U.S. vs. China: Has Trade War Begun?

Twenty years ago, the Chinese government and Corporate America both concluded they had serious “problems”. China had the world's largest pool of labour, but relatively few employment opportunities or means of wealth-creation.

Corporate America, on the other hand, had concluded that its own domestic labour market had become prohibitively expensive. It wasn't really an issue of wages. Instead, there were two other factors which influenced these corporate “leaders” to shun American workers – and relocate to jurisdictions where they could slash their labour costs.

The most serious burden these companies faced was the exponential increase in the cost of providing medical coverage to their workers, along with a workforce which severely neglected their own health through a number of extremely poor lifestyle choices.

The second reason why these corporations had decided that U.S. workers had simply become too expensive was that the grossly-overvalued U.S. dollar made their real take-home pay much higher than even most other industrialized economies.

Don't let this “explanation” be mistaken for “justification”. It is Corporate America which instructed their Washington puppets to reject a government-run, “universal” system of health-care (where the cost burden is not directly borne by U.S. employers), in favor of the current, private, for-profit system – which provides less health-care than other industrialized economies, at double the cost.

This doesn't mean that Corporate America is a single, monolithic block. A number of U.S. corporations have complained bitterly about how their private health-care plans were destroying their businesses (the “Big Three” automakers immediately come to mind). However, these companies deserve little sympathy, since they refused to “rock the boat” among U.S. corporations, and publicly endorse replacing the U.S.'s ludicrously inefficient system.

Similarly, U.S. corporations deserve zero sympathy for the adverse consequences of an over-valued U.S. dollar, since for decades they were the prime beneficiaries of this policy decision. Backed with their over-valued currency, U.S. corporations embarked on a multi-decade “shopping” binge, where the inflated purchasing power of their USDs allowed them to out-bid all other rivals to purchase these companies.

It was only after they had gorged themselves on these foreign acquisitions that they began to feel the negative consequences from the artificially propped-up dollar (along with attempting to 'digest' the massive amounts of debt, which they had taken on in the process). With nothing left to gain from remaining based in the U.S., these economic opportunists deserted the U.S. for “greener pastures”. Not surprisingly, the “pasture” of choice for many of these companies was China.

It is certainly not a coincidence that China's push to reform its economy and expand its wealth-creation (primarily through building up a domestic manufacturing sector) didn't really begin to take shape until after China witnessed its neighbour, and fellow totalitarian regime, the Soviet Union financially implode – due to a stunted economy which could not support its domestic and foreign agenda.

Since that time, there has also been a radical shift in the attitude of the Chinese government. Suddenly “wealth” and “profit” were laudable goals, which Chinese citizens were encouraged to pursue – and not evil “symptoms” of a “decadent, capitalistic society”. While some people continue to refer to China as a “communist” nation (CNN's Lou Dobbs comes immediately to mind), these are people who do not have the slightest understanding of the definition of communism.

It thus became inevitable that China and Corporate America would embark upon their unofficial partnership. Not quite a marriage, the alliance between Corporate America and China is more like a 21st century remake of “The Odd Couple”.

Like all “good” capitalists, Corporate America wants to plunder China's economy, not contribute to it – just as they plundered all the wealth of the United States, and then moved on in search of other victims. Conversely, even if the Chinese government secretly welcomes these fickle, rapacious corporations, officially it must demonstrate an attitude of tolerance as opposed to friendship with these entities – or risk appearing as betrayers of their own doctrine in the eyes of the Chinese people.

Thus, as with “Felix” and “Oscar”, even as these partners have become more closely entwined, their relationship appears to be getting frostier rather than warmer. It is truly an “alliance of convenience” as opposed to any mutual attraction.

Whether there was ever any official deal, or not, the U.S. and Chinese governments clearly had an “understanding”. U.S. politicians (under orders from their Corporate masters) would turn a “blind eye” to the dismantling of the U.S. manufacturing base (and its export to China), along with guaranteeing China (and the many U.S. corporations operating there) access to the U.S. market.

