America is in a trade war with China. It’s losing.

This past week news media outlets around America have been silently editing out the ‘unimportant parts’ of the presidential primaries, particularly those surrounding Presidential Candidate Donald Trump’s comments on Mexico and China. They instead are highlighting the ‘more important’ parts of ‘controversial statements’ (i.e.: the parts where he’s obviously vying for both press coverage and to appeal to the very far right).

We don’t beat China in trade. We don’t beat Japan, with their millions and millions of cars coming into this country, in trade. We can’t beat Mexico, at the border or in trade.

– Donald Trump

A spat of articles were quickly written to challenge the idea that America could be losing to Mexico in trade; these articles all pretty much admitting “yes but not by nearly as much as we have historically”, though you wouldn’t get it from their headlines (e.g. Is Donald Trump right that Mexico is ‘killing us’ on trade?).

But curiously missing were headlines asking “Is Donald Trump right that China is ‘killing us’ on trade?”

Why? Because everyone knows the answer: yes. China is killing us on trade. China has overtaken the United States GDP, though the US media has so far declined to cover this. (1)

Not only is China’s economy larger than the United States, it’s growing remarkably faster. The US media hurrahs every time the growth projections for China are around 7% and even champion 7.5% growth as a significant and important slow down from its historic “10%”. The United States struggles to achieve 2% growth.

It’s not fair to compare numbers out of context like this: China is an emerging economy and about to hit the knee of the curve into a modern import-consumer economy. The growth numbers above are both easier for China to achieve as it continues to industrialize and modernize. These are specific policy targets the Chinese national banks are targeting for reasons we will get to in a minute.

China is the central economic spoke of an Asia-Pacific region of the world. This region is about to crest into financial and economic plenty. In one or two short decades the Asia-Pacific region (comprising nearly half of the entire world population) will transition from second to first world nations. Every prediction from every multinational bank positions the Asia-Pacific region and China especially as the center of the global economy for at least the next half century. These same banks predict that the region will grow to host nearly 3/4 of all global shipping – this causing the United States to double down in investments to the Panama Canal.

China is set to lead the helm of a huge financial windfall. However, they haven’t been merely waiting for natural causes to provide this. Frustrated by inaccessibility to leadership positions denied to them in highly guarded multilateral banks and lending institutions (the World Bank and the IMF), China has developed a series of its own international organizations, forming an alphabet soup including the new BRICS Bank (Brazil, Russia, India, China, South Africa international bank), the AIIB (Asian Infrastructure Investment Bank), the ADB (Asian Development Bank), and several others.

The AIIB in particular has garnered a lot of US press because the United States tried at the time of its formation to project the image that China would not be a responsible leader of the initiative and encouraged its allies and defense partners not to join in membership. Alas, the majority of allied parties including the majority of Europe did join the AIIB. This was somehow unanticipated by US statesmen and it took the States by surprise.

The AIIB is one of the tools that will be used by China in its upcoming plan to create a ‘new silk road’ or ‘one road, one belt’. The AIIB will be used to grant internationally sourced investments to building infrastructure in countries that will benefit its lenders geostrategically – similar to how the IMF funds the majority of war costs on the Kiev side of the civil war in Ukraine because it benefits the NATO member countries that contribute to it.

China will be using the AIIB to build oil pipelines, highways and other infrastructure through Eurasia, and ports in countries with access to the Pacific Ocean. With this ‘one belt, one road’ initiative China seeks to develop a large economic zone in its neighborhood and in tandem with the rise of the associated economies. China will profit from the trade, the capital flows, the economic power, the regional leverage and the debt that must be repaid by the borrower countries.

Additionally, much like how the Colonies stole intellectual property from Britain to sponsor their industrial revolution, industrial cyber espionage by China is asymmetrically beneficial (versus the US’s industrial cyber espionage of China) to that China. China has simply more to gain in the cyber espionage war than the United States does on the side of intellectual property. This is even more complicated for the US because there is no international intellectual property law nor any international cyber law it can enforce.

Recently China depegged the Renminbi (Chinese currency) from the dollar, a move that was immediately criticized in US media and caused US officials to go haywire. The dominant narrative in the media was that lowing the currency was manipulation and was done to offset Chinese export losses (around 8%) in the previous quarter. This is partially true but so far from complete as to be dishonest. Missing from the broad media coverage was the fact that a depeg of the Chinese currency was a long standing demand of the US government and was advised by the IMF.

