong against China, but needs to balance that with an economy that hasn’t gotten used to Chinese tariffs yet. Trump seems to be in favour of trade wars, the first modern president to be so, even tweeting that “trade wars are good and easy to win” (Economist, 2019c).
You may be interested to know that America’s name in Chinese is literally ‘the beautiful country’ (Rudd, 2019).
President Xi Jinping
When Xi and Trump met in 2018 to discuss the trade war, more progress was made in 11 months of discussion than the Americans made in 20 years (Zeihan, 2019a).
Xi based his policies on three topics:
2) Made in China 2025
A focus on 10 industries to transition China from producing low-capital goods to controlling the main industries of the 4th Industrial Revolution.
3) The Tigers and Flies Campaign
An anti-corruption campaign to restore trust in the government from the common people, and remove Xi’s political enemies, particularly those in Jiang Zemin’s faction.
Xi balances between multiple factions within his party, and should he become unpopular, he would face great difficulty. Therefore, he is hopeful that the Chinese economy continues to grow (Zeihan, 2019a).
Secretary of the Treasury Steve Mnuchin
Mnuchin has been one of the actors who most wants a trade deal, and most aggressively pursuing a positive trade deal with China (Ellyatt, 2019).
Mnuchin has held up a package condemning Chinese treatment of Muslims in the hopes that the U.S. and Chinese will be able to make a trade deal together (Gan and Churchill, 2019). He is not alone; Vice-President Mike Pence has delayed the ‘evil empire’ speech until after the trade talks, in the hopes of resolution (Nagasawa, 2019).
Trade Representative Robert Lighthizer
Current U.S. Trade Representative. Back in 1980’s, he worked for Reagan. A small story about this time; a lot of Europeans and other allies were currency manipulating to inflate the value of the dollar to allow them to export to the U.S. market, and stabilise their domestic markets. In 1985, the U.S. had had enough and forced them to stop, the Soviets were calming, and Reagan had won his re-election. The U.S. dollar dropped in value by half, and it was stopped.
Lighthizer was the man assigned to Japan; he would lay out the U.S. orders to Japan. When the Japanese would complain, he would take out his ear piece, take it apart, play with the pieces, and when they were done, he’d put it back together and tell them they’re doing it the U.S. way (Zeihan, 2019a).
Another story; when Trump and Trudeau broke their friendship, Lighthizer threatened Canada saying that Mexico was a useful economy to work with, and if Canada didn’t sign whatever NAFTA deal the U.S. brought, the U.S. would leave them behind. Canada had 7 days. They surrendered in 6 (Zeihan, 2019a).
Lighthizer has been the main driver for forcing the Chinese to agree to enforcement mechanisms, as he simply doesn’t trust the Chinese government to uphold the deal (Lo, 2019). This guy is also going for the People’s Republic of China.
National Security Advisor John Bolton
Described as a man who hasn’t seen a country he hasn’t wanted to bomb, or a government he hasn’t wanted to overthrow, or an ally he hasn’t wanted to threaten (Zeihan, 2019c). He is, to quote Zeihan, “a prick”.
He is one of the few diplomats to use military matters as a tool, rather than something to be avoided. He is considered perhaps one of the best diplomats in the modern era, able to play the whole game; roses or bullets, polite or threats (Zeihan, 2019c).
His reputation is harsh, but he knows what he is doing. He worked under George W. Bush, and brought together an 18 nation alliance including the Chinese and Russians to board North Korean vessels (Zeihan, 2019a). He is aiming for the People’s Republic of China now.
Bolton becoming the National Security Advisor tells us that Trump wants a man who will use kisses and knives to force, and if necessary, break the Chinese without mercy and with cruelty and pleasure. This is not a man of peace.
The Trade Context
In the ancient times, trade used be based in ammunition; if you wanted something, you took it (Zeihan, 2019b). Today, we trade goods and fight in competition; that’s the idea. Trade makes war too expensive to consider. This is the fundamental reason for global trade between powers; the economist will point out that the ability to consume is greater when two countries trade, but the E.U., for example, was born from the idea of stopping pan-European wars.
Free trade has been the U.S. method, since World War ΙI, to convince countries to liberalise and work with the U.S. (Zeihan, 2019a). This is the logic for which President Clinton supported China joining the WTO, in the hope for liberalisation and the rule of law (Clinton, 2000). For everything else we must worry about, the trade war is removing the main way that the U.S. and China would avoid war (Economist, 2019a). Profit used to help China and America look past ideological differences (Economist, 2019c). How big is this issue? In the Cold War, the US-Soviet trade was $2 billion a year; Sino-US trade is $2 billion per day (Economist, 2019c).
This means that China is worth focusing on. This also means that trade is necessary to provide a reason for the U.S. and China to avoid war. Bill Clinton (2000) said in the speech in which he signed for China to enter to WTO said that letting China join the WTO would lead to “a future of greater openness and freedom for the people of China”.
One of the mistakes made by President Trump was pulling out of the Trans-Pacific Partnership. which would have blocked China out of the main position in East Asia (Economist, 2019c). President Obama had a good command of the context of decisions (Zeihan, 2019a). The Obama Administration made TPP to force IP protections and technology protections across Asia, specifically against China who wasn’t invited to join (Economist, 2019c). It was, however, widely unpopular; arguments including the ability for companies to issue visas and the ability for companies to sue countries for lost profits were bandied about and seen as the main problems. In hindsight, these were purely anti-Chinese measures; Obama’s problem was he was terrible at selling the TPP. Trump’s preference on bi-lateral trade treaties (U.S. versus one single country, the U.S. usually has most of the leverage) has led to the current events.
Previous Deal Collapse
Before the deal collapsed, the mood was positive (Economist, 2019d). In May, trade secretary Steve Mnuchin said that the trade talks were in their final laps (Economist, 2019a). He has since said that the deal is 90% done, and requires signing.
Although tariffs have been implemented, talks continue. Liu He is China’s lead trade-envoy; “I came here with sincerity. Under the special circumstances, I hope to engage in rational, candid exchanges with the U.S. side. Of course, China believes that raising tariffs in the current situation is not a solution to the problem, but harmful to China, the United States, and the whole world” (Economist, 2019a).
He may have gone too far, however. Lighthizer believes that when Liu He returned with his trade deal, it was struck down for ‘overstepping his mandate’ as a trade representative (Lo, 2019).
Talks now take place under the threat of further tariffs. Currently, tariffs from the U.S. are 25% on $300 billion of goods from China (Economist, 2019a). President Trump has threatened to expand this to all Chinese products (an additional $200 billion of goods) if a deal isn’t met.
China has threatened to follow up with tariffs in retaliation (Economist, 2019a). China’s export growth could have slowed down, but in actuality, Chinese exports have increased, even to the U.S. (Lawson, 2019); this can be seen here. Chinese growth could slow to 6% in response (Economist, 2019a).
What is in the Trade Deal?
Trade issues including IP, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement (Economist, 2019d). There was also the issue of product dumping (Zeihan, 2019c).
Part Two: Leverage
The simple question is: who needs who? Who can afford to walk away? Who has the strength now, and who will have it in 20 years?
