Are you ready for a US economic war on China?

There’s big debate going on. A very big debate. It is whether or not China and the US are engaged in a trade war or an economic war. The difference between the two is captured in a piece by noted economist and author Richard Duncan at the SCMP:

The deepening trade dispute between the United States and China could mark a “turning point in history”, ending the system of global trade that brought low-cost goods to consumers and fuelled the rise of the Chinese mainland and other emerging markets in just a few decades, according to noted economist and author Richard Duncan.

Bangkok-based Duncan believes the US$50 billion of Chinese products designated for 25 per cent tariffs by the Trump administration – in addition to a proposed 10 per cent tariff on an additional US$200 billion in Chinese goods – may represent the first steps in a policy shift by Washington that goes far beyond what many observers expect.

“I am becoming concerned that they really do intend to put up trade tariffs on a very large scale against China and that perhaps there’s more to this strategy than just balancing trade. They may be intent on stopping China’s economic growth altogether, now that China has become so large they are becoming not only an economic competitor, but potentially a military threat to US global dominance. If that’s the case, this could be a turning point in history,” Duncan said in a new South China Morning Post business podcast.

While it is too early to say how the trade talks between the two sides will play out, one concern is that escalating tariffs, beginning with the US$34 billion of Chinese products which went into effect on July 6, are about to become the norm, rather than the exception.

Another is whether the trade policies are really designed to reverse the deindustrialisation of the US economy – a theme made prominent during Donald Trump’s presidential campaign.

“Over the last 30 years the rapid economic rise of China has really transformed the world, but if the US starts putting tariffs on US$200 billion and US$500 billion of Chinese exports, then China’s economy could go into a very serious crisis,” Duncan said.

Duncan, who now publishes independent research at his subscription video newsletter Macro Watch (richardduncaneconomics.com), said China’s growth could come to a “screeching halt”, resulting in millions of job losses, while a domino slowdown would also be felt among its major trading partners.

Another outcome would be rising inflation, higher interest rates, and a global drag on asset prices ranging from stocks to real estate.

“The impact would be global and we would see a drop in metal prices and that would be a blow to metal and mining companies. Also as commodity prices fell, the economies of the commodity-producing economies would go into recession,” he said.

There are two schools of thought on this. The first is that Donald Trump has in mind a simple trade war. This notion is supported by the progressive lifting of tariffs on Chinese goods and White House rhetoric to date. It is also supported by Trump’s wider tariff agenda and his jawboning for a lower US dollar.

The second school of thought is that the US is pursuing an economic war. This was captured recently by Steven Bannon:

If this is the objective then the US will drive tariffs and the USD upwards to break both the Chinese trade and capital accounts. China will see both falling trade to the US and major capital flight driving a domestic credit crunch. The US will need to keep stimulating to achieve this end, just as Ronald Reagan did versus the USSR.

There is a third possible outcome which is probably the highest risk. That is that the US begins with a trade war and stumbles into a economic war. This could easily happen because China cannot meet the US demands or it mishandles its response. From here it is frighteningly easy to see how the US applies its tariffs right up to $500bn, China responds with an aggressive internal anti-US goods boycott. The US responds in kind and global recession is upon us, with Australia at its epicentre.

The fourth scenario is more benign. Both leaders are under pressure over the issue at home. Via WSJ on Trump:

Mr. Barr is one of 24 GOP representatives whose re-election this November is rated a toss-up by the Cook Political Report, and he complained that bourbon makers in his district were being hurt by European retaliation for U.S. steel tariffs. “We want to know when we’re going to get a solution.”

With Republicans growing increasingly worried about losing control of the House this fall, fears aggravated by polls showing the unpopularity of Trump trade policies, Rep. Bill Huizenga (R., Mich.) read aloud to the White House advisers a text from a tool-and-die maker in his district who was facing higher raw-material costs because of the aluminum and steel tariffs. “I was making sure that they heard the message that this is not just uncomfortable—it’s painful and it’s damaging,” Mr. Huizenga later told reporters. He said that because his district also includes farmers, who are getting squeezed by the retaliatory tariffs, “we’re getting it coming and going in western Michigan.”

Many of the lawmakers said the GOP-led Congress should keep alive the prospect of legislation to curb Mr. Trump’s ability to impose tariffs on the table, even after the apparent thaw in relations between the U.S. and EU.

With mid-terms looming at year end this could break either way.

Richard MacGregor notes that Xi Jinping’s critics are growing bolder, via AFR:

In recent weeks, the signs of a nascent pushback against Xi’s absolute power have started to emerge. Some are cryptic, given the nature of Chinese politics, contained in coyly worded postings on social media. Some are the stuff of rumour, or back alley news, as the Chinese call such information, which flourishes in the absence of a free press.

The whisperings emanate from a variety of sources – retired leaders, rival factions within the CCP, the intelligentsia and the economic policy making apparatus. None presage Xi being toppled from power, nor are they an indicator of meaningful political reform of the single-party state. The ruling communist party, in whatever form, is here to stay.

But after nearly six years during which he has relentlessly accumulated power and sidelined rivals, either by ousting them from office or having them jailed for corruption, Xi’s multitude of critics and enemies may be finding their voice.

Either or both leaders could be forced to sue for peace, triggering a big risk-on rally for global markets.

So, how do we position investment for these outcomes? We use scenario analysis.

A successful US trade war on China results in moderately bearish outcomes. China stimulates as its trade account is attacked but the balance of forces still means weaker growth. This results in ongoing falls in Australia’s terms of trade.

A successful US economic war on China results in an historic house price crash and deep recession as the terms of trade fall heavily and Australia joins the Chinese capital flight, lifting mortgage rates just as the RBA runs out rate cuts.

At the same time, there is the benign outcome which will lead global markets very much higher before the cycle ends so we can’t afford to simply duck for cover in a bunker somewhere.

