In The Tyranny of the Status Quo, Milton and Rose Friedman describe the tendency of governments to reverse the policies of their elected leader. A new administration is put in place. It launches a few initiatives. Six to nine months later, the vested interests take over and policies go back to normal. This is a constant, no matter the political leanings of the new president. The Friedmans called it “The Iron Triangle” which preserves the status quo. In the triangle's three corners are the direct beneficiaries of laws, the bureaucrats who thrive on them and the politicians who seek votes.
It looks as if Xi Jinping was a good student of Milton Friedman. He thought that if he waited a bit, the Trump administration would cave in. The Iron Triangle, he bought, would soon convince the president to give up his trade crusade. All the Chinese would have to do is increase imports of soy beans and the Americans would claim a victory and back off.
As it turns out, this President is different. He fires those members of his cabinet who try to reverse his policies. Instead of letting his policies revert back to the status, president Trump insists on real results.
The problem for China is that for once they do not have time on their side. How often have we heard that the Chinese can sit it out? Chinese people are considered to think long term. American democracy is not equipped to fight a trade war. The stock market and business people cannot take a slowdown. An economic downturn would bring the administration down etc. This is what the talking heads have been saying. Yet, it looks as if this time China is the one blinking first.
In his memoirs, Ulysses Grant explained how scared he was the night before his first encounter with the Confederate army. As it turned out, his worst fears notwithstanding, dawn the next morning showed the enemy had run away. He never forgot the lesson. The enemy too is scared.
In much the same way, we tend to overestimate our adversaries. In this case, the Chinese economy was already weak and vulnerable. With the tariffs now in place, it seems as if China’s economy is in a downward spiral. Further trade sanctions could lead to social unrest.
This is why we can expect a major trade deal before March. China needs to revive its economy before it spins out of control. Such a deal will be a big relief for China, for the U.S. stock market and for the world economy. Then, expect the Chinese to cheat and drag their feet, but the world order will have changed.
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