Issue of Face
Neither side wants to be seen as weak (Vaswani, 2019). Historically, and by that I mean less than 200 years ago, China had been conquered by Western powers, and felt humiliated by them; they called this the Century of Shame; the treaties signed are called the Unequal Treaties. When Germany lost World War 1, Chinese colonies were given, not back to China, but to Japan. When the Japanese declared war on China, the world looked away for at least the first two years (Rudd, 2019).
Chinese state-run media replies: “If you want a fight, we will fight you until the end” (Economist, 2019c). In private conversations with the common Chinese citizens, the majority feel that America is simply jealous of China’s rise to power, and is being a bully. China’s elite sees the U.S. as a sore loser (Economist, 2019c). China recently released a white paper, saying that the U.S. must not interfere with ‘sovereign affairs’ (Lo, 2019).
China sees itself in a zero-sum competition to bring down the U.S., according to U.S. think tanks. To win, China must bring down the U.S. and the American order, according to Senator Rubio (Economist, 2019c). They believe that they will never be accepted by the West, that they are being boxed in by the West, and that the West is ‘too damned arrogant’ (Rudd, 2015). A state-run social media account has given the statement that the United States must change its’ tone if it wants to work with China, believing that the U.S. was not treating China as an equal (Lo, 2019).
However, it is common economic wisdom that the Chinese are dependent on the Americans to not ‘pull the rug’ out from the Chinese economy, as well as relying on access to the finance, energy, and security markets from the United States (Zeihan, 2019a). The U.S. is not a trading country. But China is a country that relies on external demand to maintain its’ economy (Zeihan, 2019b).
Micheal Froman (former U.S. trade representative) says that tariffs have forced urgency to China to discuss trade relations; they have been effective to get China to the table. He tells a tale that China has been notoriously difficult to work with, and every trade representative simply wishes the next one luck. Under Obama, there was high-level engagement focusing in specific issues and bringing them to the WTO; Obama had 16 cases brought to the WTO against China. They won every completed case (Economist, 2019c).
In Washington, both the Democrats and the Republicans have reached consensus that China needs to be dealt with (Economist, 2019c). Trump himself is not a China hawk; he talks a big game, but he’d love to have a deal to say what a great negotiator he is (Economist, 2019c).
The Americans believe that they have been, historically, nothing but kind to China. The Americans welcomed China into the U.N., and unlike the Soviets, China was allowed to trade with the West (Rudd, 2015). Americans also believe that China has risen at the expense of America, and that it has to stop (Economist, 2019c). The West believes that democracy is universal (Jacques, 2019).
With a 2020 election coming up, if Trump looks weak, there goes another part of his base in an election he will have trouble winning in good conditions. The American importers are already paying the majority of tariffs (Economists, 2019c). This could lead to an increase in inflation for American consumers of up to 0.5% (Economist, 2019a). He has already withdrawn from Iran retaliations (at time of writing), which only makes him look weaker and less stable. Trump is also famously egotistical and hates anyone who insults or embarrasses him.
Robert Lighthizer, the current U.S. trade representative and China Hawk, has focused primarily on enforcement (Economist, 2019d). Historically, a problem in that China will make promises and then not implement them (Economist, 2019d).
The U.S. wants an enforcement mechanism to know that China will keep to their word and hold them to account; they’ll be discussing the circumstances for the U.S. to punish the Chinese, how quickly will the existing tariffs be removed (the Chinese want them removed immediately, the Trump administration wants the inventive to remain) (Economist, 2019d).
Lighthizer puts this enforcement mechanism at the centre of why the current trade deal nearly made in May failed; the Chinese side wanted “trust and good faith” that he couldn’t give them (Lo, 2019).
A personal theory I have is this; Lighthizer and the rest of the U.S. staff do not believe that China can hold to a deal; they want enforcement clauses so they can decimate the Chinese economy later, and without the stink of the current measures, but with the roses of a mutually agreed deal.
The most basic resource in economic is not food or clothes or land, but people. People work. People buy. People save money. Every great economy long-term requires a large, rich population.
Zeihan (2019a) points out that a country with a young population doesn’t require massive amounts of trade; those young people (and their parents) below 40 years old are able to consume all that the country produces.
Countries with older populations (above 40) are earning a lot, with a massive tax base and investing their savings, with a lot of capital in the system. It has to export though, because older workers won’t buy so many goods.
The top bulge for the United States are the baby boomers, who provide the massive capital of an elderly population. In fact, the U.S. is ‘unprecedentedly capital rich’, or even too capital rich leading to the cheapest capital price yet (Zeihan, 2019a). Due to the fact that these baby boomers are trying to get as much return on investment as possible, they are taking risky debts (leading to the past two recessions). In 2022, the majority of these baby boomers will be drawing on their investments, as well as drawing pension and healthcare costs, meaning that the cost of capital will quadruple.
Every single dot not in the U.S. above has seen a net-deficit in transfer with the United States for at least 4 years, a net total of over $7 trillion dollars of capital flight (Zeihan, 2019a). So the only major hiccup in the U.S. economy is that of the baby boomers removing capital. But every time there is a geo-political issue, money floods to the U.S. for safety (Zeihan, 2019a).
The millennials are the second bulge; they consume massively and drive the economy out of recession, and will do so for 4 years. In 2030, they will move to the taxpaying class and take over the burden left by the baby boomers (Zeihan, 2019a).
The U.S. is also one of the few countries in the world which actually has a large young population; without the U.S., the average world population is getting older, not younger (Zeihan, 2019a).
What does all of this mean? The boomers make the U.S. the capital power of the world; the millennials make the U.S. the consumption power of the world (Zeihan, 2019a). In 10 years though, the U.S. may be the only power in these areas as other countries are devastated by ageing populations.
Let’s look at China (CIA, 2019a):
The majority of the Chinese are above 40 years old. This means that China is a capital rich society. We have seen in this article that the Chinese are slowing spending. China is a capital rich country, with a low level of GDP per capita, and a slowing rate of GDP growth (Shepherd, 2019).
China has another problem; the elderly of China do not make a lot, and there are not a lot of young. The young people must provide healthcare for their parents, housing for themselves (in a housing market that is becoming more expensive), and education for their children. They are not consuming; they are tapped out. This will only get worse; when you have two children, the expenses double for at least the first 20 years of the children’s lives. The CIA (2019a) puts the dependency ratio at 7.5 people per earning person. It will take a long time to course-correct.
That said; we need to understand another fact; China is large. Four out of 28 provinces (and 6 cities) have a larger population than the United States (Anhui, Shandong, Jiangsu, and Henan) (Jacques, 2019). This means that China’s potential wealth far outstrips anywhere else. In 2030, they will outstrip the West in purchasing power parity (Jacques, 2019):
We can see that this projection of the global economy in 2030, China may well account of a third of global GDP; in 1820, China accounted for the same amount (Jacques, 2019).
In summary; when the world, and China, become unable to consume and burdened with the elderly and the new generation of children, and the United States will become the only country able to absorb global exports, it will have no interest to do so. China will have a massive population, but one who famously saves and will be tapped out of credit
.The American Economy
Zeihan (2019a) points out that the United States simply doesn’t need to trade much anymore. In 2017, trade made 8% of GDP. Half of that is within NAFTA.
Above, we can see that the U.S. has begun to produce massive amounts of crude oil (Zeihan, 2019a). Functionally, the U.S. has reached energy independence, or will do so within 2 years.
