Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 8 of 13

Oncoming Recession and the Chinese/US Trade War

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On May 29, 2019

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Chinese and American flags flying together.

So, it’s been a long time since the last recession and indicators are turning negative. While this is never a science, odds are good for a recession in 2020 or early 2021 in the United States.

This is not due to the China/US trade war, but that conflict will make things worse. There is an argument for what Trump is doing. However, even if this has overall good effects for the US, in the long run there are significant dislocation costs when moving production back to the US and there are always going to be losers, because the US does sell a lot to China even if it has a trade deficit, and those people will lose markets. (Hello, soybean farmers!)

Meanwhile the Chinese are ratcheting up their rhetoric. Multiple newspapers have suggested embargoing rare-earths to the United States and this seems like a near certainty if there isn’t a deal soon.

Rare earths exist other places than China, but China has been able to mine them more cheaply than anywhere else, so no one has bothered to create significant production, as it isn’t profitable. China produces 80 percent of rare earths. So, if there is an embargo, other sources can be developed, but that will take time: again, dislocation costs.

The last time a rare-earth embargo happened, I noted that it was insane to have only one country producing all rare-earths and that sensible policy would subsidize production somewhere else just to avoid this scenario. But modern trade rules make subsidizing production of most items (except agriculture and defense) essentially illegal, so we have to wait for a crisis to do the sensible thing.

Chinese rhetoric around the trade war has become very serious, with the People’s Daily newspaper (official Communist newspaper) writing:

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!”

…The expression “Don’t say we didn’t warn you!” is generally only used by official Chinese media to warn rivals over major areas of disagreement, for example during a border dispute with India in 2017 and in 1978 before China invaded Vietnam.

I’m going to discuss the oncoming new trade-era more in the future. For now, note that this isn’t just about Trump. Moves in this direction had already started under Obama (the Trans-Pacific Partnership was meant to isolate China).

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

What is different about Trump is that he prefers unilateral negotiations to multilateral (WTO) or plurilateral (a few countries).

This is not stupid. Out of anyone in a singular deal, the US will always be the stronger partner. It prevents other nations from ganging up on the giant, and trying to use numbers to make up for their weakness.

The US can almost always inflict more damage on any one other nation than that nation can on the US.

Again, not stupid; entirely rational and good negotiating tactics.The larger issue is that the US is, itself, dismantling a trade order created, largely, by the US. That trade order had significant disadvantages for the US working and middle classes, but it also was to their advantage geopolitically. The US chose who could industrialize or re-industrialize (its allies – Taiwan, Japan, Germany, South Korea), and so on.

This worked well for the US (not so much most other people) until the Americans got stupid and greedy under neoliberalism. Then, the US corporate class, looking at China, lost their heads: Especially as China went out of its way to make sure that various Americans made a lot of money helping China industrialize.

The difference, of course, is that China is the world’s natural leading power. Has been for most of the last two thousand years. China would be an actual competitor with the US, if it was allowed to get back onto its feet.

And it was.

As a Canadian, I have a dog in this fight. Canada is an American subject state, and we’ll be on the US’s side, because we won’t have a choice. Nor am I particularly a fan of how China is run.

But this is the cycle of great powers. There is always a new challenger, and the old Hegemon always resists (and is virtually always in a late Imperial stage of incompetence and corruption).

When giants clash, ants (you and me) are advised to beware.

Make money now, before the recession, if you can. If your income or wealth is tied to trade, try and mitigate your exposure.

Meanwhile, we may as well enjoy the show.

Everyone’s Noticed the Oncoming US/China Cold War

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On May 22, 2019

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Chinese and American flags flying together

Horowitz calls it a tech cold war, but it is unlikely to stay that way.

Cutting Huawei off from all non-open source Google services, including the Play Store, and not allowing it to buy US components is a huge blow to Huawei.

Huawei is ahead in 5G, and American allies have been reluctant to ban it, but the US can do great damage to China’s tech industry, because in many other ways it is still far behind America’s. (Horwitz is good on this.)

