China Feels the Heat on Trade Policy

In a prior post here the argument was put forth that China did not have a lot of room to maneuver after the initial salvos in a trade “war” and that they were in a poker game with President Trump who was holding a full house. The Chinese raised the stakes early, Trump saw that bet and re-raised as he sits on the larger stack of chips.

The economic pink panties crowd once again predicted that we were all going to die and that the “war” would stall a finally, aggressively, recovering economy. They overestimated what the Chinese could do to us by apparently overlooking the factual aspects of trade between China and the U.S., not to mention the issues of intellectual property theft and copyright infringement.

My, my, two stories today are worth serious attention as a follow up to the prior post. One, that jobless claims unexpectedly fell and that inflation ticked downward indicating, again, a fundamental strength in the current economy. The second revolves around anonymous sources that are reporting that President Xi is facing an internal backlash for his part in the trade dispute with the U.S. By the way ‘unexpectedly’, in case you forgot is the modifier our media attaches to news that favors the President and his policies.

The reporting does not in any way lead one to believe that Xi does not have a firm grasp on power but this is the first time we’ve heard of a significant internal dispute within the Chinese Communist bureaucracy and it could be a signal that it may be well advised to adopt a revised strategy.

The fundamental complaint appears to be that the Chinese took too hard a line with one source reporting that the outlook for China was ‘grim’. Another anonymous source who is an academic attached to a think tank also says; too hard line and guilty of misjudging the situation and by extension President Trump’s commitment to the issue.

What feeds the misjudgment? First and foremost, a Congress that simply does not have the patience to wait for boiling water let alone see a massive negotiation to its end. It is also likely that not a one of the President’s opponents ever took the time to get the scoop on what the plan was. It’s simply too easy to find a microphone and predict that we’re all going to die. Secondly, based on obvious results, a group as large as the Senate or House is incapable of carefully manipulated negotiations. A committee that sets out to create a horse will likely end up with a Rhino. Large groups don’t work for sensitive negotiations.

Thirdly, when China looks at American media what do they see? They see constant, day in day out criticism and ‘resistance’ to the American President. 90%-92% negative coverage in legacy media. It’s not hard to imagine President Xi being presented with analysis that says this President does not have enough support to get into a trade war with China and if he does his unpopularity will force him to relent.

Oops, no relenting!

So far China has been unwilling to agree to anything that would re-balance the trade issues with the U.S. China has apparently forgotten that Western capital, in large measure, has gotten them to where they are and an artificial re-balancing based on tariff policies will make keeping capital at home a much more attractive option.

While China will, for now, fight to maintain their current position they will eventually face the reality that they’re going to have to take a haircut on their margins and thus we end up with fairer trade policies. We mean more to them than they mean to us. To us its goods marginally more expensive than they have been, to them it stands the potential of hollowing out their manufacturing base with no comparable market available to replace the U.S.

As stated in the prior post; ‘speak loudly and carry a full house.’