Once these two links are fulfilled by domestic sources, the United States will no longer rely on trade or the world economy at large. It will become completely self-fulfilling. If there were a global energy crisis, in “the speed of a tweet” the exporting of oil will cease, putting a cap on oil prices at $60 per barrel (Zeihan, 2019a). The rest of the world will be screwed.
In fact, natural gas in the United States is 1/6 of the price it is globally on average, because it is a free by-product of shale technology (Zeihan, 2019a).
The natural defences, geography, and traits of America ‘condemn’ America to being an agricultural, military, financial, industrial superpower (Zeihan, 2019a).
Issues of American Employment
Trump famously said “China is stealing our jobs” (Economist, 2019c). He even ran in 2016 on the platform. “We could make the product right here…like we used to” (Economist, 2019c). Trump has told China that, using tariffs, he can make American companies flee China and hurt the Chinese economy badly (Economist, 2019c).
One example given is how in 1990, bikes made in China were exported to the U.S. and cheaper than the cost of raw materials in the U.S., leading to closing of many bike firms after 1911 in the U.S. Now 95% of bikes in the U.S. are importing from China (Economist, 2019c). This story has two sides; the U.S. believes it is a story of how Chinese firms undercut and killed American jobs. The Chinese believe it is a story of how Chinese cunning, backed by government subsidies, stole jobs from the U.S. (Economist, 2019c). The actual manager of the Chinese factory said he saw the U.S. as a partner in competition; he even ended up buying 49% of the American firms’ company later (Economist, 2019c).
There is an argument that the tariffs have hurt U.S. producers, and in turn, cost U.S. jobs (Economist, 2019c). Not only that, but Chinese investors are moving factories from the U.S. to South America (Economist, 2019c). This has been confirmed in a letter from the American Chamber of Commerce in China (Stratford, 2019).
Most Americans work for small and medium companies that simply do not trade (Zeihan, 2019a). They may have their jobs taken from them due to undercutting from the Chinese, but they do not benefit from trade.
Are Chinese tariffs on the U.S. causing untold damage? The U.S. economy is indeed slowing down, but is it because of China? 10% of the exports to China are soy beans; these have been greatly affected by Chinese tariffs (Setser, 2019). This is why you’ll see hundreds of documentaries about poor soy bean farmers; they’re the mainly affected party in the U.S.
But U.S. manufacturing and car and planes are barely different in how they export to China (Setser, 2019):
So Chinese tariffs on commodities have dropped exports by 60%, and the rest by…not very much at all.
One interpretation is that China hasn’t implemented tariffs as aggressively, so it can do so if Trump increases tariffs further. There is also the fact that China has already protected whichever industries it deems important.
Another is that China imports what it cannot make itself, and so a tariff on U.S. goods would hurt the Chinese economy more than the U.S. (Setser, 2019). That said, imports to China have dropped in general.
The Chinese Economy
Former Australian Prime Minister Kevin Rudd (2015) once described the threat of China to the West as the world’s largest economy being “a non-English speaking country, a non-Western country, a non-liberal democratic country”. In turn, this must have an effect on the world and how countries will act within it.
I do believe, however, the principal reasons for the Chinese economy as it is are simple; to provide wealth, to provide jobs, to provide legitimacy for the Communist Party (CIA, 2019b). Once you understand this, you can understand the reason that China cannot give into the trade deal demands.
The “China model”, so effective that Modi loves it, is a development model based on overbuilding, subsidisation, product dumping, lack of reciprocity, and intellectual property theft (Zeihan, 2019c). Any reduction in these activities would cut directly from bones and organs of the Chinese economy, not the flesh. We can see the effects of the China model further.
China has had a 3000 year tributary system; not the military expansion of the West (with over 140 wars between the UK and France in 500 years, while in the same period, China had 1 major war with Vietnam), but a system based on economic gain for China while said tributaries would acknowledge the superiority of the Chinese system (Jacques, 2019). Otherwise, the Chinese stayed out of foreign politics.
China now represents 16-17% of global GDP (Jacques, 2019).
Borrowing and Debt
Chinese people love to save. They’re famous for it. Their marginal propensity to consume is 0.375; meaning that for every $100 that a Chinese person would get, they will not spend 62.5% of that pay check (Su et al., 2019). The reasons are outlined in this article. What does this mean? When the Chinese stick everything into a bank, a bank will loan that money out. The Chinese have so much capital because the population saves every single penny they can. Those government investments to build roads, hospitals, etc? They come from these banks. As such, the Chinese has over-used their finance sector. Here is the People’s Republic of China’s credit level in the world (Zeihan, 2019a):
Economist Solow notes that while saving can create technological growth, it cannot sustain economic growth (Shilirò, 2017). Hence the recent drop in economic growth in China; there was a point of the economy growing 20% each year; now it is at below 6.5% and dropping.
Recently, the Chinese have been relying on Chinese banks and financial houses to flood the country with currency to keep the economy chugging (Zeihan, 2019c). This has lead to a massive drop in Chinese consumption. This also means that capital debt has been rising.
The Chinese are the most over-credited country in the world in history in both absolute and economic terms; every economic sector and factor is over credited. The most in debt sector is agriculture. That means when the economy pops, not only do they face the worst economic crisis in history, they starve as well (Zeihan, 2019a). The Chinese will also be facing a food-crisis (Zeihan, 2019a).
Subsidising State Owned Enterprises
There is also the question of subsidising Chinese companies. The official bank rate in China is 4.35% (Trading Economics, 2019). This is the interest rate that most state-owned companies would enjoy; the reasoning from President Xi is that they ‘strength decision making and overall coordination’ (Buckley, 2018; https://www.nytimes.com/2018/03/21/world/asia/china-communist-party-xi-jinping.html).
Because Chinese capital is mostly restricted to state-owned enterprises (S.O.E.’s), private firms have had to find alternative ways to find capital (Leng, 2018). This has led to a $16 trillion shadow banking industry in China, before it was shut down (Bloomberg, 2018). The unofficial interest rate in China (used to be before they closed it) would be between 10-25% in 2018 (BIS, 2018). These loans would provide a significant portion of the loans given to companies in China.
So what does this all mean? It means that S.O.E.’s, to pay back 4.35% interest, only have to make a return of 4.36% to make the investment worth it. But private firms must make between 10.1%-25.1% to make return on loans. This means that private firms can make far more efficient use of capital, produce more value, and do so while burdened with worse, now illegal, loans, whereas the uncompetitive S.O.E.’s can mosey by making between 1/7-1/2.5 of the value with the same money. We can see that private firms have always done better than S.O.E.’s (Lardy, 2016).
Not only that, but S.O.E’s can often simply forgo repaying the debt and be forgiven, whereas private business owners often solve the problem via suicide (Leng, 2018). This could well be part of why the Chinese economy is slowing down.
Why does this matter?
In the above graph (University of Alberta, 2018), we can see that private industries make more value for China than state-owned enterprises (S.O.E.’s). Private companies also tend to be more environmentally friendly than S.O.E’s. Higher value will create higher wages and more jobs; the problem is that S.O.E’s are more stable, can be directed, and are an integral part of both Made in China 2025 and One Belt, One Road (CIA, 2019b).