China has ways of retaliating. The most potent is to embargo rare earths. China did this once before and the WTO declared it illegal, but that won’t necessarily stop the Chinese from doing it again. The WTO, which is also under attack by the Trump administration, may not have the teeth necessary to stop the Chinese, especially as the US is scarcely innocent in the tariff escalation.

I’ve been on the Huawei situation for months, because I believed it was the first step in a dangerous escalation between the current hegemonic power and the challenging power.

The best book on the subject is Thucydides Trap, by Graham Allison. Allison also wrote a foreign affairs article on Thucydides Trap. The summary is that in the past 500 years there have been 16 similar challenges. Twelve of them led to war.

America was a particularly aggressive rising power: seizing huge amounts of Mexico, grabbing the Alaskan panhandle under threat of war with Great Britain (who couldn’t afford to move their forces away from the Germans, and so let Teddy Roosevelt, an aggressive asshole in foreign affairs, take it.)

And of course, America terrorized South and Central America, as it still does, while claiming foreign naval forces had no right to be in the Americas (an echo to China’s expansion in the South China Sea most Americans refuse to acknowledge.)

Now that America is the hegemonic power they want to stay the hegemonic power.

The current international order was mostly created when China was weak, recovering from arguably the worst position it had been in for 2,500 years.

The Chinese do not accept the current international order; created by America, with European help, after WWII as legitimate, because it was created almost entirely without their input when they were weak. Indeed, a clear-eyed realpolitik view is that America enforced the order because they were massively strong, then further enforced it after the collapse of the USSR.

Put aside all the bullshit, the Pax Americana, like all Pax’s comes out American force: the barrel of a lot of guns, and the boom of a lot of nukes.

So China is moving to retake what it regards as its rightful place in the world: The greatest nation in the world. America is doing what all hegemonic powers do when an upstart rises: Resisting.

This is not a temporary thing and it is not just a result of Trump. There are real differences, and the pivot to China as the big enemy began under Obama, not Trump. Ironically, the Trans Pacific Partnership (which Trump refused to ratify) was an effort to contain China.

Trump’s addition is a preference for unilateralism. Under mulitalternalism the Americans had found it harder and harder to get their way, as the failure of the Doha round of WTO negotiations showed.

One-on-one America is always greater than anyone else. It always has the advantage. Trump is not wrong about that. So he is using that might to “re-negotiate” with other nations, including China.

Meanwhile the Chinese have been forming their Belt and Road system, which is an alliance and trade organization substitute, meant to form deals 1:1 with other countries, and to create trade links, especially a land-route across Asian to Europe,  which will allow China to bypass America’s stranglehold on naval power, and especially on the Straits of Malacca.

And so on.

Let’s cut to the chase. There will be many tactical and strategic moves, but China is about as economically powerful now as the US. They are currently, overall, a middle income country, but many cities are high income.

Because China has three times the population of the US, if they can move their population to high income, they will have an economy about three times the size of the US.

They will win.

The US should think about that carefully, because if they oppose the Chinese at every point, when China becomes the hegemonic power, the US may find themselves treated badly. The Chinese won’t feel badly about it, at all, given how they feel about how China was treated when it was weak by Europeans and Americans.

The Chinese, meanwhile, should remember that their rise to hegemonic power isn’t certain, and that if it requires great power war in a world with nuclear weapons, that may go very badly for everyone involved.

Neither side, as an aside, are good guys. The Chinese are, domestically, creating a rather nasty authoritarian surveillance state. America domestically is a shit show for many, and it has been far more likely to go to war with other countries than the Chinese have.

In fact, while Chinese actions in the South China Sea are nasty, they are mild by rising hegemonic power standards, and certainly, so far, less nasty than how the US acted when it was the rising power.

A new cold war, with the world dividing into two blocs, would be shitty. A hot war would be worse.

But I’m not at all sure “cooler heads” will prevail. The simple fact is that Americans think they are the indispensable nation, and good people, and therefore have the right to rule the world. Meanwhile the Chinese nurse their own powerful sense of superiority, added to a massive feeling of grievance and ill-use. Nor can the Chinese Communist Party allow economic growth to falter without danger to their own power and legitimacy. If it does, be sure they will focus the anger at foreign enemies.