There is no saying which way this will go. Even putting odds on it is impossible given the political nature of the risks. What we can say is that the bad outcomes represent, at this stage, more than just a tail risk. They are a hedge risk that you should have a plan for.

That means lifting them from a consideration that would normally be covered by some small allocation of portfolio insurance to an active allocation rebalancing that lowers your exposure to this specific risk. The easiest way to cover yourself on this front is to have a generous amount of your wealth positioned offshore because the worse the outcome of the trade war then the lower the AUD will go.

We also maintain a solid exposure to international shares so that we do not miss the updraft if it comes.


David Llewellyn-Smith is chief strategist at the MB Fund which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book. Below is the performance of the MB Fund since inception:

If the ideas above interest you then contact us below. 

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. The USA simply cannot afford not to have an economic war with China.

    Almost all the intellectual property that has been used to produce the Chinese (and Japanese or Korean) economy came from the USA’s investment in R&D post WWII that was funded by the taxpayer – public money. The US has either given this away for free or the US corporations have moved the technology offshore to China for profit – thus giving China the means to bankrupt the US middle class and the United States itself.

    The big picture is that this is not a trade war but an IP war. Politicians and economists know nothing about science and innovation. These idiots rant on about trade as if things get made by magic. But it is the investment in science and technology over many decades that is the driver of profit.

    Not one scientist sits in the Australian parliament. Lawyers, business managers and unionists have driven our economy without the slightest understanding of the key element that produces productive economies. They are ignorant fools who think in terms of contemporary trade and short-term trends.

    Capitalism screwed the nation that fostered capitalism. So what do you do? You have a trade war and make local manufacturing in the USA profitable again and go to war with your own overseas corporations. At the same time you protect your IP and never give it away offshore – ever again. This is at least part of the reason why the USA spends big on the military – this is where all the big IP break-throughs that have carried the west for half a century have come from.

    You can control military IP. This is where the transistor, IC, computer, radar, internet etc came from. We got it for free from Uncle Sam.

    That’s going to change. Invest in military R&D and you can control the IP. China is going to be on its own as far as R&D goes. And if you think the Chinese have this covered, think again.

    Trade war is round 1. Intellectual property and innovation war is round 2 – and the USA will win that one hands down if they are serious and keep Japan and Korea on side. Overall, this will be a cultural and scientific war with globalisation being curtailed.

    Australia will be on the wrong side of this.

    Our smart and far sighted politicians destroyed our manufacturing base and sold off our IP generation system (our universities) as degree sausage factories for overseas students. When round 1 bleeds into round 2 we are totally rooted. We have been done over by the ALP and LNP who have invested in the FIRE sector not science and technology and allied us with China which will be an anchor around our necks in a trade war.

    Our politicians of the last 3 decades will be seen as the Pig Iron Bobs of the 21st century – tossers who put the national wealth into a frigging housing boom and then poured good money after bad until it blew up. They should have invested in science and R&D.

    Science investment takes a good few decades to show results. Our politicians don’t get it and never will.

    • Science Mart covers this nicely, knowlage IP’ed and then the Corporate sector got the LBO bug, equity incentives and the U.S. markets hate for labour meant sending everything offshore for a quick buck.

    • You’re clearly nuts.

      Who needs “science” or “r&d” when you can make great money renovating houses for profit or making coffee or doing life coaching?

      Not only is science expensive and hard it is also largely fruitless. Show me one rich Australian scientist and for each one I will show you 1,000 rich property investors and 100 20-something life coaches.

      As they say in science class… QED.

    • Succinctly put. I worked in science R&D in Europe and joined an Australian University in 2016. The focus here is on ensuring that our clients (fee paying students) get increasingly better grades, not doing good science or generating returns to our investors, tax payers, through IP generation.

      • I’m sorry but you are talking nonsense. As someone who also works in the industry I’m all for criticizing the system but everybody knows that the main goal in academia is research. In my many years I’ve never once felt pressure or seen a single example of favouring international students. In fact if they fail a unit the uni gets more money because they have to repeat! You are just conpletely off base here, for better or for worse the entire motivation for academics and the only criteria they are evaluated by is the quality and quantity of their research.

    • reusachtigeMEMBER

      Because China has a lack of Jews they will struggle to create new science stuffs

    • I’m with you on this Clive. Put your post together with myne’s below and it seems to me you get a real feel for just how thoroughly our political, social and business ‘leaders’ have destroyed our future ……….. but much more importantly, the futures of Australian children now living and their children ……………

    • Just because US companies get their stuff manufactured in China doesn’t mean China holds the IP. The thinking processes come out of the US. Not many people want to live in China – its dense, its dirty and if you have wealth there is no shortage of people who’d like to deprive you of it (e.g. via ransoming your family to you).

      China has innovation too, but the idea that they somehow hold a monopoly is crazy.

      • That a nation might ‘hold’ IP (as patents?) is not my point – many patents expired decades ago. The USA invested trillions in public money for R&D that they got no return on – other than when it was given to corporations to produce industry that employed people. Public money was literally given to private industry in the form of mature technology, mostly developed by the US military during the Cold War.

        The IP and technology was then moved to China and the employment transferred so that corporations made money but no longer employed or invested in the middle class by way of employment. Hence, the USA has given away both its competitive advantage and industry that maintained the middle and working class.

        IP and knowhow is the key to productive economies. Attempting to rebalance and redress trade is a band aid measure – a retrospective nod to a bigger failing. Making sure that the USA now keeps the IP it generates and prevents it being moved off-shore is the real battleground. The engine of the USAs IP generation is the military-industrial complex that includes key universities. Military R&D is the silent battle ground that is going to produce the IP of the 21st century. That is going to be tightly held by the USA and some of it is going to be robotics that will mitigate the Chinese cheap labour advantage. It produces other problems of course.