S.O.E.’s have another advantage; they will be more willing to bear costs that won’t return financially, but will benefit China as a whole; they provide 45% of investment into mining (all of China benefits from more coal, oil, and gas), and 66% into utilities (such as water, which the people of China naturally benefit from).
How much better do Chinese private firms perform? One example is this; when the industrial market collapsed in 2015, private firms gained 2.3% profit. But S.O.E.’s lost 21.9% (Lardy, 2016). However, S.O.E.’s are more stable; they have been exporting 11% of China’s goods since 2013 (Lardy, 2016).
Private firms also provide around two-thirds of employment in urban areas in China (Lardy, 2016). Focusing on S.O.E.’s rather than private firms will lead to greater unemployment.
The Legitimacy of the Communist Party
One of the main reasons for supporting S.O.E.’s is for employment (University of Alberta, 2018). The Chinese dislike instability; people who are working, making money, these people do not have any reason to revolt or cause trouble. This keeps China stable. S.O.E.’s also provide far more for social security payments than private companies (University of Alberta, 2018). At the risk of sounding like a Chinese apologist, let me explain the mindset of the Chinese.
To help you keep this in mind; every single time the government in China changes, there is usually a massive civil war, with mass famine, death, disease, unemployment, and millions of Chinese citizens die. As long as people are fed, and getting money, obey the government, and otherwise left alone, they are left as free as they want to be, generally. Pew Research Polls show that the Chinese are satisfied (Jacques, 2019).
Another reason is this; almost every single Chinese person has at least one living grandparent who was alive during the Great Leap Forward and the Cultural Revolution. They hear stories of growing up without food, eating tree bark soap, unable to attend school to work. I have heard stories of mothers who simply sit and watch as their beautiful baby cries of hunger, unable to feed him even breast milk, because they themselves haven’t eaten and so cannot produce any. To read any of the literature, or speak to any of the people, is to bring tears to your eyes if you have a heart in your chest.
So the Chinese people today have cars; phones; jobs; go to university; get a salary; usually are not in any kind of danger; safe, stable homes; electricity turns on, gas turns on, they can eat in restaurants. In the West, we are taught they are living in an oppressive hell. To the Chinese, they are living in the most wealthy, most stable, and more prosperous time in Chinese history. Their grandparents didn’t eat; today, they have an obesity problem creeping in. This is the legitimacy of the Chinese Communist Party. To the Chinese, for whom all of the society and state are family, the government are elders who have given them prosperity and fortune; look at the nicknames. Xi-Dada (Father Xi), Mao-Yeye (Granfather Mao), etc. The state is seen as the guardian of society, as the father of society; from Confucian tradition, a good ruler was like a good father (Jacques, 2019). When one businessman who employed 29,000 people went into massive debt, he wrote a letter begging to be relieved of his debts from the local government to keep those jobs viable; it worked. The government answered (Leng, 2018). As long as China continues to improve the lives of the Chinese, the Chinese genuinely do not have much if any dislike to the government. To quote Clinton, “it’s the economy, stupid”. Money in your pocket is all that matters. A Chinese worker shrugged when confronted with potential issues over credit and government debt; “all I know is they still pay me”, he replied (Leng, 2018).
China is extremely dependant on the U.S. economy. China relies on over 40% of GDP from trade in 2017 (Zeihan, 2019a). According to one analyst, America controls the global finance and global energy markets; two markets that the Chinese must have access to, and only at the permission of the Americans (Zeihan, 2019a). Should the trade war become a traditional war, almost all exports and imports to China would cease, including 3/4 of their oil requirements, and food supplies (Zeihan, 2019c). This will cause massive problems to the stability of the Chinese government, and bring chaos, death, and worse if the state were to fall. The Chinese people by and large dislike Trump and the Americans for this; they are threatening the very way of life for China. Who wouldn’t hate such people?
The Issue of IP Theft
We must understand the Chinese perspective. They believe it is a fair deal; you want access to the Chinese market, we want access to your technology. Many of the Chinese see no problem with this law; as such, there is very little internal pressure within China to change it.
Allow to explain why technology growth matters the most out of everything else. It matters so much that one of President Xi’s main proposals, Made in China 2025, is based on this technological growth.
Firstly, try to consider this; your population is limited by your population. There is a limit to how many people can immigrate to your country. There is also a limit to how productive these people can be. A man can only farm so much land, or fill out so many pieces of paper. This is the limit of labour.
Secondly, there is a limit to capital. If you print more capital than your country is producing, the value of money will reduce, leading to inflation. You can borrow and borrow and borrow it (Keynesian economics, basically), but eventually, it has a limit it will reach and inflation becomes hyperinflation and wrecks the economy. This is the limit of capital.
Not only that, but opportunity always strikes. As such, people will always be looking for work, and people will always be looking to have more money; this means that countries in the long term will always be using all of their available resources; let’s call this full employment.
There is a third factor to growth; technology. One man can do the work of one man naturally. Give him a tractor, and he can do the work of a thousand men. One man can fill out the papers of one man. Give him a computer, and some training, and he can make an AI that will fill out all of the papers, doing the work of limitless men. Labour and capital are limited; technology provides the boundary of that limit. The more technology, the further out the limit. We call this additional factor Solow’s Residual (Schilirò, 2017).
When China joined the WTO, they did so with the condition that they would stop forced technology transfer (Clinton, 2000). However, the technology transfer, intellectual property theft happens under the Joint Venture Law (McMaster, 2019). The U.S. just want a level playing field, according to them (Economist, 2019c).
In response by the U.S., visas have become harder to obtain for Chinese students, and harder to stay in U.S. in post-graduation. Senator Rubio has said that Chinese students are sent to the United States to steal technology from the U.S. He says the motivations may range from financial to nationalistic to duress. (Economist, 2019c). The U.S. has begun to restrict these types of student visas (Kihara, 2019).
Why does this matter? China’s plan to create 10 high-tech companies to conquer these industries in the world, from robotics to AI, called Made in China 2025. Senator Marco Rubio (Republican, Florida) has called Made in China 2025 a road-map to a Chinese dominated 21st Century (Economist, 2019c).
Critics say that the U.S. is having a crisis of confidence seeing high quality goods coming from China; it has been conventional wisdom that only free societies can produce such goods and having such creativity (Economist, 2019c). China is no longer the country of copiers; it is now an innovative country which has reached this height based on already stolen technology , according to Senator Rubio (Economist, 2019c). China has been building its’ innovation for a long time, and now it is challenging the U.S.’s monopoly on innovation. Firms like TenCent, Huawei, and Alibaba are on equal footing to U.S. firms (Jacques, 2019). It certainly is spending on R&D (Duffin, 2019):
We can see that both China and the U.S. are pouring money into research and development because it is such a vital part of economic growth. That leads us to the next part of the discussion; the theft of technology and IP. We know that technological growth leads to long-term growth. According to the Obama Adminstration (White House Office of Trade and Manufacturing Policy, 2018), China gains between $180 billion to $540 billion in taking IP and technology from America. What does that mean? That means that China potentially gains more from hacking and taking IP than it does in exports from the United States; it would be better, long term, for China to not agree to stop the IP and technology practises, than it would be for China to trade with America. Let me give you a graph:
In this graph, we are assuming that the U.S. continues as it has always done; gaining 20 ‘technology’ every year. We shall also assume that China gains 15 of its own technology, and 75% of America’s technology. (Note: These are numbers for the graph, not real figures). Eventually, even if China cannot innovate like the U.S. can (and there is no longer evidence for that), China will be able to overtake the U.S. with a combined portion of U.S. technology and its own innovation.