In return, China would “invest” a large portion of the revenues which it derived from the operations of these U.S. “carpetbaggers” in U.S. debt – which allowed the U.S. to ignore its increasingly serious fiscal problems, and to fund wars which it couldn't otherwise have paid for. There was never a chance of this forming the long-term basis of a true “friendship”.

As China's economy grows, it increasingly becomes a rival for the U.S. in latching onto the world's increasingly tight supplies of many commodities. As its government grows in power and stature, it has become a serious political rival – offering a genuine alternative to U.S. hegemony.

From China's perspective, it sees the U.S. government continue to be content to completely ignore its hopeless insolvency – while it becomes more and more obvious that the only possible way to avoid national bankruptcy is to grossly dilute the value of the U.S. dollar, which would grossly dilute the real value of U.S. debts.

To some extent, this is a moot point. The U.S. hasn't paid back a penny of what it has borrowed from other nations for somewhere around 50 years. The value of $0 is the same, regardless of the exchange rate. Now, the crippling accumulation of debt has resulted in such enormous structural deficits that a “balanced budget” is nearly mathematically impossible – and absolutely impossible without dramatically scaling-back the U.S.'s war-machine.

Thus, China and the U.S. have become the “players” of an increasingly silly game. Privately, the U.S. government knows that massive devaluation of the U.S. dollar is the only way to delay bankruptcy. However, if it were to publicly endorse such a policy it would have immediate and disastrous consequences.

The moment other governments saw the U.S. ceasing to attempt to prop-up the dollar, they would desert the currency en masse – resulting in a total collapse of the dollar, and the ugly consequence of hyperinflation. U.S. citizens would also be enraged, since as the primary holders of U.S. dollars and U.S. dollar-based assets, they are the ones who would suffer the biggest losses to their own wealth, combined with out-of-control inflation.

Conversely, if the U.S. government spouts too much absurd, “strong-dollar” rhetoric, this will only encourage even more U.S. corporations to abandon operations in the U.S.

For China, the “game” is to dump its U.S. dollars as fast as possible. This is not a “problem” for China, as so many U.S. propagandists continue to assert. It wants to buy up hard assets (i.e. commodities and commodity-producers) as fast as it can, and (for the moment) the U.S. dollar is still the most popular medium of exchange (i.e. reserve currency) for the world. It wants to “diversify” its currency reserves into gold and other paper currencies.

On the other hand, if the U.S. government begins devaluing the dollar faster than China can dump dollars, this naturally has a negative impact on China. So, China must continue to publicly chastise the U.S. government for its reckless fiscal and monetary policies – to try to slow down the U.S. devaluation. However, if it is too strident with such criticisms, then its own criticisms will undermine the dollar (and China's objectives). This is why the rhetoric of both governments often contradicts their own, official statements – sometimes just days apart.

It is now clear that this tense relationship has erupted into at least a trade “spat” if not (yet) an actual “trade war”. It is highly debatable who deserves the credit/blame for the current trade-conflict.

The first overt move has come from the U.S. government, through slapping huge, additional tariffs on Chinese tire exports to the U.S. Interestingly, no U.S. tire companies were behind this trade complaint – presumably because they are all making too much money producing their tires in China. Furthermore, the U.S. government made no attempt to demonstrate any harm from Chinese tire imports. Instead, it relied upon a previously unused “grandfather” clause – which it insisted upon before it would approve China's membership in the WTO (World Trade Organization).

Just two days later, China has begun retaliation, through announcing it is “probing” U.S. chicken and auto imports, as a first step toward the possible imposition of import tariffs against these U.S. goods.

At this point, there is no way of predicting whether these two trade-partners will “kiss, and make-up”, or whether this dispute will escalate into a full-fledged “trade war”. For me, personally, the more interesting issue is whether the U.S. government privately believes that it was China who was the instigator.

