May You Live in Interesting Times

 

A portion of a hacked official EU cable describing a private meeting in July

between European officials and Xi Jinping, the Chinese president.

The above phrase in blue is a Chinese curse, not remotely a blessing. If anything, current global complexities – exacerbated by Malthusian population growth and global climate change – reflect a world in dire transformation. There is a shift in power from West to East, as Western democracies can no longer sustain economies built on a glorious past but are in desperate need of upgrades and revitalized infrastructure, while rising Eastern nations are building entirely new, ultramodern nation-states. Nothing screams progress like the centrally-directed, non-democratic People’s Republic of China (PRC), which managed to lift over a billion people out of poverty in a little over three decades.

At least Europe rose from the ashes of World War II, having to rebuild most everything. The United States lives off dams and systems that pre-date WWII – we suffered virtually no war damage – plus the massive post-War boom in homes, highways and power/telecommunications grids. China has pretty much built its current modern nation after 1985. She tested her first nuclear weapon in 1970 and replaced the Republic of China (Taiwan) as a permanent member of the United Nations Security Council in 1971.

As China aggressively moved from low-end manufacturing upwards towards increasingly complex technology (for example, Lenovo bought out IBM’s consumer computer manufacturing business in 2005 and took over IBM’s Intel-server business in 2014), her economy soared. Skylines in China’s big cities are filled with ultra-modern skyscrapers, her rail lines have some of the fastest trains on earth, her subways are clean and new, her road and highway system super-modern and extensive, and her universities have become some of the most advanced in the world.

First by absorbing vast segments of manufacturing that once sat in the West – creating a globalized-outsourcing business without equal – and then by investing heavily in developing nations around the world while shift her internal focus to her own consumers and vastly more sophisticated technology, China built an economic capacity to compete with any nation anywhere. She also built a modern military, with more naval vessels than even the United States, to control her part of the world without serious challenge.

The rise of China occurred as the Western world teetered with migration and immigration issues, Brexit, rusty industries, drug problems and an inability to do the right thing in the growing consternation in the Middle East, North Africa and Islamic Asia. China focused on internal growth, roping as many global natural resource commitments as she could muster, and regional power. As much as it seemed the Western world, wasting trillions of dollars in the process, had picked a fight with an increasingly radicalized and angry Islamic world, most of which were once Western colonies, China deployed its capital to foster “what’s best for China.”

The Western/Islamic clash of civilizations was and is a massive distraction and financial drain particularly on the United States and her “allies.” And while China has had her share with Islamic forces – notably the Uyghurs in her own Jinjiang Province – that has proven to be a relatively minor blip on her path to massive success. But there is another clash of civilizations going on, the East/West confrontation, one made vastly more difficult because of the deep and abiding economic dependency between the regions.

That clash moved to an entirely new level with the election of a reading-history-and-economics-averse U.S. president, a bully looking for confrontation to prove his worth. Not fully understanding that a tariff war produces no winners, Donald Trump elected for a full-frontal tariff war assault on China’s global rise to power. While there is currently a moratorium on new tariffs between the U.S. and China which ends on March 1, 2019, despite the slight gives we have seen to date – some soybean orders, acknowledging that fentanyl is a dangerous narcotic, etc. – there has been little in the way of real movement between the nations.

Just as Trump has a legitimate beef with China vis-à-vis their proclivity to steal intellectual property and allow their nationals to use such purloined processes and content with no genuine attempt to enforce the necessary copyright, trademark and patent laws within the PRC, he has diluted that claim with inane tariffs that will not generate much in the way of new American jobs (most probably, tariffs will provoke and have already provoked the opposite result and perhaps end with a recession) but will result in very serious rises in U.S. consumer prices. Most economists are pretty sanguine in Tariff Man’s probable harm to the U.S. economy, but there is also more than enough pain already plaguing China.