I’m not sure there’s much point being worked up by all this, mind you. Rising and falling hegemonic powers act like this, that’s just how it is. Most of us don’t have enough power to affect these events. Just be aware of them, and if you have some power, perhaps put your finger on the scale that at least avoids hot war.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

 

The Coming War with Iran?

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On May 7, 2019

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Image by Yuan2003

It may turn out that the worst thing Donald Trump ever did was hire John Bolton as his National Security Advisor.

Trump was already deranged on the subject of Iran, possibly because Jared Kushner is his son-in-law, and Jared is having a (presumably) platonic love affair with Saudi Crown Prince (and de facto ruler) Mohammad Bin Salman Al Saud. Saudi Royals both hate and fear Shia Islam, in part because the regions of Saudi Arabia with the oil are Shia.

So Trump unilaterally left the nuclear weapons treaty with Iran, and the Treasury department has made it illegal for any country to buy oil from Iran. Since almost all finance in the world goes through US banks, the Treasury can do this. Only firms which don’t use the SWIFT system can avoid the Treasury’s grasp.

These sanctions are having a terrible effect on Iran, and one which will grow even greater as the final waivers expire. There will be smuggling, but even so, Iran will be starved of foreign currency.

The US has also declared the Iranian military to be a terrorist organization, the first time part of a foreign government has ever received that designation.

And a carrier task group has been sent to the region, specifically as a warning to Iran.

It is well known that the NeoCons, of which Bolton is a prominent member, want a war with Iran, to remake the Middle East. (This is part of the same project which saw Iraq destroyed, and which fuel US-led regime change aspirations in Syria. A little further afield, Libya, while not in the Middle East, was similarly dealt with.)

The issue, as Escobar points out, is that a new alliance is rising. Its key members are China and Russia, but Iran is part of it as well. The Chinese Belt and Road Initiative is meant to create routes to Europe and a Chinese-led trade zone. It is meant to bypass the straits of Malacca (which the US can shut down at any time to strangle China), and the land parts will be a lot faster (though not cheaper) than sea transport.

Iran is a key part of this system.

Because other countries aren’t cooperating with the US when it tries to stop the B&R system (indeed, Italy just signed on), the US needs to actually destroy part of it.

Thus Iran.

This isn’t the only reason, needless to say, the NeoCons have wanted to destroy Iran for far longer than the B&R system has existed, but it is now an important consideration.

But what if Iran survives the sanctions? No one except the US is happy about the sanctions. Others may submit, but they don’t like it. The Chinese will do a huge end-run, as with the Russians. Even the Europeans are angry, and have created a “special vehicle” to avoid sanctions. (Consensus seems to be that it doesn’t do a good job and that if they’re serious they need to improve it.)

Because no one is happy, there’s going to be a lot of oil still sold. It may be enough to keep the Iranian government in power.

Then what?

Well, war, maybe.

The problem with that is that Iranians can shut down the Strait of Hormuz. There is no situation, short of nuclear glassing, in which the US can keep it open. That spikes the price of oil to hundreds of dollars a barrel, because, at that point, a quarter of the world’s oil cannot get to the market at all.

And that causes an economic and financial crisis, likely even larger than 2008, because it involves economic fundamentals.

So the question is whether or not Bolton, who is a true believer, can talk Trump into it.

And the answer is… I don’t know. Just don’t know.

But that’s a serious precipice on which we’re walking.

Even without war, this is a serious situation. The US’s continued abuse of its privileged position in the world payments system to sanction countries like Iran and Venezuela, even when other great powers disagree, means that the loss of that privileged position through the creation of alternatives is inevitable. It is already happening and only a matter of time before they become viable enough that major countries will simply be able to ignore the Treasury’s sanctions.

This is also true because other markets are large enough that access to the American market is no longer required. Especially if the EU comes onside with this, the ability to sanction is basically finished if the other great powers (and especially China), don’t agree.