Regular readers are very familiar with my own analysis and list of reasons as to why U.S. bankster-oligarchs (and their Washington servants) have conspired to undermine the gold and silver markets (and the prices of those two, precious metals) for decades. Are we to believe that it is mere coincidence that the U.S. tariffs on Chinese tires come only days after gold and silver staged important, technical break-outs? It was also only recently publicized that the Chinese government is now officially encouraging their 1.3 billion citizens (with a vast pool of savings) to favor gold and silver as investments (see “China urges citizens to buy gold and silver”).

It is no longer a secret that the Chinese government has been aggressively (but secretly) adding to its gold reserves. Along with the gold-buying from Russia's government this year, it is highly likely that it was the actions of these two governments which has kept gold solidly above $900/oz throughout a year in which the normal, heavy buying from Indian bullion dealers has totally evaporated.

I strongly encourage people to keep an eye on the gold and silver markets, as they watch the “trade dispute” between China and the U.S. unfold. My strong suspicion is that tensions between these two nations will continue to increase, should gold and silver continue their strong, recent runs. If so, I may need to add a fourth chapter to my recent “Gold Wars” series.

Comments

[Nettligent:]

Focus on our America, economy recovery, and Americans. China government is only interested to sell low quality and tainted products. Let them sell their toxic products via Wal-Mart without liabilities.

Sep 14 02:43 PM

[Tony Petroski:]

I have compassion for Mr. Nielson. Growing up reading the little red book and then forced to defend Chinese communism on the grounds that they do capitalism better than the great satan.

That's not an easy job.

Selling gold and silver, that's a living.

Sep 14 03:16 PM

[Johnny Oxygen:]

These comments always start out as insightful and interesting then degenerate into name calling. Sheesh.

Sep 14 03:24 PM

[thiazole:]

Can you answer the question posed to you, or are you forced to spout idiotic drivel? Which nation should replace the US as the super power?


On Sep 14 02:17 PM User 357705 wrote:

> Rah rah rah sis boom bah! We're number one....."I'm proud to be a
> Duhmerican where at least I know......."
>

Sep 14 03:27 PM

[User 357705:]

Posed to me? ehem, OK,

Your presumption that there should be a "the superpower" is in and of itself revealing. The answer is that there should not be a sole superpower. The chances of there not being a sole superpower are nil. Whomever replaces Duhmerica in that role will be hard pressed to do worse.

That do it for ya? Have a nice day!


On Sep 14 03:27 PM thiazole wrote:

> Can you answer the question posed to you, or are you forced to spout
> idiotic drivel? Which nation should replace the US as the super
> power?

Sep 14 03:41 PM

[thiazole:]

Unfortunately there will always be a nation or two that, instead of spending all its resources on social programs, spends it on military might. If you think the world would be better off with Russia or China in those roles, than you must be delusional. Unfortunately, the US is the only democracy that is willing to make that sacrifice. I'd much rather have free healthcare and the plush social programs, but we can't afford both and with Europe and Canada completely unwilling to make any sacrifices to legitimately help with that role, I guess you are stuck with the US for now.


On Sep 14 03:41 PM User 357705 wrote:

> Posed to me? ehem, OK,
>
> Your presumption that there should be a "the superpower" is in and
> of itself revealing. The answer is that there should not be a sole
> superpower. The chances of there not being a sole superpower are
> nil. Whomever replaces Duhmerica in that role will be hard pressed
> to do worse.
>
> That do it for ya? Have a nice day!

Sep 14 04:15 PM

[mna:]

Then the solution is simple. US should stop making the "sacrifice", cut military spending among others to fund spending at home. We get a balanced budget. The rest of the world gets less unwanted US intrusion. Everybody Wins.


On Sep 14 04:15 PM thiazole wrote:
> might. If you think the world would be better off with Russia or
> China in those roles, than you must be delusional. Unfortunately,
> the US is the only democracy that is willing to make that sacrifice.

