Back on December 12, 2015, we described Mr. Trump’s style of thinking & playing the game as the political version of the Wayne Gretzky Dictum – Skate to where the puck is going to be, not to where it has been. Look at every public position Candidate Trump took in his campaign. In every case, the journoratti & the elite blasted him. And, in every case, American sentiment swung towards his position & then the elite followed. Sadly, they haven’t learned yet. They remain rooted to their positions & watch with amazement as sentiment swings towards the Trump statements.
This happened again last week. President Elect Trump took a congratulatory call from the President of Taiwan and the journoratti blew their collective top. None of them figured out that Mr. Trump was sending a real message in a smart, deft, & easily deniable way. They just don’t get that Mr. Trump means to do what he campaigned on – help middle America get economically & mentally better. He has been saying that the plight of middle America stems from loss of manufacturing jobs and that unfair trade with two countries is mainly responsible for that plight. China is one of these two countries with Mexico being the other. China may be the harder nut to crack out of the two as sourcing from China is cheaper and their factories can make products just as good as American-based companies can, thanks to some inspection and quality assurance third parties as well.
His phone call with Taiwan’s President was a signal of the beginning. Understand, Mr. Trump doesn’t really have a choice. In the words of Dr. George Friedman of Geopolitical Futures, “China’s severe undercutting of American industry ended up creating an economic & social crisis in America” that led to Mr. Trump leading a political movement & winning the election. So he is committed to “restructuring the US-China relationship“.
And President Trump means to honor that commitment. Listen to his words on Thursday in his Thank You Tour rally in Iowa (minute 16:00 to 22:00):
- “One of the relationships we have to improve is our relationship with China; the nation of China is responsible for almost half of America’s trade deficit … China is not a market economy; that’s why we designate them as a non-market economy … they haven’t played by the rules & I know its time they are going to start; they are going to start … we are all in this together folks, we got to play by the rules, folks; you have the massive theft of intellectual property, utterly unfair taxes on our companies, not helping with the menace of North Koreas and the at will massive devaluation of their currency & product dumping – other than that they have been wonderful, right?”
The above sounds like his normal campaign speech, right? Words meant to fire up the crowd, right? Stuff that the journoratti should ignore or better look down upon as rhetoric, right? Wrong. Those who dismiss the above rally comments missed the big big statement “China is not a market economy; that’s why we designate them as a non-market economy“.
This was on Thursday, December 8. What happened on Friday, December 9? The Obama Administration announced that they were NOT going to give China “market economy” status. What’s the big deal about these two words? And why this week? Because of Sunday, December 11, 2016, the 15 year anniversary of China’s accession to the World Trade Organization. As Stratfor explained on Friday, December 9:
- “On Sunday, a key provision contained in Article 15 of China’s WTO accession protocols will expire. At issue is what countries must do to make the case that China is subsidizing exports as a way to undercut competition abroad. The provision stipulates that unless producers in China can “clearly show that market conditions prevail” in a given sector, … In practice, this provision makes it much easier to launch anti-dumping investigations in the WTO and to impose protective tariffs on Chinese imports than if China were recognized as a market economy.”
The expiration of this key provision & the insistence on “Non-Market Economy” designation is a launching pad for President Elect Trump to begin restructuring the US-China relationship. And it fits his style of negotiating from strength. Today, China is in a much weaker position than America. As Dr. George Friedman wrote on December 5:
- “China’s ability to counter is limited. It has money in American banks, and if the Chinese want to redeposit that money in European banks, it’s their risk to take. Their military capabilities remain limited. Their navy remains no match for the U.S. Navy, and they can’t afford a war whose outcome they can’t predict. The U.S. is 25 percent of the world’s economy. China can’t walk away from the U.S. without enormous pain. The U.S. can’t afford to leave the relationship unchanged, and China may not be able to stonewall Trump as they did with other presidents.”