The US wanted China to depeg its currency when it would led to the Chinese economy becoming in the more immediate term a consumer economy on level of the size of the US economy. The strategic depeg this week was criticized because the float of the currency drove its value down, rather than up (as the US wanted). This puts an upward pressure on the US dollar and will encourage US debt to continue to drive the global economy through consumer debt. It will also probably exacerbate the US export problem so much that the Federal Reserve may back out of plans to raise the US bond rates in the upcoming financial quarter.

China did what the US asked them to, but what they did is going to allow China to continue to grow its economy relative to the United States in the short term. It also encourages other countries to take debt from US trade deficits and means that China can be continue to grow larger than the United States before it decides to “balance” and level out. A very good explanation of these details can be found in Patrick Chovanec’s Let the Global Race to the Bottom Begin. Phil Levy does a good Q&A in Let Slip the Dogs of Currency War, similarly noting that nothing specifically implicates China for bad behavior because it did exactly what the US has been asking it to, but in a way that harms the future of the US economy in predictable terms.

Folks in high finance have been warning that the trade war may turn into a currency war. At the Financial Times, headlines read: China devaluation raises spectre of currency wars, rhyming with prior coverage wherein Brazil accused the United States of doing the same to them.

This paves the way for the accusations of alleged US backed coordinated naked short selling that set off the most recent market turmoil in the Chinese stock markets. Intelligence interference of the sort has been seen before in the Libor rate scandals, Iranian financial hacking operations, and others – given the national security stakes, do we think the United States is above this sort of covert action?

The Xi Jinpeng administration wants China to grow into a superpower that can compete with the United States. Already a permanent member of the UN security counsel and holder of atomic weapons, China has officially stated its intention to become a great global nation. So far it’s tried to do this by consolidating financial might, soft power, and increasing regional responsibility. China now spends the second most of any nation of military budget. This is where the United States has a fundamental issue. The United State Grand Defense Strategy, codified in the leaked Wolfowitz Doctrine, is to prevent any other nation from rising in order to preserve its uniqueness as a hegemonic superpower.

Knowing this themselves, China has sought to eject the United States from the Asia Pacific region. It has gone on the record internationally claiming that the US is not a legitimate Pacific power and need not patrol these areas with aircraft carriers when other regional powers can provide the services the US claims to provide. Crucial to this effort, China has been developing exclusive trade deals with ASEAN (regional powers) and has excluded the participation of the United States despite great enthusiasm on its part.

So it makes sense that the Secretary of Defense has said “passing TPP is as important to me as another aircraft carrier“. Or that Thomas Friedman has publicly called the Trans Pacific Partnership a national security imperative on multiple occasions. Or that the historic address by Japanese Prime Minister Shinzo Abe to the US Congress on mutual security (re: extending NATO into Asia) saw him answering questions about the TPP almost exclusively in relation to the national security benefits it would foster in the face of a rising China. It explains why Obama, during his last State of the Union Address, urged the US to pass TPP as a means of “writing the rules” in Asia, rather than China.

The TPP is a protectionist trade deal that enshrines benefits and provisions meant to exclude China. It would create a trade bloc through the Asia-Pacific region composing 40% of the world’s GDP. The draft chapters leaked through Wikileaks reveal a slew of international laws that work against China. If China were to want to be allowed into the TPP’s trade bloc, it would need to adopt a slew of castrating laws the United States has long sought to establish over China. It would benefit regional adversaries and neighbors of China in a way that might keep them from being entirely under China’s economic shadow. It codifies partnerships and mutual benefits between nations that might otherwise be divided and conquered by soft or financial power. If the TPP passes, China will be faced with a choice to be excluded from huge capital flows or to agree to international law that will end many of the tactics it currently employs in its bid for global prominence.

The United States media has mostly been worried that a cabal of rich neoliberal capital monopolists and international corporations would be armed by TPP to further control and to accrue wealth, ideas, labor and productive capacities: that the economic benefits will go primarily to the few while the many are left hoping some of this wealth will make it into their 401k – or that somehow they will marry a daughter of one of these moguls and launch themselves into riches. This is a tangential issue to the one covered in this article but I’ll cover it briefly:

The United States does not have state owned enterprises (though much of its enterprise happens to be owned privately by the same elite circle who hold positions as defense and public officials). When a country in a trade war creates a weaponized trade deal for its industry and security, the few private individuals that own these enterprises will have their power and wealth magnified by that trade deal. The question is: which country’s elites will reap the benefits?


  1. It depends on how you measure and diehards will stick to obscure measures but most estimates agree that the US has been overtaken in price-parity adjusted gross domestic product..
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: