President Trump is executing one of the most brilliant geopolitical economic resets in the history of global trade. It really is stunningly remarkable how President Trump has controlled the entire landscape. The consequential phase now begins.
It is fascinating how the financial pundits didn’t see this coming. Perhaps one of the best indicators of where things are today comes from this quote within the South China Post:
“The Administration’s Section 301 tariffs and China’s retaliatory tariffs will now further disrupt – or even break – many thousands of supply chains in both countries.”
The quote by Nelson Dong is stated *as if* shifting/breaking supply chains is a flaw in the approach. It’s not. Exactly the opposite is true; this is a feature of the strategic reset. A specific and purposeful feature designed by President Trump.
What Dong is predicting is the deconstruction of “one-belt, one-road”.
As President Trump highlighted today, over time (and it won’t take long) there will be an exodus of multinational manufacturing away from China. Corporations will shift their purchase agreements, manufacturing and assembly plans to ASEAN countries outside the investment ‘risk zone’ that is now China.
Notice some of the nuance (specific references) within President Trump’s tweets. Japan, Vietnam (President Trang Dai Quang), South Korea (KORUS), Philippines and India are positioned to pick-up business.
To counteract the predictable exodus the Chinese state-run enterprises (and banks) will offer incentives to retain the corporate manufacturing business. This process means China, in essence, subsidizes the tariffs:
China has no choice if they want to retain their economic model. Remember, China’s economy is deep (manufacturing) but also narrow. They are dependent on raw materials, customers and market access. {Go Deep}
Additionally, President Trump announces today he has not made any decision on the next phase of 25% tariffs on the remaining $350 billion in Chinese products. He doesn’t need to. Merely the possibility of additional tariffs will pause any further investment; and some companies not currently impacted will make decisions to avoid the possibility of impact.
President Trump has walked Chairman Xi into a trap. There is only downside for China in the current dynamic. In an effort to avoid the downside, China will bleed cash to retain their economic position…. However, this can only last so long.
President Trump knows the strength of our U.S. position is that our economy is deep and wide. The U.S. is a self-sustaining economy. Almost 80% of our internal production and manufacturing is purchased within our own market.
In the big picture – economic strength is an outcome of the ability of a nation, any nation, to support itself first and foremost. If a nations’ economy is dependent on other nations to survive it is less strong than a nation whose economy is more independent.
The reality of China as a dependent economic model; heck, they cannot even feed themselves; puts them at greater risk from the effects of global economic contraction. However, more importantly it puts China at risk from President Trump’s strategic use of geopolitical economic leverage to weaken their economy. Trump is exploiting that risk.
As things go forward, China cannot sustain a long-term economic conflict with the U.S. As each day passes the ASEAN alliance will see their investment grow as companies pull-out of China and invest in S-Korea, Vietnam, Philippines, India etc. The GDP of our allies (including Mexico) grows, and the controlled GDP of China, as an adversary, shrinks.
(LA Times) GoPro Inc. will move most of its U.S.-bound camera production out of China by summer, becoming one of the first brand-name electronics makers to take such action to minimize the impact of the U.S.-China trade war.
“Today’s geopolitical business environment requires agility,” GoPro Chief Financial Officer Brian McGee said in a statement Monday. “We’re proactively addressing tariff concerns.” The company is still deciding where to put the manufacturing operation. (more)
All of this was entirely predictable. President Trump and Ambassador Lighthizer told the world what to expect in 2017:
Da Nang, Vietnam – United States Trade Representative Robert Lighthizer today released the following statement in response to President Trump’s speech on trade between the United States and the Indo-Pacific region, at the Asia Pacific Economic Cooperation (APEC) CEO Summit (emphasis mine):
“The President spoke loud and clear: the era of trade compromised by massive state intervention, subsidies, closed markets and mercantilism is ending. Free, fair and reciprocal trade that leads to market outcomes and greater prosperity is on the horizon.
“President Trump understands that too many nations talk about free trade abroad, only to shield their economies behind tariff and non-tariff barriers at home. The United States will no longer allow these actions to continue, and we are willing to use our economic leverage to pursue truly fair and balanced trade.
“I look forward to doing as the President instructed me and to pursue policies that will improve the lives of our workers, farmers and ranchers.” (link)