        In Australia I don’t think our idiot leaders understand how the war of IP and science is about to hot up and get real. The USA is not going to give IP away but go head-to-head with China. The USA will win this hands down – it must if it is to save its middle class and rescue its living standards. There is no choice.

        This is worth thinking about, because our parliament of lawyers, bankers, unionists, neoliberal rust buckets and real estate investors have not even seen the consequences of their failed policies over the last 30 years. None of them understand that science, technology and innovation takes a culture to be made over decades. They have dismantled it for short-term profit.

        Germany and Finland will thrive in the new IP war, Australia’s service economy will sink. We will be forced to pick a side and stand for something but also need to confront that our degree factories are the type of thing that only a nation of true thickheads could produce.

        Is Germany, Finland and Scandinavia making a buck out of Micky Mouse degrees with a population Ponzi? No – and only a blithering idiot can’t see why. They are generating real IP and real value that will support their society in 50 years time. In Australia we are pissing it against the wall to water the FIRE parasite that will eat us.

      • And all the opposition has to do is let a large scale EMP device loose and any advantage in an technological IP war is redundant, Clive.

        When the chips fall, all conflict becomes about violence. Killing the enemy and holding their land.

        Scientists will be needed to make killing machines that work offline and potentially without electricity. IP lawyers will be sent to battle.

    • All of this can be expressed in much simpler terms – power – the availability of physical force. China is gathering military strength, so the best play for the US is to cripple the Chinese economy before China can increase it’s military might

      It will end up as a real war before all you suggest plays out, most trade wars do.

    • DominicMEMBER

      All U.S. R&D was publicly funded? You’re deluded.

      That comment to be filed with Obama’s infamous quip: “You didn’t build that business”
      (In other words, Obama claiming that businessmen don’t make businesses successful — the Govt does).

      OMFG, lefties …

  2. matthewMEMBER

    Was so amazed that most Australians have never heard of Barry Marshall. Says it all really and says everything about our future

      • Barry must not have been a cathomic. Didn’t form a stockade with an irish accent. How long before a modern ‘aussie’ Chinaese martyr enters the headlines standing against pale oppression … and a curriculum somewhere.

  3. A US v China Trade war or real conflict would see a very predictable result, repeated in every other host country with a large Chinese minority group .. the 2 million+ Chinese ethnic community in Australia will be actively managed by China to internally subvert, economically damage, threaten or destroy any Australian / US political or military alliance.

    You have to admire the Chinese in their infiltration & colonisation of Australia, 8% of our onshore population, political & industrial & key utility control, farmland, domestic housing, key industries, trade & borders.
    We only have ourselves to blame.

    First to change some perspectives about Chinese migrants into Australia.
    For a long time the perception was skilled & wealthy Chinese and this was partially true with the initial Taiwan, Malaya, HK exodus being higher class & with money.

    But the more recent PRC intake is quite different story.
    In China (PRC / Mainland) Australia is viewed as a dumping ground for misfits, anti social & dissenters, and their social burden.

    In China this is called slum clearance or rural resettlement as foreign colonisation – eerily similiar to Britain’s 18th century colonisation, send their poor, unskilled, criminal & misfits out to a new land, ideally a western country or a new Chinese territory. Once a beachhead & critical mass is established – fill it out by breeding & chain migration of their old sick & useless attendant burden.*

    Tens of millions of inner city poor & misfits have been cleansed from China’s main cities in the last decade – they are called ‘migrants’ internally as China has city location work & residency pass controls.

    https://foreignpolicy.com/2018/02/01/chinas-middle-class-is-pulling-up-the-ladder-behind-itself/amp/

    Which makes the debate in Australia about settlement of new migrants into the regions & not our cities look tame.
    A Chinese can’t stay or work in a city without a pass. Whole blocks are bulldozed at night by the authorities without notice. Thousands are evicted overnight then rounded up and helped to get on a bus or a plane with a loan debt & Fake papers – to go away to Australia as a student or skilled visa, or fake partner – papers willingly stamped by the Chinese authorities.

    We do not get the Chinese upper or middle class in what’s coming in here.
    We get the result of Chinese mass programs of slum, misfit & rural poor clearance & export.

    It’s not just misfits & the social burden from China.
    It’s also the unwelcome & unassimilated Chinese being actively exited from their north & south Asian enclaves. (Korea, Taiwan, HK, along with Vietnam, Thailand, Malaysia, Indonesia, pacific islands etc) all trying to get rid of the Chinese burden – often after many generations of non assimilation and resentment those countries). Can’t get into a Australia ? then via the NZ transit stop, then into Australia.

    Then add on another 600,000 Chinese TR as the future PR anchors in chain migration to drag in their old, sick and useless as our burden.

    Here’s how they came in 2016. Still do.
    $2,000 in China buys a TR with all the Fake documents then PR with Medicare, Centrelink, family sponsorship, all organised by the criminal syndicates & Chinese authorities actively collaborating in ‘exporting the skin clearance & Chinese colonisation.

    https://www.afr.com/news/australian-residency-for-just-2000-in-china-20160403-gnx4xu

    How many Chinese now in Australia entered directly or via later chain migration on these scams ?
    Most of them & with a lot of help & push by China sending the people it did not want in China.
    As stated – we do not get the Chinese talented & wealthy, they already have US or Canadian or UK / Euro stamps as their preference.

    Look st what comes in.
    Talk to them or via an interpreter.
    They are invariably rural poor, city slum clearance, tattooed EoL vice workers as students, faked family & partner rackets, on a TR. Then the fake course, or fake sponsorship or partner to PR & then the chain migration of their old broken down factory worker father, the old toothless sick mother & grandparents, Falun Gong & other dissidents, criminals, money launderers, spivs – all assisted in the visa & loan debt to exit China & go and be Australia’s problem.