This is, for the US, a late Imperial period. Don’t mistake it as anything else. And remember, very few countries manage to regain their pre-eminence or Empire. Britain lost one Empire and gained another, but it is an exception, and driven by a specific situation (first mover in the Industrial revolution) which has no modern parallel (no, the information revolution is not even a rounding error on the industrial revolution.)

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The Problem with Banning Huawei 5G Tech

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On January 27, 2019

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So, the Huawei saga rolls on. The executive arrested, the daughter of the CEO, will probably wind up released, as it’s been made clear this is a political arrest.  (Trump has said so, and it’s over Iran sanctions. Breaking Iran sanctions is clearly political, and probably even the ethical thing to do in many cases.)

But something else is more important to note. Huawei genuinely has the most advanced net tech in the world. It’s that simple.

America no longer manufacturers telecom equipment – Cisco got out of the business several years ago – and Huawei’s two Scandinavian competitors are too little, too late, and too expensive…

the Shenzhen firm is spending $20 billion a year on R&D, about four times as much as either Ericsson or Nokia, its only important challengers in the telecommunications equipment market.

Huawei’s internal assessment holds that its technological lead in 5G mobile broadband is so wide that the competition has no effective chance of catching up. In late February, Huawei will introduce its Balong phone, with a chipset that can handle downloads ten times faster than the best 4G LTE speeds, while operating with 4G networks as well.

Or:

“China’s largest tech company makes high-quality networking gear that it sells to rural telecommunications operators for 20 percent to 30 percent less than its competitors do, says Joseph Franell, chief executive officer and general manager of Eastern Oregon Telecom in Hermiston…”

This is hopeless. It’s probably true that Huawei stole a lot of technology, especially in the 90s and the 2000’s. One of its victims was Nortel, Canada’s telecom giant, which makes me angry.

So what?

They have the technology. It’s cheaper and more advanced than anyone else’s and, hilariously, the US doesn’t even compete in this type of telecom equipment any more.

If this is a strategic matter, then the US has fallen down completely. If an industry is strategic, a country must make sure it, or a trusted ally, stays in the lead. Not only did the US not do that, but US policies from the 80s onwards effectively off-shored this sort of production and research, as a deliberate policy choice.

Now they cry?

5G is lost. If the US, or the US and its allies, want a shot at 6E they’d better figure out how to do industrial policy. That might, indeed, mean banning Huawei, but only if they’re willing to put up with worse, more expensive internet for a decade or so. (But then US and Canadian internet is already not nearly as good as the best.)

One of the key tenets of neoliberal economic policy is that it doesn’t matter where something is manufactured, or done. Let the cheapest domicile do it, and everyone will benefit.

This is bullshit, and always was. Making and designing new things is where economic strength, the good life and military power all come from.

Nations which forget this wind up in the dustbin. Free trade, as an ideology, is the deathknell of great powers, including Great Britain, and likely to include the US. It does work for smaller powers, and should be the default policy mode for all city states, but great powers are not small powers, let alone city states.

So, if the US wants to ban Huawei, it’d better figure out how it’s going to support Huawei’s competitors enough so that they at least catch up, or even consider making sure the US has its own telecom manufacturers. If it can’t do that, this is a band-aid on a wound.

(Oh, and there’s a reason the US, whose technology is used in most of the older telecom equipment, especially cables, thinks that China might use that to listen in. Mmmmm. What would that be?)

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Actual Sovereign Nations and the End of the Unipolar Moment

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On November 3, 2018

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This chart is a “sovereign nation” chart. Spot the only sovereign nation.

Japan could be a great power, but right now it is still an American subject state. South Korea obviously is, and so is India. Of these four, only China is sovereign. The rest have to do what they are told to by the United States.

This period is ending. The US (primary) and European (secondary) stranglehold on the world payments system WILL come to an end, and the world is most likely to split into two primary trade blocks.

Since things like the US-imposed Iranian sanctions are crimes (along with the strangling of various other countries, as is killing people–with reports of Iranians dying from shortages of insulin as a result of the sanctions), the end of the US unipolarity will be a good thing.

Those who abuse their power should lose it.

