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US-China Relations In The Years Ahead: The Trade War Is A Sideshow

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Via Zerohedge

Authored by Michael Krieger via Liberty Blitzkrieg blog,

As President Trump has said many times, we rebuilt China over the past 25 years. No truer words were spoken, but those days are over.

The United States now recognizes China as a strategic and economic rival.

– Vice President Mike Pence during a speech last week at the Woodrow Wilson International Center for Scholars

The truth is that China is a strategic competitor at best that uses coercion and corruption as its tools of statecraft. (Applause.) 

We’ve reconvened “the Quad” – the security talks between Japan, Australia, India and the Untied States that had been dormant for nine years. This will prove very important in the efforts ahead, ensuring that China retains only its proper place in the world.

– Secretary of State Mike Pompeo in a speech last week to the Heritage Foundation

I don’t take the U.S.-China trade war seriously, because I don’t expect a transformative deal to come of it. Specifically, I see the current trade charade as little more than a warmup to a far more serious, unpredictable and dangerous conflict between the U.S. and China in the years ahead.

Last December, in a piece titled Is U.S. Geopolitical Strategy Experiencing a Monumental Shift?, I explained how the U.S. was repositioning its foreign policy to focus on China, and how this would set off a long-lasting and enormously consequential feud between the dominant empire and the emerging power. The post concluded with the following thought:

I’ve now seen enough to seriously consider that we may be entering an entirely new geopolitical environment dominated by vastly increased tensions between the U.S. and China. If so, it will likely last a lot longer than you think as leaders in both China in the U.S. will be looking for a scapegoat as their crony, financialized economies struggle under unpayable debt and unimaginable levels of corruption.

It’s been close to a year since that was published, and I’m now more convinced than ever what we’re witnessing with the trade war is nothing more than insincere negotiations with virtually zero chance of resulting in a major deal that fundamentally restructures the U.S.-China relationship. Despite the endless rounds of talks and optimistic tweets from Trump, absolutely nothing has been accomplished. Let me explain what I think’s really going on.

First, I think Trump and his administration genuinely mean it when it comes to their desire to get China under control and stymie its geopolitical and economic rise. This has been clear from the very beginning, and continues to be expressed by top administration officials including by Mike Pence and Mike Pompeo in a set of speeches last week (here and here), which I encourage everyone to analyze independently.

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In his speech, Pence harshly attacked virtually every aspect of Chinese society and referred to it an “authoritarian regime” on multiple occasions. This isn’t the sort of language U.S. officials tend to use when a breakthrough deal with a foreign nation is imminent, it’s the sort of language U.S. officials use when the country is at war, about to be at war, or is working on a regime change operation.

If that’s the case, why do both China and the U.S. continue to play pretend when it comes to the trade war? I think there are several reasons. Let’s begin by examining what Trump’s trying to achieve. I think he went into the trade war thinking that by taking an unexpectedly aggressive approach he could inflict enough pain on China’s economy to force them into the sort of historic and transformative deal he had in mind, but this did not pan out. I believe Trump now recognizes such a deal will not happen, but he continues to fake it. This isn’t because his fundamental strategic objectives changed, it’s because he’s consumed with concerns around reelection. As such, he’s decided to pretend things are going well regarding a trade deal he knows isn’t coming to keep the stock market elevated. Trump is absolutely obsessed with the U.S. equity market and believes keeping it elevated is key to his reelection. Thus, he’s intentionally keeping hope alive when there’s no real reason to be hopeful.

As I noted a couple of weeks ago:

Subsequent days offered additional evidence for this perspective as Trump proclaimed the trade deal would be separated into phases, with phase one pretty much ready to go. Naturally, if you look into what’s expected to be accomplished in “phase one,” it’s a complete joke.

As noted in the Bloomberg article, it appears phase one will amount to a complete zero from the U.S. perspective. We learn:

China aims to buy at least $20 billion of agricultural products in a year if it signs a partial trade deal with the U.S., and would consider boosting purchases further in future rounds of talks, people familiar with the matter said.

That would take China’s imports of U.S. farm goods back to around 2017 levels, before Trump began a tit-for-tat tariff feud with Beijing. In the second year of a potential final deal, purchases could rise to $40 billion to $50 billion. But that would depend on Trump removing remaining punitive tariffs, said the people, who asked not to be named because talks are private.

If this is accurate, it accomplishes absolutely nothing. It simply brings Chinese purchases back to where they were before. Even if they agree to much higher purchases, this was never about China buying more pigs and soybeans, it was about fundamentally restructuring the U.S.-China relationship, and there’s no evidence whatsoever this is going to happen. Trump is dragging this out and pretending it’s going well in order to keep the stock market at record levels to help his reelection odds. Other more significant trade phases will be discussed ad nauseam for the next twelve months, but no truly transformative deal will occur. Trump knows this and so does China.

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If I’m right and China’s leadership understands the sort of deal the Trump administration demands will never happen, why are they willing to play along with Trump’s trade song and dance? I think the primary motivation lies in China’s hope Trump can be removed from office, either via impeachment or in the 2020 election. Chinese leadership probably thinks escalating the situation could end up helping Trump. Though a fall in equity markets and U.S. economic activity wouldn’t be good for Trump, if he’s able to blame it on China’s unwillingness to compromise it could actually help his reelection prospects. I think the Chinese understand this and don’t want to offer Trump the scapegoat he desires. They figure the U.S. economy and markets could very well stumble on their own over the next twelve months, and they want the U.S. populace to blame Trump instead of China.

To summarize, I think Trump went into the trade war thinking he could cause such a massive headache for China it would swiftly agree to major concessions. When this didn’t happen, Trump figured he couldn’t safely escalate into a more aggressive confrontation without torching his reelection prospects, so he decided to drag out this ridiculous spectacle to prop up the stock market into November 2020. From its perspective, China doesn’t want to give Trump the scapegoat he desires should the economy and stock market tank before the election. Chinese leadership probably thinks there’s a reasonable chance Trump’s days are numbered and they might get a China softie like Biden in the White House. As such, both the Trump administration and China both appear to have their own distinct incentives for pretending that the trade war negotiations are going well, when in fact both sides know they are not.

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If I’m correct, there’s no point in spending much time thinking about the trade war. It’s just a spectacle, a sideshow and a total circus at this point. Rather, it’s much more important to think about where this is all headed over the next several years, and on that front I think the conflict will get far more severe.

If Trump wins in 2020, I expect he’ll become more aggressive with China than almost anyone can imagine. Without having to think about reelection, Trump will focus on his legacy and he’ll see reorienting the U.S.-Chinese relationship as the most historically significant achievement he can accomplish. At that point, China will have have no choice but to face the reality of another four years of Trump, and it’ll likewise stop pretending things are going well, which will cause the situation to deteriorate fast.

The path is a bit less clear should Trump lose reelection, though a major U.S.-China conflict remains in the cards early next decade regardless for a couple of reasons. First, the global economy is in fact on the verge of systemic failure due to it being structurally little more than a massive fraud scheme of debt, corruption and rent-seeking. When this failure truly manifests globally, both Chinese and U.S. leadership will desire a conflict in order to distract from internal problems. Chinese elites won’t want the Chinese people to blame them, and U.S. elites won’t want to be blamed either. As such, an external enemy works for politicians and oligarchs in both countries. It’s the same as it ever was. Trump’s just escalating and bringing forward a collision that’s increasingly likely to unfold irrespective of who resides in the oval office.

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