    That’s what our hopeless border & money laundering controls are set for – the absolute lowest quality intake.

    Then add on the fastest growing migrant intake – the 440,000 illegal tourist workers (5% of the 8.8 million foreign tourists primarily from China, North & South Asia & India). At 5% ratio, approximately 200,000+ are ethnic Chinese from PRC/HK, Taiwan, Vietnam, Malaysia etc who come in as tourists & work illegally.

    Again only ourselves to blame, totally ineffective & corrupted border controls & government too weak & straightjacketed by politically correctness & pandering to migrant lobbyists to realise that no Australians ennmasse could go to China as a ‘tourist’ & live & work illegally.

    ———-
    The overall ethnic ‘Chinese’ foreign born actually in Australia is at least 2 million.

    Massively concentrated in Sydney, Melbourne then Brisbane, the PRC intake being at least 1.3 million at least and particularly unassimilated.*

    Would they ever assimilate & identify and be loyal to Australia in a US & Australia trade or actual war ?

    It appears not.
    For a start – most remain PR on a Chinese passport so they don’t surrender their Chinese sole passport & identity.*

    Even if they do become citizens, their children speak Chinese, the family lives in a Chinese enclave, and they live here in a Chinese unassimilated bubble.

    The Chinese from Vietnam, Malaysia, Indonesia, Korea, Thailand, etc pushed here, never assimilated in those countries after generations.
    Chinese schools, Chinese districts, Chinese slums, many couldn’t speak that host country language after many years.

    In times of conflict (Vietnam, Malaya, Indonesia etc) all these Chinese, even after many generations in those country, the Chinese enclaves opposed or fought or formented insurrection & sedition against those countries sovereign & national interests.

    So why would it be any different with very same ethic Chinese identifying as ‘Chinese first’ now here ?

    There is no concept of multiculturalism in a Chinese identity, to be blended into some other culture or racial group. It fills Chinese with horror.

    The Chinese culture is fiercely & inherently racist or exclusionary – to each other in clans, North / South / skin colour & features (go live in China for a while) and totally exclusionary & intolerant of any non Chinese culture. Or ask any Korean, Japanese, Tibetan or Mongolian, Vietnamese or anyone else that’s had the experience.

    The Chinese government also tells them what to do, in Australia. Family still in China, their real past, black money and connections used as both inducement & blackmail.

    The Chinese government actively lobbies, spies, monitors and controls them here in Australia in what to do & say. They are China colonists, not Australians in China’s view and continually reminded of that.

    And China lobbies & influences our political parties, industry, key institutions, telecommunications, internet, our border controls, commercial & residential investment very much as it wishes.

    So in a China USA trade war or real conflict….

    ➡️Australia will be totally knocked out by the Chinese government, applying all the internal as well as external pressure points it can.

    And the USA can’t rely on Australia being an ally.

    *Same btw with the 1.1 million ethnic Indians now onshore, exited from India or also other Indian colonisation into Australia, but that’s another story.

      • The current and historical evidence supports much of what you assert. Excellent comment. I have marked Brutus as a troll for a country that will soon be spoken of freely in this land.

      • Ha ha, you do know Bezos owns Wapo, a politized smear rag. Alex Jones ? has he ever even commented on Chinese in Australia ?

        Anyway let’s do a facts check just to make sure your ignorance of things Chinese, here or in China is resolved.

        ☑️2 million+ ethnic Chinese foreign born in Australia. Yes, stats given & ABS DHA has more.
        ☑️PRC coming in mostly slum cleafrom slum clearance & rural poor or countries that don’t want them after multi generation failure to assimilate. Link given. Google it esp Chinese media in where these people are ‘sent to’
        ☑️Poor, unskilled, collaboratively corrupt. Again there is 2 million + so a gradient, but the educated elitist Chinese fleeing here with their capital is a thing of the past. The bulk of Chinese (PRC & ethnic Chinese being expelled from other countries) are uneducated, poor, unskilled, & then chain migration of their old & sick.
        ☑️Highly racist & exclusionary culture. Go to China & live there for a while. Pass system. Police State. 36% of China city slum poor have now been evicted to be sent to new territories or helped overseas. Tens of millions including as many as China could flood into Australia in our broken border & visa controls. I think you are just very ignorant that a different world to what you think can exist thats all.
        ☑️Controlled here. spied on, monitored and organised as colonists of chinese new territory control & no Australian identification or loyalty.
        Face reality & read some local Chinese papers or the rare Chinese dissident voices – there is media on this.
        ☑️A very long consistent history in all other countries of Chinese separatism, racial & culture exclusionism, corruption. Why so you think the ethnic Chinese offshore are so hated & being actively pushed out of every North, South & even pacific Island country ?
        ☑️They don’t assimilate, they do not hold Australian values, and do not have Australian loyalty. Look at the number still on PR & reluctance to be a citizen or lose their Chinese passport. Live in Chinese only slums & bubble worlds onshore. Lol, look around, spend some time with actual Chinese rather than commenting in ignorance .
        ➡️Long & consistent history of Chinese subversion of sovereignty & national interests – why every country in north & south aisa & the pacific (examples given) is pushing their ethnic Chinese into Australia as well.
        ☑️USA has repeatedly warned Australia that the Chinese infiltration & colonisation here means we can’t be trusted, and risks the alliance & protection.
        ☑️Has been stated by the US.

        Mmm, looks like the facts check ok & you’re just ignorant, having a hard time accepting reality.

    • reusachtigeMEMBER

      Rubbish!!! So how did all these sick and poor Chinese bid up or housing so that it has gained such excellent value huh?

      • The Chinese TR, PR here are proxies for the criminal & money laundering syndicates. Not their money.