Sep 14 04:26 PM

[User 357705:]

Duhmerica is no longer the worlds superpower. Superpowers aren't in hock so far that they have to 'buy' their own T-bills because no one else wants them. Superpowers don't have hope that the Chinese continue to buy Duhmerican't T-bills to finance their lie that all is well with Duhmerica and the world. Superpowers aren't in hock so far that they will have to debase their currency to finagle their way out of debt. Superpowers aren't running around the planet starting wars they can't win much less finish. Superpowers aren't controlled by banksters. Superpowers don't have a propagandized populace that believes anything their corporate masters sell them.


On Sep 14 04:15 PM thiazole wrote:

> I guess
> you are stuck with the US for now.

Sep 14 04:35 PM

[Dave Wrixon:]

Iran would have been a democratic country if the US had not deposed its government and installed a dictator to facilitate the theft of its oil.


On Sep 14 12:37 PM thiazole wrote:

> So what if Ford had been a nonprofit organization? Where do you
> think the automobile would be now? Seem Iran had a "government"
> automobile that they finally scrapped. It was sub 100hp and got
> less than 10mpg. Profit is the driver of innovation. To deny profit
> is to deny innovation.

Sep 14 06:17 PM

[Allen Charles:]

It would seem that China has already started buying SDR from the IMF instead of US debt.

See "IMF Signs US$50 Billion Note Purchase Agreement with China"
www.imf.org/external/n...

Sep 14 07:18 PM

[Papasmurf:]

Just require "made in China" be stamped on the tires. Who would buy them then?

Sep 14 08:14 PM

[thiazole:]

LOL, name a superpower that hasn't been in most of these situations. Seriously, THINK about it. They are often the cost of being a superpower.


On Sep 14 04:35 PM User 357705 wrote:

> Duhmerica is no longer the worlds superpower. Superpowers aren't
> in hock so far that they have to 'buy' their own T-bills because
> no one else wants them. Superpowers don't have hope that the Chinese
> continue to buy Duhmerican't T-bills to finance their lie that all
> is well with Duhmerica and the world. Superpowers aren't in hock
> so far that they will have to debase their currency to finagle their
> way out of debt. Superpowers aren't running around the planet starting
> wars they can't win much less finish. Superpowers aren't controlled
> by banksters. Superpowers don't have a propagandized populace that
> believes anything their corporate masters sell them.

Sep 14 10:58 PM

[thiazole:]

I was wondering why you weren't at the anti-American party going on here. I thought you would be the guest of honor!


On Sep 14 06:17 PM Dave Wrixon wrote:

> Iran would have been a democratic country if the US had not deposed
> its government and installed a dictator to facilitate the theft of
> its oil.

Sep 14 10:59 PM

[Moon Kil Woong:]

There are a few logical flaws to this historic analysis. First is that the author contends the US corporations artificially boosted up the dollar. With the continuous depriciation of the dollar for decades this is doubtful.

Then the author claims that the US is trying to push down its currency which would be normalizing it if in fact it was artificially pumped in previous statements. It is more the relative peg to the dollar that China assigns that is distorting the dollar's value and the trade imbalances than anything else.

I do agree with the author that the US healthcare system is a wreck. After all Nixon was the one who pushed through the HMO employer pays structure we have today. The costs are overboard (higer as a percentage of GDP than even France) and the level of care is shoddier than Canada. This system is wrecking US corporate competitiveness and putting its citizens in the poohouse.

I also agree that both China and the US have been playing a very dangeous and mutually beneficial game for a long time and now it's out of control and its proportions are so large no one can help either one. China must wean its way off of exports and its huge dollar surplus without collapsing its economy. And the US must cut its deficit binge and balance its trade surplus without crashing the dollar and causing massive inflation (the economy is already partially crashed as is the dollar).