This is one issue that the U.S. and China cannot agree on. Consider this box chart below:
On this issue alone, we will find that the most likely outcome is that neither China nor America will agree on this issue. We also find that they shouldn’t in the long-term if the Chinese have the ambition of being the world power, and why shouldn’t they?
Issue of Trade Balance
There is plenty on trade balance here.
The trade balance has another advantage; Solow’s model of long-term real economic growth is that older, less productive methods and machinery would be slowly phased out over time with newer, more well-trained workers, and better, more elegant and less wasteful machinery (Shilirò, 2017). Why does this matter?
We buy new machines, and we train workers using money. You need money to pay for the teachers and trainers of labourers, and the engineers, creation, installation and maintenance of machinery. This all means that the role of capital in long-term growth is linked to that of long-term technological improvement. The more capital is in a country, the more it can invest, lend, start businesses, update technology, and so on. In short; capital is strongly linked to technological growth.
So when China is sucking up $500 billion per year from America alone from exports, what does that mean? It means that all of that extra capital is flowing around the Chinese economy, buying new machines, building infrastructure, developing 5G.
What would it mean if China opened the markets, and allowed greater importing of foreign goods into the Chinese market? It means that Chinese capital is flowing out (remember; China’s economy is already over-extended in capital), which reduces the growth of the country long term.
Not only that; a recent report found that new Chinese growth is driven by ‘hot markets’, when Chinese people want the newest luxury or technological good (Su et al., 2019). Not only that, but Hancock (2019) found that 76% of economic growth in China was driven by consumption of Chinese goods and services, and consumption made up over 56% of Chinese GDP. This means that you need Chinese people buying to drive up economic growth, and that means that Chinese needs this new technology.
Another reason for the export focus is this; in 2011, 40% of Chinese export is provided by private firms, whereas state-owned firms provided only 11% (Lardy, 2016). If private firms are providing the lion’s share of value added, and employment, and the most efficient sector of the economy, then we can see the problems with the trade war; it is not the S.O.E.’s that are suffering, indeed, their stock is rising at the moment, but the private companies who will suffer, and take their employment and value with them if they declare bankruptcy.
However, this is the area that China can most easily, and will most likely, cave, promising to buy more U.S. goods in exchange of ending the trade war and ending the blacklist of Chinese companies. This would also allow Trump to say how great he is, and so he may agree. However, the long term sucking of U.S. capital leads to the long-term deterioration of technological growth, and the medium term increase of unemployment in the U.S as unskilled and skilled labour is slowly being priced out of the market.
The Issue of Food Security
In the graph above, we can see the United States is a calorie exporter, exporting over 35% of production abroad. The United States has the cheapest inputs for costs in the entire world for most products (Zeihan, 2019a).
China is a calorie importer, requiring 10-25% of their calories to be imported from abroad (Zeihan, 2019a). It is also worth noting that the agriculture industry in China is largely private, with around 1% of employment and 3% of output done by S.O.E.’s (Lardy, 2016).
In short; one of the largest effects of an upcoming economic collapse will be food, and China imports with capital, and the U.S. produces. If capital collapses, it will be China with its 1.3 billion people who will suffer.
In terms of geography, the United States is covered in some of the best farm land in the world, and fully able to produce its’ own food, and food for other countries as well. Not only that, but the U.S. has rivers that stretch across the continent; the Greater Mississippi River alone has more internal river miles than the rest of the planet combined (Zeihan, 2019a).
America has only one major competitor for soy (American’s main agricultural export); Brazil. A country that is the most unequal in the world. A country that has only one road to export soy out of the country from. A country that just elected a man who said the Nazis were too soft. And a country who is already poor, when the world is about to hit a capital crunch that will destroy all potential social mobility in Brazil, leading to a revolution which only has to cut one single road to end all exports of soy, leaving the U.S. as the only major exporter of soy on the planet (Zeihan, 2019a).
When the food economies collapse, the United States can expand their output more than the rest of the world combined.
Rank two is Myanmar; one of the countries targeted by One Belt, One Road. Next is Australia (mostly desert, so rising, but not sustainable competitor), also targeted by One Belt One Road. Rank four is New Zealand; cheapest and fifth largest producer of beef and dairy in the world with a Deputy Prime Minister who focuses on keeping the industry as unregulated and efficient as possible; another target of One Belt, One Road.
Regarding the above 3 countries, you will find that there is great political pressure to sign a deal between the ASEAN countries (including Myanmar), as well as New Zealand and Australia (Chen and Promyamyai, 2019).
Rank five and six are France and Argentina; similar to the United States, but smaller scale (Weihan, 2019a). President Xi visited France in May 2019, and even ordered 300 jets from France for no apparent reason (Pennetier, 2019). Xi also visited Argentina in 2018 to sign 30 agricultural and investment agreements, and China is the biggest investor into Argentina and, besides the IMF, owns the most Argentine debt (Henao, 2018).
You will also notice how Thailand is an exporter of food? President Xi has been leading trade deals with Thailand and ASEAN and aims to finish it this year (AFP, 2019).
What does this mean for leverage? If China withdraws from food trading, Chinese food prices will rise, and potentially lead to food instability and political instability. If the U.S. withdraws, it will export its food elsewhere, or worse case scenario, simply over-produce food to rot while the government raises taxes to pay for the food price floor. In this case, the U.S. simply wastes some food and money; China starves. In this case, the U.S. has the absolute advantage.
But there is a problem for the U.S.; should the U.S. take actions that leads to the starvation of the Chinese people, it would be widely blamed from the wider global community, and China would be sent food from other countries in sympathy. As such, this option between the U.S. and China is very limited in its leverage.
We also know that Trump refused to bomb the Iranians because it may lead to the deaths of 150 people; I then doubt if Trump would have the stomach to starve 1.3 billion people.
However, we have now found that China cut itself off from U.S. and Canadian exports of food, which has lead to massive inflation of food prices, and China scrambling to find new partners to import food from.
Part Three: International Issues
U.S. Domestic Moves Against China
While it is not part of the trade deal directly, it would be remiss not to note that the trail for Meng Wanzhou, daughter of CEO of Huawei and CFO, has yet to finish (Pearson, 2019). Trump didn’t stop the prosecution of his lawyer, former staff-members, or the investigation into his family or himself. I don’t expect Trump to do much for Ms. Meng.
Within the United States, Senator Marco Rubio has put forth a bill to remove up to 50,000 patents from Huawei in the United States (Stone, 2019), which is seen as a hypocritical move from the U.S. on IP protections. Rubio responded that Huawei didn’t get the patents honestly, calling Huawei a ‘patent troll’.
The U.S. Department of Commerce has also put Huawei under a trade blacklist.
The United States has also recently charged Huawei Technology Co. with bank fraud and violating U.S. sanctions on Iran (Hurtado, 2019). Huawei’s lawyers have been unable to access evidence so far, a breach of due process.
When Trump was elected, the South Korean President Moon made a deal with the U.S. in which they agreed to every single aspect presented, in order to keep U.S. boots on South Korea soil (Zeihan, 2019a).