    • So you’re saying China sends us their dissenters, dissidents and other useless people, then talk about them like perfectly obedient and sneaky agents of the very people who sent them here.

      China wouldn’t do what you’re saying outside of some very unique circumstances. Why? Because they’d get caught. Think about it- any nation that is reasonably well respected on a global stage comes out with irrefutable proof that China is using migrants en masse as foreign agents. The entire friggin planet would lock their shit down. You wouldn’t just lose your Australian agents. We are simply not valuable enough to risk that for.

  4. From other thread…

    Result of trade war between US and China.

    China starts dumping its goods on the world market at 1/5, 1/10 even less than the price they currently charge and completely drive all American made goods out the door.

    Being able to by an Apple phone for £1200 or the Equivalent Chinese made for £200 is an absolute no brainer. Same for cars, stereos, everything you can imagine.

    Now consider that the primary imports from China into the US are super cheap components for manufacturing which are the very epicenter of profitability in the supply chain.

    The World Bank put the Chinese economy on PRICE PARITY at roughly 20% larger than the United States this year – that is a HUGE advantage.

    People talk about civil unrest in China – China has endured 100 years of grinding poverty, their state security apparatus is far beyond that of the United States, an the last time there was an economic melt down it was the US, EU and UK that went into deep civil unrest with the Occupy movements in the US and straight up riots across Europe and the UK.

    There is a lot of confidence and bravado about the US capacity to win a trade war with China – however we are forgetting that the US has moved into high value, high cost finished goods while China has totally occupied the supply of low cost components and consumer products.

    In a world where recession is biting everywhere it is American items which are more inelastic.

    • Those phones already exist.

      Yet iPhones still sell.

      And no, the millennial Chinese are known as “Little Emperors”, because they’re spoiled only children who’ve never known hardship.

      You need to rethink your base assumptions, mate.

      • The equivalent Huawei phone sells for about 80% of an iPhone currently. It is no where NEAR what you suggest.

        Those little Emperors existed during the GFC as well – and nothing happened – they existed prior to China’s boom. One child policy was in place for decades.

        But it was the EU, US and UK which rioted with civil unrest – as evidenced by historical fact.

      • They weren’t threatened during the gfc.
        A bit of stimulus and the pockets of unrest went away.

        Now the food chain is threatened. Try telling them they can’t afford pork any more.

        I was thinking more like your base xiaomi. But let’s be real here, phones are a big market but most of the money is in the platform over the phone itself. Google and Apple aren’t losing that any time soon.

    • “…the US has moved into high value, high cost finished goods while China has totally occupied the supply of low cost components and consumer products…”

      Robotics are going to turn this on its head. The nation that applies new robotic technology on a large scale to low cost components and consumer goods will produce a very large advantage for high value finished goods. This is why the trade war will become an IP war and cheap labour will no longer the ace in the hole within 10 years. This dynamic will change quickly. Australia is neither a manufacturer in either area and our ‘service economy’ will wither on the vine. We are no Germany, Sweden or Finland that has built its economy on efficient high tech based upon a population highly educated in technology. We stamp out MBAs, back-crackers and marketers at the rate that other economies produce engineers and scientists who actually generate value.

      • Absolutely, cheap advanced robotics changes everything and I mean everything.
        In Australia Today you still need to talk to the traditional western robotics companies if you want to automate a factory or even just build a moderately complex conveyor belt system. Hardware for these systems are typically sold at about 10 times their actual (inflated) component costs. You then get the opportunity to bend over touch your toes and lube up before they tell you how much they’ll charge you for the systems/support/software.
        Everything about this changes when the Robotics hardware becomes a commodity. The upcoming revolution in robotics will be nothing short of the changes we all saw in the PC sector in the decade from late 1980’s to late 1990’s.
        Unfortunately the use of Intellectual Property laws to influence rapidly changing markets is a little like trying to hold back the tide with a broom. There’s a rule of thumb wrt new product development that goes along the lines..Once a function is embedded more than two levels deep in a product the IP associated with that function can be safely ignored. So wrt the upcoming robotics revolution we have lots of IP associated with control functions like vision or grasping objects that will be effectively obsolete once the unit product offers these as fully integrated functions.

      • So you are citing two incidents which occurred prior to China’s liberalization. That would be like citing the American civil war or the civil rights movement as an example of unrest in modern USA after the GFC. Or, the Falklands in the UK.

        The remainder of those examples are “airing of public grievances” or “public speeches”.

        The Tianmen response was brutal – and provides evidence towards the power of the Chinese state military apparatus to respond to civil unrest.

        Let me see the United States roll tanks over students protesting in the Occupy movement in Wall St and you might have a case – until then you have nothing.

    • The lived experience, at least in Shanghai, is that things keep becoming more and more expensive. The last 20 years has been crazy. You start cutting margins to undercut the US and various other dominoes start falling. Hell, especially in Shanghai. Look at a picture of Shanghai in 1990 vs today. Consider loan terms and how long they are. Simply put, real estate in Shanghai alone would crash without a lot of support and those effects would flood outwards. Meanwhile look at cities in the US that didnt go through crazy booms- their workforce can take a hair cut because there is plenty of labour living in paid off accomodation.

      I’m not trying to pick winners, I’m just saying that this idea that China could safely go backwards is risky as hell.The generation that lived through poverty as adults are retired now. Their children in their 30s and 40s remember poverty but have experienced conditions only ever getting better. If it looks like they’ll get to enjoy their own famine, they’ll start fleeing for safer shores.

  5. From the bearish eternal optimist perspective there is a now great opportunity to work WITH China to fight our respective mutual “vested interests” who benefit from the status quo.

    Keep in mind that our FIRE sector mutation is the counterpart of the Chinese mercantalist sector which is now fighting the reforms pursued by Xi Jinping.

    Our property ponzi / import retailer sector depend on the mercantist consumer goods and capital exports from mercantalists like China.