There is no easy solutions and the longer it takes for the system to crash or balance itself the more painful the adjustment is liable to be.

Sep 15 01:20 AM

[Wizler:]

great points on the situation and what the short term future may hold

however, I refuse to believe that health care and consumer lifestyle drove the evil US corporate giants to China. Look at German automakers. they have a higher cost base, drinking and smoking workers, but continue to innovate and export. The Mini and the Smart car are great examples of innovating to meeting consumer needs.

Any ass that was reading the stats in the back of the economist could see the ballooning deficit, but no one blinked. Do you want to tell consumers they have to pay more for thier clothes and kids toys. Not on my watch.

Time for some innovation and accountability for consumer actions

Sep 15 08:46 AM

[Jeff Nielson:]

I'm afraid you didn't read my commentary very carefully.

1) I did NOT say that U.S. corporations had "artificially boosted" the USD, I merely said they were prime beneficiaries.

2) I did NOT say that the U.S. government is "trying to push down the currency". In fact, all it takes for the USD to fall is to NOT try to prop it up. What I did say is the U.S. government WANTS the dollar to fall, and knows it must fall - to delay bankruptcy.


On Sep 15 01:20 AM Moon Kil Woong wrote:

> There are a few logical flaws to this historic analysis. First is
> that the author contends the US corporations artificially boosted
> up the dollar. With the continuous depriciation of the dollar for
> decades this is doubtful.
>
> Then the author claims that the US is trying to push down its currency
> which would be normalizing it if in fact it was artificially pumped
> in previous statements. It is more the relative peg to the dollar
> that China assigns that is distorting the dollar's value and the
> trade imbalances than anything else.
>
> I do agree with the author that the US healthcare system is a wreck.
> After all Nixon was the one who pushed through the HMO employer pays
> structure we have today. The costs are overboard (higer as a percentage
> of GDP than even France) and the level of care is shoddier than Canada.
> This system is wrecking US corporate competitiveness and putting
> its citizens in the poohouse.
>
> I also agree that both China and the US have been playing a very
> dangeous and mutually beneficial game for a long time and now it's
> out of control and its proportions are so large no one can help either
> one. China must wean its way off of exports and its huge dollar surplus
> without collapsing its economy. And the US must cut its deficit binge
> and balance its trade surplus without crashing the dollar and causing
> massive inflation (the economy is already partially crashed as is
> the dollar).
>
> There is no easy solutions and the longer it takes for the system
> to crash or balance itself the more painful the adjustment is liable
> to be.

Sep 15 10:09 AM

[coreopsis:]

Did you take your thiazole this morning? Or did you leave it in the closet?


On Sep 14 01:52 PM thiazole wrote:

> closet
> communists/socialists. It makes sense. It isn't that you are irrationally
> bearish - you just WANT the US to fail so badly that you are blind
> to reality. Where is Dave Wrixon? I know he is a bear just because
> he fantasizes about the US failing.

Sep 15 11:27 AM

[China Buyer.:]

I had travel and review the China very deeply, its clearly seems the production increased in year 2009 over 15%, but the export reduced to 33%, I am talking about Auto Parts Industry, recent increased of raw material does not hit the actual buyer, the sleeping industries of China also understand clearly this increment is consumed by Buildings and homes not because of the demand, this is fake increment which did by China government to put pressure on buyers,but the game is failed.

Sep 15 01:10 PM

[coreopsis:]

Hey, Poopasmut, maybe the people who buy iPhones?


On Sep 14 08:14 PM Papasmurf wrote:

> Just require "made in China" be stamped on the tires. Who would
> buy them then?

Sep 16 10:38 AM

[User 222735:]

There are vast disparities between US and China trade as well as geopolitical factors (Iran) that are omitted in this analysis. It is an interesting theory but don't trade on it. It is too bold of an assumption that "Chimerica" was planned by greedy corporations. The part that discusses government rhetoric vs. intentions is good though.

Sep 17 03:09 PM