That does not mean that China is a nice and cuddly power either, but they have more respect for most other countries’ sovereignty than the US does and want a “great power” influence area, not a “superpower” area (i.e., they do not want to control the world).

The process of this split is ongoing. The recent NAFTA renegotiations were about breaking the near-satrapies to American will. Mexico gave in immediately, Canada crumbled under auto export tariff threats. You can tell this is about the split, because the new trade agreement, the USMCA, had in a clause intended to stop Mexico or Canada from having new trade deals with China.

This is the new world being born. It doesn’t have to be better than the old one, and may not be, but that doesn’t mean the old order doesn’t need to die.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Should Canada Concede to Trump in NAFTA Renegotiations?

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On August 28, 2018

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So, Trump has been renegotiating NAFTA. Not necessarily a bad thing. He’s cut a deal with Mexico, says he’ll sign it without Canada.

Canada has three main sticking points.

It wants to keep the Chapter 19 dispute resolution system so that the US can’t unilaterally impose dumping and anti-subsidy penalties. This is a big deal, because the US is prone to do this stuff due to domestic pressure from industries, and with no check, it will do them more often. Not that Chapter 19 is that great; when the US loses Chapter 19 rulings it tends to just ignore them and impose duties anyway, as it did in the 2000s on lumber. Still, even a delay is good, and that delay has likely stopped a lot of tariffs over the years.

The second issue is IP.

Other hurdles include intellectual property rights, such as the U.S.-Mexico ten-year data exclusivity for biologic drug makers and extensions of copyright protections to 75 years from 50, all higher thresholds than Canada has previously supported.

Yeah, that’s just fucking awful. No thank you. 50 years is already way too much and who wants even higher drug prices in Canada. (US pharma, yeah.)

Finally there is the Canadian milk production system, which is horribly protective and freezes American milk out of Canada. But, well, our standards are higher for milk production, and as such, no, I don’t want change.

If Trump doesn’t get this, he promised auto tariffs, which will hit Southern Ontario hard.

I’m going to say that Canada shouldn’t give in on these issues. It’s not clear that Trump has the votes in the Senate to pass his bilateral Mexico-US deal, and even if NAFTA is lost, well, whatever. Being subject to American tariffs at the whim of any sitting President is not acceptable, nor are higher drug prices and shitty milk.

Canada gave up our world-leading aviation industry in the 50s, in essence, for the right to be part of the US automobile industry. It was a shitty deal then, because it made us dependent, and we are seeing that dependency now.

We’ll see how this plays out. I don’t know if Freeland and Trudeau have the guts to walk away and there certainly would be a cost. But Trump is not certain to be forever, and anything we give up now we are unlikely to get back in the near future.

There was a possible NAFTA renegotiation which would have been a win for all three countries, dealing with issues such as the right of private investors to sue governments for doing perfectly reasonable things like banning anti-cancer additives in oil, but that’s not the renegotiation Trump has chosen to do.

As such, I hope Trudeau holds the line.

Also, there are ways for Canada to retaliate. They are counter-intuitive, but real. I would start by slapping a huge export-tax on all wood products, and watch the US housing industry fall to its knees and the US economy tremble. That would involve some pain at home, but frankly, we can tax a little higher and subsidize those who lose, it’s not a big deal.

Trump’s the sort of person who only respects hardball. Play it, or crawl on your belly.

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Why Free Trade Isn’t Efficient

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On June 26, 2018

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For the past few weeks, I’ve been reading a raft of literature by lawyers, economists, and bureaucrats involved with the World Trade Organization (WTO) and other free traders. It’s been a fascinating journey into an alternate world, one in which frictionless trade and money flows, and unified regulations and laws are considered to be a good thing.

The reasoning behind this virtually unquestioned acceptance is as follows: If there are no barriers to trade, whether financial or regulatory, goods and services will be created (or done) wherever they cost the least. If they are done in the lowest-cost place, they are being done in the most efficient way, and that means more is created and consumers also pay less.

It is thus a good thing, virtually always, to reduce barriers to trade and services. If it can be done for cheaper somewhere, it should be. Some people may lose, but overall more (or the same) is created for less, and this is good.