    It likely that corresponding ‘barriers’ to reform may exist in trade deficit countries with the result that on both sides of the ‘trade divide’ there is intense resistance to the kind of reforms that would reduce trade imbalances and in doing so reduce political pressure, and the need, to resort to more explicit “trade war” defensive measures like ‘tariffs’, ‘quotas’ and administrative barriers to imports.

    We need an alliance with China so ALL the foxes – US, Australian and Chinese (and Japanese, German) – are encouraged to leave town.

    https://theglass-pyramid.com/2018/07/28/trade-wars-working-with-china-to-fight-vested-interests/

  6. All sound and fury until after the US mid-term elections….Chinese and US economies are joined at the hip and separating them will be a courageous decision ……..all I see so far are frightened leaders scared to do anything large be it Brexit or trade

    https://moneymaven.io/mishtalk/economics/trump-s-lies-won-t-make-farmers-great-again-there-was-no-deal-on-agriculture-tDIUyeh6YkmZZuMHk–0RQ/

    Just like Iran oil sanctions these trade threats are all decisions put off until after the mid-terms……all platitudes until then whatever is said for public consumption………doesn’t mean someone can’t stumble into a real problem with high risk tactics

    • Yeah there is a lot more too it than meets the eye. Right now Trump is coughing up BILLIONS in aid money to mid west farmers who have started turning very nasty no him – this is his bread and butter voters. Trump loses the mid-west – he loses everything.

      China has hit him straight in the knackers.

      The tariffs on beef, corn, soy, pork, etc have really impacted them with almost $60 Billion wiped out.

      Check out this piece from MSNBC talking about jobs being lost due to tariffs on steel imports

      https://www.youtube.com/watch?v=A9oP0dtPeq8

      We forget that Trump is targeting not just China – but Europe, Japan, Canada, Mexico, Korea, and a PLETHORA of other countries. Its not a CHINA trade war – its a WORLD WIDE trade war.

      ,,,

      • It’s not. Or it won’t be. The EU is already mostly on board. The rest will follow in time once it’s explained carefully that its a about China.

    • The EU, Japan, Korea, Mexico, etc are absolutely NOT on board. Try reading the news mate. Are you joking ? They are all at the WTO as we speak and implementing their own retaliatory tariffs.

      How can you even post that with a straight face ?

      • Tusk and Trump just started a defacto fta.

        Not that it’s close, but it’s agreed in principle.

        That’s huge.

      • So ONE free trade agreement started compared to over 5 countries at the WTO with cases they are guaranteed to win along with their own retaliatory tariffs.

        Sorry but you are flat out wrong.

  7. Hegemony cannot fall to dictatorship.

    That’s the real game on both sides. The economy is just the only practical way to strike at this time.

    I expect elements in the Pentagon to be fully supportive of Bannons take. They’re probably aiming for another Chinese revolution.

  8. Marc, this repost is for you, mostly. This is how I see the US game.

    July 27, 2018 at 11:04 am
    I just posted this elsewhere, but it seems mostly relevant to the topic.
    I have posted similar before, so, sorry if it seems a bit repetitive.

    It seems like most people don’t see the big picture. The game is the same as it always has been. Geopolitical chess.

    Right now, there’s a player which had long been ignored, that’s rocketed to the forefront. It’s only a matter of time before technical and military equality is reached – but with two caveats: there’s 3x more of them than the US, and they have all the factories.

    “Befriending” Russia is part of that game.

    The director of the European Council for Foreign Relations observes it this way:

    For the Chinese, even Mr Trump’s sycophantic press conference with Vladimir Putin, the Russian president, in Helsinki had a strategic purpose. They see it as Henry Kissinger in reverse. In 1972, the US nudged China off the Soviet axis in order to put pressure on its real rival, the Soviet Union. Today Mr Trump is reaching out to Russia in order to isolate China.

    https://www.ft.com/content/f83b20e4-8e67-11e8-9609-3d3b945e78cf

    Here’s my opinion of the US game plan:

    1) Twist Europe’s arm militarily and with trade to ultimately form a “western bloc” of 800m well armed people.

    This will thwart a potential repeat of WW2. If you recall, WW2 had two fronts. Europe and the Pacific. A potential re-run would see Russia and China team up, with China going first in the Pacific, pulling US resources back home, and then Russia distracting Europe. Population wise, the US can’t deal with both threats conventionally. It has to have a strong Europe that can deal with Russia with its eyes closed, and send troops to reinforce the Pacific. While it looked like the US’ little dummy spit is pushing friends away, it really isn’t aimed at that. Sure, it pisses you off when your big brother twists your arm, but they’re still family. Europe’s leadership just gave a major concession that looks like nothing at all. It looks like nothing. Just a reaffirming of prior commitments. No big deal. It’s not though. Now that the US and EU are seeing eye-to-eye on trade, they’ll (I expect a lot more rapidly than before) work through a bunch of mini-deals. Quid Pro Quo. This tariff drops for that Tariff. This subsidy drops for that subsidy.

    2) “Befriending” Russia drives a wedge between that potential scenario.

    It’s not a requirement for “success”. Call it a “stretch goal”. Nice to have, but not necessary. An isolated Russia has everything to gain from an alliance with China. A Russia integrated with the broader west has a lot to lose. Yes, everyone hates Russia right now. They’ve done some nasty shit. In this game of chess though, there’s no country who can say they’re innocent of such crimes. They’re forgivable insofar as forgiveness suits future interests. (Yes, the world is pretty much run by malevolent psychopaths). If you look moderately closely at Russia, you see a deeply conservative, militant, predominantly christian nation. Gee, who does that sound like? Sure, they’re about 60 years behind on human rights, but that’s also not a real concern to the big picture.

    3) Choke China.