When President Abe thought he had a deal with Trump, it turned out that the deal the Japanese would have to accept would be bilateral, and would be whatever the Americans wanted it to be. The Japanese originally pulled back. With the Canadians, Mexicans, and South Koreans all trading under the new Trump order, the Japanese are now working out a deal with the U.S. (Zeihan, 2019a).
The last time the British asked for help from the United States, it cost them every single British base in the Western hemisphere. This was during World War 2. Now, Prime Minister Theresa May is going to ask for a deal after Brexit. Zeihan (2019a) believes it will cost them London as a financial centre.
Those deals; Mexico, Canada, Britain, Japan, South Korea; that’s half of the American trade portfolio, and everything Trump wants for American trade (Zeihan, 2019a).
The German-American relationship died when Donald Trump presented Angela Merkel with a bill for 70 years of American defence of German land (Zeihan, 2019a).
The North-Korean issue for President Trump ended when Kim stopped developing inter-continental ballistic missiles; now Kim can only hit inside Asia. Once America was safe from nuclear attacks, Trump more or less stopped paying attention, regarding it as Japan’s, China’s, and South Koreas’ problems (Zeihan, 2019a).
China’s military expansion and increasingly aggressive posture in Asia (Economist, 2019a). China has an advantage over America; whereas America must hold the entire planet and spread its forces across Europe, the Middle East, Asia, as well as at home due to global commitments, China only has to hold its own waters. China could well out-match the U.S. locally. (Economist, 2019b).
Chinese island building is causing friction (Economist, 2019b).
The Chinese Navy just celebrated it’s 70th birthday. China has also boasted of nuclear submarines and aircraft carriers. China is growing the military spending 10% every year, each year producing more ships than the entire Japanese or Indian navies. (Economist, 2019b).
The United States spends $716 billion in 2019, outspending the next 8 countries combined (Economist, 2019b). At the current level, the Chinese navy is estimated to have 3% of the naval strength of the United States (Zeihan, 2019c).
There is also the fact that when one side is building weapons, then the other side will build weapons for defence; once those weapons are there, there is a contribution to the motivation to then use those weapons (Economist, 2019b).
America now regards China as the single greatest threat that America has ever faced (Economist, 2019c).
Now that the U.S. is generally reverting to isolationism and has little incentive to hold the planet except from some sense of duty or power, the Chinese are quite happy to fill the power vacuum that would be left by an isolated America (Zeihan, 2019a).
Despite drawing up a trade bill with many of the South East Asian members, China faces a lot of friction regarding it’s claim the entire “Nine-Dash Line” on the South China Sea, which could cause more friction (Chen and Promyamyai, 2019).
There are also multiple issues of friction in the South China Sea, such as a Chinese military vessel sinking a Philippine fishing boat and then refusing to rescue the 22 sinking fishermen. President Duterte and his administration says they don’t believe the fisherman involved and stands with China, but it is causing a populous reaction. China itself has said it is launching an inquiry into the incident. (Venzon, 2019).
When North Korea agreed to meet Trump, Kim was summoned to Beijing to be put onto T.V. and lectured to publicly by the President Xi, which in turn made the North Koreans more favourable to American diplomacy (Zeihan, 2019a).
The U.S. is also concerned about China’s push to have the yuan as a trading currency, instead of using U.S. dollars (Bray, 2019).
U.S. Military Strength
Above the U.S. are frozen mountains, below are deserts, and moats on either side; it is the most defensible country on the planet (Zeihan, 2019a).
The Chinese Liaoning, the first (and so far, only) Chinese aircraft jump carrier, is 55,000 tons (ChinaPower, 2018). For reference, the United States USS Ronald Reagan is 100,000 tons.
There are 20 jump carriers in the world (smaller); the U.S. holds half of them (Zeihan, 2019a). There are 11 super carriers in the world; the U.S. holds all of them. It takes 11 jump carriers to equal to firepower of 1 super carrier (Zeihan, 2019a). One super-carrier battlegroup has more firepower than the navies of the rest of the entire planet.
At the current rate of navy build-up, the rest of the world, not just China, but the entire planet will equal the U.S in 2240A.D. (Zeihan, 2019a).
Why does this matter? Because China depends on U.S. protection and opening of the global seas to allow the supply chains that China relies on to manufacture goods, feed up to 25% of it’s population, and allow the export of Chinese goods to their customers (Zeihan, 2019b). This is why One Belt One Road is so important; to open a land route to protect itself from the United States potentially closing the sea.
Naturally, as I am writing this, President Trump writes these words on Twitter. It looks like the United States is beginning to realise that it doesn’t have to hold the seas open for the world anymore. It looks like China will be expected to hold its own straight open, as well as other countries being potentially beholden to China, rather than the U.S. This isn’t policy yet, but if it becomes so, we could see a withdrawing, consuming U.S. leave the global market to itself, and a return to the seas being a dangerous place to trade.
Alternatively, Trump could use this as leverage in future trade deals; if you want us to open your sea, you pay us a safety tax, or some other concession.
China’s Growing Influence Across the World
The American Congress frequently discusses the influence of the Chinese government on American university campuses (Economist, 2019c).
Confucius Institutes are being used to promote Chinese language and culture; these have come under scrutiny (Economist, 2019c). Senator Marco Rubio urged universities in his state, Florida, to end their relationship with these institutes (Economist, 2019c).
Critics say that America is having a crisis of conscience about openness (Economist, 2019c).
Issues of Security
To put it mildly, America has a deep suspicion of Chinese telecom giant Huawei (Economist, 2019c). In Washington D.C. today, the political atmosphere is that the threat of China must be put above corporate profits (Economist, 2019c). Because of Chinese installation of Huawei into British 5G networks, America has said it would pull back from sharing information with the British (Economist, 2019b).
Chinese companies are beginning to feel pressure from the U.S. government within the U.S., who may be seeing a spy scandal from these Chinese companies whenever they try to buy a technology company (Economist, 2019c).
The U.S. Department of Commerce has already placed Huawei on a trade black-list. Not only that, but it has updated to include five more Chinese technology companies at the centre of nuclear, biomedical, and space industries (Fang, 2019). Particularly companies in China’s One Belt, One Road and Made in China 2025 plans.
The U.S. has already begun considering a requirement that all domestic 5G equipment used in American telecoms, not just on national security issues, but in general, all the way down to the smallest chip, is made and assembled by law outside of China (Raina, 2019).
Foreign Companies Are Leaving China
Many companies who put factories in China for the low costs may be thinking about moving out of China (Economist, 2019c). The trade war has more and more countries and companies pulling out of China. South Korean giants (Samsung, Hyundai, Kia Motors, and LG Electronics) have just announced their intention to pull out of China (Yamada, 2019)
The business world is split on the trade war. On one hand, we have Apple complaining that the trade war and tariffs on Apple goods will cost Apple a competitive advantage, and may leave Apple unable to compete in the future (Nikkei Asian Review, 2019). We can also see Apple moving 15-30% out of China in the near future, from multiple factors including the rising age of China’s population and the trade war. Apple has already begun allowing other countries and governments to seduce them to bring production (and technology and jobs) to their country. Not only Apple, but multiple of Apple’s suppliers have been asked by Apple to leave with them, including Foxconn, Pegatron, and so on. (Li and Ting-Fang, 2019).