This is basically an article of faith in everything I’ve been reading from people who make their living around the WTO.

But you may have caught the error in the thinking: It assumes the lowest cost is equivalent to the most efficient.

But it isn’t. When manufacturing moved from the US to China, it cost less to do in China, yes, but it produced more carbon (climate change); it took more people to produce the same amount of goods, and it generally used more materials, as well.

In other words, it is less efficient in every way except the monetary cost.

The rejoinder to this might be that those people who were manufacturing those goods would be better employed elsewhere; people were being wasted. If it can be done for a few dollars an hour, rather than $20 or more (if labor was unionized), then the higher-paid workers should do something else.

But everyone knows now, and trade advocates admit, that the people who lose the jobs to offshoring and outsourcing were mostly not employed again, or never had as good a job again. People are not fungible, they don’t just fit into any spot.

Moreover, as those jobs moved away, those people earned less money, and local businesses got less money from them as consumers. Everyone’s employees are someone else’s customers: When everyone cuts wage “costs,” they’re also cutting demand.

The core problem with capitalism is that it assumes that money measures benefit: If someone is willing and able to buy something (is in “demand”), then that something is good.

But the cheapest cost and the highest profit don’t take into account actual efficiency or actual good in the world. Producing less climate change gases to produce the same stuff is more important than saving five or ten percent manufacturing cost, or making five percent or ten percent profit. Using less resources that are limited is more important than the lowest cost. And good wages are also important, because they measure good lives. (There is an argument that China’s industrialization required America’s de-industrialization. I don’t think that’s true, but that subject is too large for this piece.)

The core assumptions of capitalism are wrong. They are simply wrong. But that doesn’t mean they don’t create a very effective system, where effective means “good at sustaining itself” and “good at telling people what to do.”

Capitalism is really very simple. It’s an algorithm for directing human behavior, and it works because it makes sure that the people who obey the algorithm are the people who have power.

Until they run the world off a cliff.

More later, but for now the point is simple: Neither the lowest price nor the highest profit automatically equal the most efficient thing to do in any way except with respect to money.

And money, while it’s lovely, is not actually food, water, or a livable environment, nor will it be able to buy those things for everyone (or perhaps anyone) when there just isn’t enough of it to go around.

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Trump’s Cancellation of the Korea Meeting Is an Excellent Excuse for Europe and Asia to Break America’s Financial Power

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On May 25, 2018

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Globe on FireThis is vastly disappointing, even though, after the appointment of Bolton to the White House, it is not all that surprising.

A peace treaty with North Korea would be, or would have been, a great accomplishment. One hopes its negotiations will resume in the future.

Even if they do not, I expect that South Korea will continue to push forward with the peace process, much as Europe has decided to ignore the US in regards to Iran. Unfortunately, as the structure of sanctions and their enforcement hinges on the US Treasury department and its ability to unilaterally sanction foreign banks and companies, the US’s participation really is necessary. At the least, the treasury needs to be willing to look the other way.

This is why allowing the US to control the payments system has always been a bad idea. China and Russia have been doing what they can to create their own system, and I would say it is time for the world as a whole, ex-US, to do so. The US can’t be trusted. This has been true for some time–it didn’t start with Trump, but if Trump is the excuse needed to end the US’s ability to choose who can move money around, then seize it.

Europe will never be a real power, in any case, so long as it allows the US to set the rules and control their implementation. And every time a Trump, a Bush, or even an Obama (whose Treasury abused this power as well) rises, well, everyone will have to bow.

The hegemonic power is the, well, hegemon, but the US is in decline and in such a situation it behooves the US to pay attention to the concerns of its satrapies (and Europe, South Korea, Japan, Australia, and Canada are all core vassals).

This is especially true when dealing with vassals like South Korea who is under vast pressure from China (the rising super power), and has reasons both to abandon the US shield and to stay under it.

Trump is an opportunity. I suggest Europe and the Asian satrapies take it to free themselves.

And while they’re at it, make peace with North Korea.

Update: and it may be back on?

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

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