    If and when the “western democratic bloc” crystalises properly, it will turn its trade attention to China. Flawed as are, when push comes to shove, the western democratic world, (shockingly) prefers western democracy over dictatorship. US-led, western hegemony, as terrible as it can be, is preferable than a super-power dictatorship. At least to the west. The first priority of any regime is survival. So, once crystalised, the EU and satellites will join in with the US’ Chinese tariffs. Remember, in the past few weeks, the EU has rebuffed China’s offer of a trade deal, admitted that they ‘agree with Trump in substance, but not method’, and yesterday agreed to a defacto-FTA with the US. Tariffs on China are next. That’s 800million customers to China. That’s a big deal. Along with this, I expect my country, Australia to be asked nicely, and then blackmailed if necessary, into cutting off our enormous iron, coal and other raw materials to China. There are few stable countries with producing resources and good shipping ports that can replace Australian supply – especially if the US fleet decides they shouldn’t. That’s a stranglehold. The Chinese middle class, who are used to life getting better every day, will go backwards rapidly. Most likely causing mass unrest that even their Orwellian surveillance can’t deal with. Many already hate the recent change to make Xi supreme leader. Many already hate the CCP.

    4) Victory?

    I think there are two possible “acceptable” outcomes to the “western bloc”: capitulation with huge reforms (probably including democracy), or revolution hopefully leading to democracy (and possibly breaking China into several countries based roughly on existing provinces). What cannot happen is for all-powerful Xi and the CCP to become a military and technological rival. Hegemony must prevail.

    So… it’s all about China. Iran, Korea, Russia, Europe, trade, NATO, NAFTA, you name it. Little wedges, every one. Whether enough of them work or not is the big question.

    Oh, and don’t think Trump is the mastermind here. There are thousands of immensely intelligent strategists at the top of the US and various western militaries. I have no doubt they’ve been quietly trying to figure this out for years. He’s their plausible deniability shield. “Mad Trump”, “Just following orders”. The day he’s gone is the day they have to choose whether to go back to hiding or come out. We’re down to 26 months before the next real election. Most of it has to work in that time frame.

    Also don’t think China isn’t and hasn’t been playing it’s own dominance game. Ever since the financial crisis, they’ve been slowly implementing financial and trade alliances. They’ve been buying gold by the boatload, they’ve been pressuring US dollar hegemony with currency swaps, Yuan denominated oil and other commodity markets. They’ve not been hiding their attempts to reduce the world’s trade reliance on the USD. Several countries trade directly in CNY – Iran’s one of them. So’s Russia. IIRC, So are a few of the ‘greater Asian’ nations and south Americans. They want to gain dominance as much as the US wants to keep it.

    Back to the original topic, Skripal, MH17, Crimea, and all the other nasty shit from Russia, could end up being mere ‘forgotten pawns’ in ‘the great game’.

    In the words of the character ‘Death’ from Terry Pratchett, “THERE IS NO JUSTICE. THERE’S JUST US.”

    • I have interpreted the Trump phenomenon similarly the result of having read ” The Hundred Year Marathon “. Great contribution.

    • Thats great that you are only able to see things from the US perspective – its awesome to have a one eyed, entirely subjective view point which is informed from selective bias and total cognitive dissonance.

      I have absolutely NO INTEREST in simply picking points which will prove me right. And by prove me right I am assuming your point is to declare victory for a western alliance as some sort of foregone conclusion. Its an absurd approach you have which is not merely myopic but total macular dystrophy.

      There is no doubt that the US is at war with China economically – Dick Cheyney and Donald Rumsfeld BOTH made clear and loud speeches over TWO decades before Trump even commenced his campaign – BEFORE they were even in the white house. It was then carried through to Obama – its not a TRUMP plan – don’t be absurd.

      Here is what is happening – PURE and simple.

      Trumps an idiot. The fawning over this buffoon is a disaster and it will come home to roost – Russia is laughing their tits off at him as is China, Germany, Japan, and the entire modern world. He’s a joke.

      The geo-strategic position of America in foreign policy over the past two decades has been to isolate Europe on energy dependency on the United States. To this end it has attempted to cut off Europes energy supplies from alternative sources and has been incredibly successful. This serves two purposes – reinforcing Western Alliance as alternative energy reliance means Europe would protect those foreign interests to protect their own interests.

      This is international relations 101. It all starts from that basic – UNDENIABLE – premise.

      Not only does it force an EU reliance on the US AND AT THE SAME TIME remove protection for alternative alliances – but it also empowers the US economy and dollar via energy trade.

      The US has invaded and destroyed every single alternative avenue of energy – from Yemen, Libya, Syria, Iran, Iraq to Ukraine where the US invested over $5 BILLION in grass roots campaigning to overthrow their pro Russian leaders before resorting to a straight out coup de’tat.

      The US military alliance with the EU is collapsing. I have no idea what you are talking about with believing otherwise. Europe has made numerous public statements that they intend to increase their domestic defense force and move away from NATO. They are building their own strategic command and have made if VERY PUBLIC they can no longer rely on Trump.

      Any thoughts otherwise are purely Trump propaganda – the EU has been unequivocal on this issue.

      While Trump continues to alienate Europe – Germany is building gas and energy pipelines directly to Russia to circumnavigate the US subjugated vassal state of Ukraine which poses a deep and serious threat to EU energy security.

      Do you seriously, SERIOUSLY think that the EU is just going to jeopordise its entire national military and energy security to appease the US and Trump ? Honestly how tarded do you have to be to even think that way ?

      So where does this leave the US and China ?

      China has built and secured trade routes throughout Asia proper, Asia minor, South East Asia – including South China Sea, through Vietnam, Russia, Mongolia, Pakistan, through the Middle East, Africa, EU and has built a direct link straight into the UK. Almost ALL of this trade route is OVER LAND not sea borne, and it opens up markets which are larger than the current existing markets available today and represents a $5 Trillion windfall to China.