Look at the example given by Stratfor in their article about China’s economy:
- “… even targeted tariffs on specific goods could do real damage to China’s economy. For instance, a tax on Chinese steel exports to the United States, which account for roughly one-tenth of China’s total steel and steel products exports, could leave Beijing with little choice but to backpedal on its cutbacks on home purchases and domestic spending in an effort to bolster its building materials sector. At the very least, it would also put a crimp in China’s enduring struggle to overhaul and consolidate inefficient businesses in heavy industries such as coal and steel”
Most people don’t realize that 2008 was the peak of China’s ascending trajectory. They misunderstood that global financial crisis & took actions that have out their economy at significant risk. As we wrote on December 3, “China is as vulnerable today as the old Soviet Union was when Ronald Reagan took over as President“. Read what Stratfor wrote:
- “Next year is shaping up to be a decisive one for China’s economy. In the eight years since the global financial crisis struck, the vitality and importance of low-cost exports – the kind the Chinese economy used to rely on – have steadily declined. Scrambling to prop up the country’s growth and protect its near-universal employment, China’s leaders have embraced monetary and fiscal stimulus measures, causing the country’s outstanding debt to balloon to almost 250 percent of gross domestic product. Corporate debt, by far the largest share of China’s total debt, has likewise surged by more than 60 percent to top 165 percent of GDP. Now, a nationwide debt crisis looms at Beijing’s doorstep amid business defaults and bankruptcies, low industrial profits, winnowing returns on investment and the very real prospect of yet another slowdown in the real estate sector. How well Beijing manages these problems in the months ahead will, to a great extent, determine China’s economic, social and political stability for years to come”
In contrast, American banks are in the strongest financial position they have ever been; rich with capital. They are about to be freed from ridiculously onerous regulations that kept them bound for the last eight years. American corporations are about to bring home $2.5 trillion they have parked outside the country and they are about to get their corporate taxes slashed. After 8 years of inaction, the American political system is like a coiled spring waiting to burst free with positive legislation. The American military; already the world’s strongest, is going get the green signal to modernize & expand with President Trump’s mandate & under the leadership of General James Warrior Monk/Mad Dog Mattis, the General’s General.
That’s why President Trump can negotiate from strength with China. And how does a smart negotiator do that? He begins with warmth & praise understanding that you get so much more with honey. Look how warm & gentle were the words President Elect Trump used on Thursday in Iowa – “we are all in this together, folks“. The “folks” here is the Chinese leadership. His message is both US & China are in this together & they can both win from a restructuring of the US-China relationship.
The author of the Art of the Deal understands that complex negotiations go easier when the two negotiators can talk easily as old friends. Look who Mr. Trump picked as his Ambassador to China – Mr. Teri Branstad, an old friend of President Xi Jinping of China and a 24-year Governor of Iowa, a state with deep trade ties with China. China was pleased. As Foreign Ministry spokesman Lu Kang said:
- “Governor Branstad is an old friend of the Chinese people. We welcome him to play a great role in promoting the development of China-U.S. relations.”
If they don’t listen or they remain obdurate? Well, he already sent a different signal with his phone call with Taiwan’s president. As George Friedman wrote on December 5:
- “Trump signaled to China that he can take away what Nixon gave them. By doing what Nixon did – using volatility and unpredictability to intimidate – Trump set the stage for a negotiation that China can’t refuse. China must have access to American markets even if the terms become less favorable. Previous presidents were prepared to posture but did nothing substantial about China. With a single phone call, Trump did what he seems to do best – baffle and unnerve a negotiating partner. Is he crafty or is he crazy? Trump has shifted the issue from what China is willing to do, to how far Trump is prepared to go.”
What happened 15 years ago on December 11, 2001 was a regime change for the world. China’s accession to the WTO on that day was the most momentous economic event in recent memory. of greater economic importance to the world than the Fall of the Berlin Wall or the breakup of the Soviet Union. As Stratfor described it on December 9:
- … in terms of their import for the structure of the global economy, few events in recent memory equal China’s entry into the organization. By virtually any indicator, Dec. 11, 2001, was an inflection point not only for China’s economy but also for much of the world’s.
The Chinese economy has grown almost tenfold in the last 15 years and enormous social progress has been made in China. Sadly, much of this came at the expense of the world, especially America. According to analysts, almost 2.4 million jobs were lost in America in these 15 years and entire regions in America lost their economic vitality & prosperity.
Just as China’s safe harbor under WTO expires on Sunday, December 11, 2016, Donald Trump is getting ready to lead America. His election represents a regime change not just for America but for the entire world & most directly for global trade. This is a major challenge for China, the absolute winner of the previous regime change. How they react will determine a lot over the next few years.
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