If the United States and China do seriously harm each other in this tariff war, who is the winner? According to Cipher Brief (December 18^th edition) Expert Ambassador Joseph DeTrani: “The Trump Administration is confronting China on issues that have been developing for years and have percolated to the top of a list of concerns that are affecting bilateral relations… A failure to resolve them, ideally through diplomacy, could lead to a new cold war with China.  Russia would be the only country to benefit from such a development.” Every time China and the U.S. slip, Vladimir Putin smiles.

China’s recent leaders have all benefited from the unwritten understanding between the Chinese citizenry and the Communist Party: as long as the economy is growing and solid, the people will accept a dictatorial government where free speech does not exist, where the Party rules. President Xi Jinping was so popular that he was able to dispense with the ten-year term limit on his office, suggesting a lifetime tenure was his to seize. But if Xi caves to Donald Trump beyond the normal give-and-go of trade agreements, his credibility and power will erode rapidly, and his dream of an unending presidency will die with it. Whatever the ultimate result, Donald Trump will claim that he has negotiated the best trade agreement in history, despite his legacy of many words and a consistently failed foreign policy. See my December 12^th blog, Foreign Policy – Big Talk, Little to Show for It, for more evidence of his litany of failure.

But Xi’s prospects are also dimmed from inside the PRC. This tariff war hurts his ambitions too. “China’s consumers and businesses are losing confidence. Car sales have plunged. The housing market is stumbling. Some factories are letting workers off for the big Lunar New Year holiday two months early.

“China’s economy has slowed sharply in recent months, presenting perhaps the biggest challenge to its top leader, Xi Jinping, in his six years of rule. At home, he faces difficult choices that could rekindle growth but add to the country’s long-term problems, like its heavy debt. On the world stage, he has been forced to make concessions to the United States as President Trump’s trade war intensifies.

“How badly this hurts him could depend on the extent to which Chinese workers like Yu Hong find their jobs disappearing. On a recent afternoon, Mr. Yu, 46, was boarding a train home, to Hubei Province in central China, for a nearly three-month unpaid holiday. The lamp factory in Dongguan where he works had drastically reduced pay and cut hours.

“Gauging the magnitude of the slowdown is difficult, given the unreliability of China’s economic data. But there are signs that the country’s problems are deepening… On Friday [12/14], Chinese officials reported surprisingly weak growth in monthly retail sales and industrial production weighing on global markets and helping to drag down the S&P 500-stock index by 1.9 percent. Many economists say the slowdown is the worst since the global financial crisis a decade ago, when Beijing was forced to plow trillions of dollars into its economy to keep growth from derailing.

“‘Xi Jinping has likened China to an ocean that no storm can disturb, but the tempest now hitting it is by far the biggest’ in years, said Diana Choyleva, the chief economist at Enodo Economics in London, who estimates that growth has fallen even lower than during the crisis.

“Over the past two decades, a surging economy gave the Chinese leadership an ever bigger platform. Since China first sought to join the World Trade Organization and host the 2008 Summer Olympics, Beijing hasn’t had to turn for help to Washington or other major world capitals. Long a source of growth, and a stabilizing influence during the global financial crisis, China has generally negotiated from a position of strength.

“Mr. Xi doesn’t have that luxury anymore. He has solidified control over ever more of Chinese political and social life and the economy. This year, he removed term limits, setting himself up to be president for life if he chooses. While the trade war with the United States provides a handy scapegoat, public blame for a prolonged downturn could ultimately fall on him. Already the government has ordered that bad economic news be censored.” New York Times, December 14^th.

For a president who gives himself an A+, who tells his constituency that they will get tired of winning, Mr. Trump has generated one of the worst track records of losing of any president in recent American history. His tariff war may well weaken Xi’s China and that leader’s political ambitions, but it is a pyrrhic victory that will kick American consumers in the gut. Our economies are so linked that one cannot fall without dragging the other down with it.

              I’m Peter Dekom, and when Trump leaves office sooner or later, he might think not about returning to “Shark Tank” but instead appearing as host of “The Biggest Loser.”