      The American response ? Tariffs.

      And if you think that Russia is going to GIVE UP its pipelines into China, Asia, Japan, India and Germany – because he is mates with Trump then you are a total, complete and utter fool.

      But you established that with your initial post.

      • Nothing happens in a vacuum. Except maybe your brain cells when you go around insulting people.

        Thanks for that. You’ve now proven that you are a worthless person to discuss anything with.

        Saved a lot of time.

      • Like him or not (I don’t), Trump may be volatile but is not stupid.
        He has cunning dripping from every pore.

    • Of course you wouldn’ t read it.

      You wont read anything which does not specifically conform to your cognitive bias – thats why the word exists. Selective bias is all about people only reading or engaging in ideas and conversations which meet their pre-held beliefs.

      You started it with your patronising condescending comments.

      If you want a conversation which maintains civility then lose the condescending attitude. You’re not smarter than anyone.

      • Oh I read it. How else would I read your insult?
        Where did I insult you?

        Show me one example.

        That’s why it’s pointless to engage.
        You’re not a good faith player.
        I don’t have time to shoot down your opinion when at the first point of difference you start name calling like a child.

    • good read myne …… thanks. Look at it much the same myself, but with a slight variation ……… the high level view needs to take into account the months to the mid-terms and then the next presidential elections ……

      I find it very difficult to get a handle on what might be the ‘average’ US voters’ views – probably too early anyway. What is clear though is that the MSM and Trump hysterics are so vociferous and so in control of the airwaves that it is not clear if Trump can continue the ‘trade war’ effectively in the face of Congressional candidates’ desire for re-election and election …… what I feel very comfortable in stating is that the next 2 and a bit years are going to be (as they say) VERY interesting ……

      Regardless, my investment position is to go long US. Maybe selfish of me but my take is that we are indeed at a turning point in history ……. however the time frames are going to extend well beyond the period that really matters to me.

      BTW – re Marc Brutus ….. what can you say. You gave him/her/zee/zim/it more time than I would have ….

      • Yeah, I guess the midterms are somewhat important though the trade action is all *executive* at this point.
        Can a lame duck be forced out of executive actions?

        I did mention 2020 though – “26 months till the next real election.”

        I think that’s why he’s hitting so hard, so fast, and so broadly.
        The ‘coalition’ has to crystalise on a timeframe that is practically impossible by normal diplomatic routes.

        I’d say he’s got 6 months to have the EU in line. A year tops.

      • yes myne, I noted your reference to the presidential cycle, and also agree with Trump having to hit ‘hard and fast’

        he has about “6 months” …… also probably right ………. hence my concerns about the smoke screens being generated within the US – and that’s all. The foreign (ex US) commentariat etc bleating is not going to swing it one way or the other except to increase support for Trump’s position ……..

    • Yes, Russia is the wildcard – just like WW2. And they will come in late, just like WW2, without actually taking a side.

  9. Options:
    1. A successful US trade war
    2. A successful US economic war
    3. unsuccessfull US …. damn it… the first two are enough…

    • Good luck with that. There is a reason why the US and its local cuckold Australia have been so vociferous and yappy respectively – the total militarization of the South China Sea.

      Any western HOT foray into that region would be sunk before they got a shot off the deck.

      Bring a proxy war to that area and you cut of global trade totally. Throw in the Persian Gulf and its a global shut down of all sea borne trade and energy – except of course for the fact that China has built direct trade routes over land via rail and can power itself outside of Middle East Energy thanks to its new energy routes with Russia.

      Throw in Europe’s new energy routes via Germany and trade routes with China and pretty much the only players left out of the world trade in the events you mention would be US allies like Australia, Singapore, Malaysia and UK.

      If we want to win this trade war – we need to refocus our eyes back on Europe and away from the Cowboys.

      • Proxy wars in Ukraine and Syria. China has no visible involvement. When their economy turns down they will need to show the “western bullies” a lesson. So if not SE Asia then Africa. But the CCP will be bellicose in a sharp or sustained downturn.

  10. ChinajimMEMBER

    Same hyperbole, different name. Today it’s “Marcus”

    The belt-road highly subsidised choo choo trains will never come close in volume to sea-freight. The 600+m long trains still only carry less than 0.5% what a modern container ship can carry, and typically rail only halves the time from about 30 days for ship to Europe to around 15 days for rail. For high value freight air is better.

    So no, the rail routes between China and the west will never be more than a blip in global trade volumes. And if sea-freight is interrupted they won’t replace it.

    As for the formerly important fish breeding habitat reefs in the SCS that are now covered in concrete, in a hot war they’d represent a major threat, for oh, about ten minutes. That’s how long it would take to neutralise them with submarine or shore-launched weapons. A former CINCPAC said they would become death-traps for whomever was there at the time.

    Or just wait a few decades and they’ll be subject to inundation, before going under completely in a few decades more.

    So much for “playing the long game”.

  11. For Fekname as no reply link on his post.
    (He argues it’s not in China’s interest to spy on or control its citizens offshore as ‘they would be caught’)

    Some reading:
    Mass slum clearance of Chinese city & rural poor to export to new territories or offshore.

    https://foreignpolicy.com/2018/02/01/chinas-middle-class-is-pulling-up-the-ladder-behind-itself/amp/

    Enter Australia & get the TR visa then PR for $2k with Chinese authorities collaboration & help. See prev link.

    China mass surveillance & control of all citizens
    https://businessinsider.com/how-china-is-watching-its-citizens-in-a-modern-surveillance-state-2018-4?

    Chinese citizen spying & control in Australia https://www.afr.com/news/world/asia/australia-is-losing-the-battle-against-chinas-citizen-spies-20160831-gr5rfq