We also have a signed letter from the American Chamber of Commerce in China asking for the trade war to stop (Stratford, 2019). U.S. Chipmaker AMD has stated it does not intend to continue it’s own partnership with Chinese counterpart past the first generation of technology already shared (Ting-Fang, 2019). In other news, Mitsubishi Motors is also leaving China (Yamamoto, 2019). Nippon Express and Deutsche Post DHL Group, as well as other logistics firms, have already begun expanding out of China to prepare for the exodus of companies from China (Takeda, 2019). Thailand has jumped onto an opportunity; selling land to Chinese producers such as the Holley Group, over 100 Chinese manufacturers are moving to Thailand to avoid the trade war and applications to do so have increased by 15% (Phoonphongphitphat, 2019). This move is expected to bring 0.4% of Thailand’s GDP, or $1.9 billion. Land prices in those areas have increased by 30%. The Thai government is going to set up an investment board to attract even more Chinese investment.
But it must be said; Chinese infrastructure (a by-product of massive government spending), the Chinese supply chain, Chinese low-costs (although getting less low) and the natural inertia of already being set up in China may make it harder to leave than some think (Li and Ting-Fang, 2019).
State of U.S. Alliances
The Obama Administration would use a combination of other nations to help put pressure on China on, for example, steel capacity. Using these economic factors, Obama would try to drive economic reform in exchange for a deal, according to Froman (Economist, 2019c). Trump, on the other hand… is Trump.
The United States started global trade as a bribe to attract countries to fight the Soviet Union (Zeihan, 2019a). One Belt One Road also acts in a similar way for China.
The United States only gave Europe a waiver from the steel and aluminium tariffs on one condition; that the Europeans join the U.S. against China in the trade talks (Zeihan, 2019c). However, European relationships with America are not the strongest at the moment (again, Trump).
State of Chinese Alliances
Regarding One Belt One Road, read more here.
China and ASEAN, New Zealand, Japan, India, and Australia are moving towards a trade-deal that would create a Pacific set of trade rules, putting China in the centre (Chen and Promyamyai, 2019). However, issues regarding treatment of Muslims has several ASEAN Islamic countries concerned, and issues regarding cheap goods has the Indian government hesitating to sign on. Regardless, we can expect a trade deal soon.
Under Chinese friendship and relationship building, the Philippines business lobby groups report that the economy is flourishing due to the Chinese market (Venzon, 2019).
Regarding North Korea, there are only three ways it can go: 1) Trump nukes it. 2) Trump and Kim make a deal. 3) Trump rings it with anti-missile defences, defanging it. The Chinese are helping to facilitate the second option, suggesting it is their preferred ending (Zeihan, 2019c).
Iran recently shot down a U.S. drone, and destroyed an oil tanker. With the U.S. threatening it, Iran is surely hoping for Chinese backing in G20 to continued survival; some believe that China will surely give it (but quietly) (Vaswani, 2019).
China, due to it’s history of poverty and European aggression, feels it can best deal with African countries, as well as the importing of materials from African countries being important to the Chinese economy. Also, China feels it better understands African countries and their problems (Jacques, 2019). We can see that China has moved in as the U.S. has moved out (Jacques, 2019):
Why does this matter? Look at the graph go global wealth in 2030:
We can see that in 2030, the majority of the wealth on the planet will not be in the West, but instead, moving to the developed world. We can see more on that here.
Long term, China and the developing world will have the majority of the wealth, although America is still likely to have the ability to consume (Jacques, 2019). If China can reduce the burden on the population, they may be able to turn around their consumption. We shall have to see.
China Dumping U.S. Bonds
A lot of people bring this up. A few things to consider.
Firstly, a t-bond is a fixed term bond; you can’t just cancel it.
Secondly, you need buyers. If you’re about to sink the U.S. dollar, who will buy them?
Thirdly, the Fed can simply buy up all additional dollars in the world. They managed to print over $500 billion during 2008 with no inflationary effect (Zeihan, 2019c).
Fourthly, why would the Chinese do so? To do so would drive the value of the dollar down, making their exports increase in price. This will drive down the value of their deals in One Belt, One Road. It will drive down Chinese exports directly, removing the jobs that the exports bring. It will also drive down Chinese exports indirectly, as U.S. exports become more competitive as they become cheaper. Due to the lack of capital flight from China, it isn’t even as if the appreciated yuan will suddenly be able to have massive international buying power, Chinese can only buy within China. There is no downside besides a small middle finger to the U.S., but it will drive U.S. exports up, bringing the U.S. it’s jobs back. It would be a complete U.S.-Trump victory. The Chinese are not stupid enough to actually do this.
Issues of Chinese Market Access
Recent changes, and the difficulties of staying in China have created hundreds of articles like this one promising to tell you how to stay in China. Corporate lawyers in China are saying there is immense legal and political pressure to push out foreign companies, and that they highly recommend that anyone who hasn’t left, leave (Harris, 2019).
S.O.E.’s certainly enjoy many benefits than foreign companies; they are approved for more licenses, and more quickly (University of Alberta, 2018). The University of Alberta (2018) discusses how the majority of support from the Chinese government was given to build up domestic companies to fight internationally. When the Chinese agreed to join the WTO, they also agreed to allow American products and investments (Clinton, 2000). However, S.O.E.’s always get guaranteed government contracts, whereas forgiven companies are not even allowed to apply, unlike in the West (University of Alberta, 2018). It is this imbalance that led Trump to target Huawei (“they can go into Western 5G networks, but we can’t go into China’s? SAD!”).
The Chinese are protecting their markets from American companies more developed (Economist, 2019c). However, when they joined the WTO, they had agreed to lower the barriers for foreigners and reduce subsidies for their own S.O.E’s (Clinton, 2000). In reality, the Chinese keep barriers for industries controlled by S.O.E.’s, and are less transparent in decisions and law-making (University of Alberta, 2018). There are also issues of interest; employees of S.O.E.’s are appointed, not employed. Language of a government official, rather than a private industry. There are also bonuses given to the executives of these businesses based on their adherence to Party Doctrine, as much as financial success (University of Alberta, 2018).
There are also issues; when a foreign company is seen to compete with an S.O.E., they tend to be forced out of the market quickly (University of Alberta, 2018).
Pressure Against Chinese Americans, Companies in America, and Immigrants
Chinese companies have said they feel under immense scrutiny when they try to invest into technology in America (Economist, 2019c).
Senator Rubio says he worries about triggering xenophobia, where the Chinese are presumed to be spies before innocent (Economist, 2019c).
Senator Rubio’s latest bill to seize Huawei patents would also stop U.S. courts from hearing such cases, effectively removing Chinese companies from equal protection from the government, according to state-run media People’s Daily (Stone, 2019). The U.S. has already begun to tighten visas for high technology sectors like robotics for Chinese students (Kihara, 2019).
The United States has already prepared the measures and a bi-partisan bill required to seize individuals and freeze their assets in the United States if they have been involved in the treatment of Muslims in China; currently, Mnuchin has stopped this in the hopes of a trade deal. Beijing refers to the rumours of the treatment of these Muslims as ‘smears’ (Gan and Churchill, 2019).
The Issue of Elections
Trump has a weakness that Xi does not; Trump faces the quite likely threat of losing the election in 2019 as things currently stand, with him losing against Biden and Warren in simulations (Real Clear Politics, 2019). Please note that it is very early to begin putting too much weight on these polls.
If Xi can outlast Trump, he may be able to get rid of his biggest problem. However, a problem is that a large amount of the U.S. Congress and Senate actually have come to dislike China, with the possible exception of Joe Biden who changes his opinion daily, but whose son Hunter Biden has connections with Chinese business and investment (Schweizer, 2019).
Issues of the Future
Senator Rubio has directly stated that China is not a “four year issue”, but an issue “so broad, so comprehensive, and so critical” that future presidents will be dealing with “for the next 50 or 60 year”. (Economist, 2019c).
Rubio also says that the U.S. must focus more on research and development to stay ahead (Economist, 2019c). The Economist believes that the U.S. is not a vital consume to China (Economist, 2019a). The Economist believes that the supply chains in China are not vital to the U.S (Economist, 2019a).
Tones between the two nations are that they want a deal; talks will likely not collapse (Economist, 2019d). Even now, talks between Lightizer, Mnuchin, and the Chinese team are set to continue before G20, although Lighthizer wouldn’t commit to saying that trade talks are ongoing (Lo, 2019). Trump wants to be seen as a “dealmaker-in-chief” and wants a deal to put his name on (Economist, 2019d).
As China and the U.S. create barriers, we will find a decoupling of the two economies (Economist, 2019c). Rubio says that China cannot be contained, nor should it be. It will be important, but there must be a balance of power. Current policy is under-balanced, and will lead to conflict (Economist, 2019c). This is one of the largest factors of capital flight to the U.S.; the economic instability and potential food collapse of China has people offering money on investments that return less than 50% on the initial investment simply to get half their money out of China (Zeihan, 2019a). A recent report suggests that $1.2 trillion has quietly left China in a massive move of capital flight (Harada and Manabe, 2019).
The United States is self-sufficient in energy, when there is a global energy crisis, the United States will not be heavily affected; the rest of the world will suffer (Zeihan, 2019a).
Part Four The Trade Deal Cannot Happen
So we have the following demands for the trade deal:
IP and forced technology transfer
The Chinese would be stupid to stop; it benefits them too much. The United States would be stupid to let it go; it will destroy them long-term. There cannot be agreement here.
Non-tariff barriers and protectionism
The Chinese want to protect their national security interests. The Chinese want to protect their vital S.O.E’s. Both of China’s main plans for the future, One Belt One Road and Made in China 2025, are vital for the Chinese. The Chinese believe they have a right to decide what to do with their own capital and citizens, and who is allowed in. The Chinese cannot and will not agree to remove these.
The United States is playing on an unfair game, where it must jump through Chinese hoops, with laws seemingly unfair and targeted against foreigners, and encourages companies to leave the U.S., taking jobs. Trump will not agree to let this go.
China subsidises its goods. If it sells those goods, they will be below market price. That’s dumping. It’s a side effect of Chinese economic policy, and it’s very effective. The Chinese will not stop subsiding S.O.E.’s. The Chinese also want to continue its export policy to bring in capital. Chinese consumption at the moment cannot consume enough to turn all the product into domestic sales. China won’t agree to stop.
It is against WTO rules. It hurts U.S. and other countries domestic industries. It potentially allows China control of those industries when all other companies are forced out. When a company closes, it takes U.S. jobs and naturally reduces U.S. trade surplus. The U.S. cannot agree to this.
China gains capital from the trade surplus, which it then uses in One Belt One Road, Made in China 2025 investments, and general government spending. This is vital for China to continue under it’s current China Model. However, buying more American goods to keep everything else is something the Chinese seem willing to do, e.g. to buy more soy. China would be willing to agree to reduce this.
Trump hates the trade deficit and sees it as another country taking U.S. money, and U.S. jobs away. It does reduce American capital in the U.S, bleeding the U.S. dry over the long term. Taxes must be raised on domestic citizens to pay for the bonds then purchased with their own money. The United States has also evolved their demands away from a simple trade deficit issue into a multi-faceted issue. Trump may agree to this in order to save face, and break from the trade war early. If this is the case, Trump and America lost. They blinked first. He will also look weak, and lose the election.
However, this is the easiest thing for China to agree to. If there is a trade deal, it will be based on this, and mostly on this.
According to Robert Lighthizer, this was the sticking point for the Chinese negotiating term. It was this that destroyed the trade deal in May; when the deal was presented with enforcement criteria, it was soundly removed from the deal without discussion from Beijing to Washington (Wu et al, 2019).
Former National Security Advisor H.R. McMaster (2019) said that the Chinese have broken too many promises to be trusted; for example, consider the Rose Garden with Obama. He said that any deal with China must focus on enforcement.
There are two ways to consider this: the American perspective is that the Chinese always cheat in deals, and so cannot be trusted. An enforcement mechanism is a normal part of a contract, and the Chinese can only be refusing because they do not plan to uphold the contract.
The Chinese perspective is that the Americans are calling them a liar and cheaters, which is quite insulting regardless of culture. It also smacks of historical deals with the West, where China was dictated to by the Western coalition in multiple treaties.
The Chinese will not agree to this; it puts too much into U.S. hands. The U.S. mustn’t agree to anything without this; it leaves the trade deal toothless and makes the U.S. look foolish.
There will very likely be no trade deal. Trump has a reputation for literally leaving mid-sentence during poor negotiations. Xi has placed conditions on what to not talk about to allow the conversation to keep going. Trump’s advisors, Mnuchin, Bolton, and Lighthizer will all be pushing Trump to accept nothing less than absolute victory. There is also domestic popular and corporate support for the trade war (Rodgers, 2019). A bi-partisan group led by Senator Rubio has gathered over 36 Congressmen and Senators to create an anti-China bloc in the U.S. political system, which is only likely to grow over time (Bray, 2019).
But don’t get me wrong; there is great popular (the farmers), political (such as AmCham) and commercial (many, many businesses) will to get a trade deal (Stratford, 2019). Multiple other political leaders will be pushing for a resolution to the trade war that slows down the economies of the whole world (Vaswani, 2019). There are already rumours of a trade deal going in (Wu et al, 2019). Former Austrialian Prime-Minister Kevin Rudd believes that if both countries have enough ‘heart’, they can work together (Rudd, 2015). A lovely thought that every Chinese person I told laughed at as ridiculous. One told me; “this is competition between governments, no hard feelings, no love”.
If there will be a trade deal, it will be a small, measly affair, promising to keep tariffs at the same level, or possibly reduce tariffs as both countries need stability; Trump for his election, and Xi for his economy and plans. It will not include almost every part of the above conditions that the United States wants, and if that is so, we could put it as a Chinese victory over America.
However, a trade deal that involves the above conditions would be an American victory, depending on how many they can get agreement to, and which enforcement mechanisms are used.
But the world economy shouldn’t hold its breath, and neither should you.
If you’ve enjoyed reading this, please consider following me on Twitter @LeonDeclis or on Apple News on the Idea Meritocracy channel. There is also a Facebook page at @IdeaMeritocracyEcon. Have a nice day!
In all articles, I provide as much information for sources as possible, including links. I encourage everyone reading this article to read deeper, and make their own conclusions. For students, links are here so they can read the original source themselves.
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