USA's Strategy in Trade War is More Complex than Reported

No one has written a decent article explaining USA's perspective on trade vis a vis China, so I'll throw my hat in the ring. As with any negotiation, whether China "wins" depends on its ability to ascertain USA's ulterior motives. (Lawyers know no matter how specific the final language of an agreement, there is always room for interpretation.) 

Robert Lighthizer, the U.S. Trade Representative, wants to obviate China's usual currency devaluation in order to stimulate its domestic economy. Stated another way, the U.S. is trying to increase domestic Chinese consumer consumption by reducing the two countries' trade deficit. Why is this American objective potentially destabilizing for China? 

With so much else at stake, American "experts" erroneously emphasize the financial value of China's promises of agricultural purchases, believed to total 32 billion USD over the next two years. In reality, America's main goals are to 1) stop China's ability to fluctuate its currency unilaterally, thus limiting its power to assist export-oriented businesses (whether SOE or otherwise); 2) stop China's "free" technological gains through IP transfers, including software code, thereby increasing the cost of competing with USA corporations; and 3) stop China's alleged procrastination in reforming its judicial system, which, due to an alleged lack of independence, appears to tolerate a laissez-faire attitude towards IP violations. Thus, China's agreement to purchase American agricultural products are the Republican Party's opening salvo aimed at advancing a Trojan Horse reshaping China's entire economy. 

To understand the challenges in achieving viable compromises, remember that USA's economy is consumer-driven. According to some sources, consumer spending comprises a whopping 68% of America's entire economy. A consumer-driven economy allows for higher individual debt, more private enterprise, and less government interference. Though much of China's recent GDP growth is from consumer spending, its path from "developing" to "developed" status has been through non-consumer infrastructure spending and exports. 

China's success thus far should not be overlooked. From Singaporean professor Danny Quah: 

In absolute terms, the average person in the bottom half of the US income distribution today is worse off than the average person in 1980 in the US... [but] the people at the bottom half of China's income distribution today are four times better off than they were 30 years ago.

America desires less restricted markets within China and a less export-oriented economy because domestic Chinese consumption would tilt towards USA/EU products. In other words, it wants to rewrite the rules of the game to favor its own economic model (domestic consumer spending, privatization) over China's (government-driven growth that has taken 750 to 850 million Chinese out of poverty). I don't fault the U.S. Trade Representative's approach. As of today, American Nike is far better than Chinese LiNing, American Ford far better than Chinese Geely, EU-Unilever and EU-Nestlé far better than any Chinese company, and so on. Why the gap in quality and reputation? 

From World Bank

I'll say it again: because China has focused on infrastructure and other government-driven projects rather than domestic consumerism, it is just now trying to move up the consumer supply chain. (It has already moved to the top in ports, roads, trains, solar energy, etc.) In fact, China is well-positioned to compete in the global consumer market because its per capita GDP recently reached the "magic" 10,000 USD number, at which point most people, especially younger people, feel comfortable trying new items and upgrading personal preferences (e.g., pork to beef, the latest smartphone, etc.). 

For its part, USA is trying to impede China's shift into USA's economic specialty of consumerism through tariffs (hurting China's exports), technological blocks (hurting Huawei), legal mechanisms (using Western countries' court systems to threaten criminal charges against Chinese executives), and manipulating oil prices ("In 2018, China had record oil and gas imports and remains the number one crude oil importer in the world after surpassing the United States in 2017 and is the number two natural gas importer, behind Japan"). 

I see little chance of success for the United States in the short-term because China still has numerous options (Manila and Jakarta ports instead of HK and Shanghai) and alternate suppliers (oil and otherwise), allowing it to soften the blow of any US trade restriction. More importantly, China's government regularly publishes five to ten year economic plans, and if an American objective runs contrary to stated governmental aims, it seems unlikely China is willing to lose face by acceding to American demands. 

Over 1,000 pages on governance.

To its credit, China knows it currently lacks expertise building globally recognized, consistent brands and has failed to replicate other countries' branding successes, whether Japan or South Korea. (I dislike K-pop, but South Korea's outsized influence in Asia's entertainment scene shows remarkable prowess in generating consumer demand.) In Chinese-majority Singapore, I have seen zero Chinese Luckin Coffee stores but plenty of Taiwanese bubble tea shops and American Starbucks, indicating China has yet to operate comfortably within other countries' regulatory systems. 

Incredibly, replicating and improving global supply chains has proven easier than building products everyone wants and can access within those supply chains. If China has to divert spending that could otherwise be used to attract competitive ad agencies, international legal experts, and other fundamental blocks of consumerism, then it risks being left behind at the exact moment it opens markets to foreign competition and its own consumers can afford to differentiate between domestic and international brands regardless of tariffs. 

The West beat the Soviet Union not because America's approach towards human rights or privacy was fundamentally different--post-Snowden and Church Committee investigations, we know both West and East are and were surveillance and military-driven. Yet, despite more similarities than differences, the West succeeded because it was able to create better stories by leveraging innovation through the private sector and parlaying substantial development risk onto private banks. (See, for example, USA's Community Reinvestment Act of 1977, through which the federal government can allow or disallow bank branch expansion based on geographic and income-based diversity of loans.) 

Once upon a time, Ronald Reagan and the West could advance a credible anti-Communist narrative because America's diversity, refugee policies, private sector loans, oil access, and bankruptcy rules trumped its inconsistencies. Rather than worry about the U.S. Trade Representative's non-numerical demands, China should be asking itself the following questions: What will China's narrative be? And will it be able to create a stable and credible one if, moving forward, it is forced to increase the value of its currency to support greater domestic consumer demand? 

© Matthew Mehdi Rafat

Bonus: A few caveats: 

First, a weak or weaker currency does not guarantee a country will export more than it imports. Indonesia--a country with oil, gold, natural gas, and timber--has a relatively weak currency. Bloomberg News reported on December 16, 2019 that Indonesia's "imports of consumer goods surged and exports contracted for a 13th straight month." 

Second, the broad language disclosed so far reminds me of USA's most recent attempt to mediate between North and South Korea. (Regarding China and USA, what exactly are the components of "high-standard commitments to refrain from competitive devaluations" & enforcement "mechanisms"?) A year later, nothing truly substantive has changed between North and South Korea despite the hype surrounding diplomatic efforts; furthermore, as of last month, according to Reuters' Joyce Lee and Ju-min Park, "The United States is 'very actively' trying to persuade North Korea to come back to negotiations... as a year-end North Korean deadline for U.S. flexibility approaches."

Similarly, I predict these American-Chinese talks will be much ado about nothing and another chapter in America's habit of overreaching post-Vietnam-War. Also, I'd be lying if I said I wasn't curious to see if China tries to use its purchasing commitments to influence America's 2020 elections. Interesting times, eh? 

President Xi Jinping (December 31, 2019):

"Human history, like a river, runs forever, witnessing both peaceful moments and great disturbances." 

The Homebody Chronicles

Shopping. That's what I do when I'm alone, playing house husband in Singapore. For the last four years, I've rarely stayed in one place for long, and I was surprised how quickly I satisfied the "bored housewife" stereotype. After two weeks of housesitting from 8:00AM to 7:30PM, I've spent unreasonable amounts of time shopping online and watching Netflix, my generation's versions of Home Shopping Network and daytime soap operas. (Feel free to mock "Peloton Wife," but I understand the Peloton bike's intended audience.) Why are shopping malls doing well in developing countries like Philippines and Indonesia but not in developed countries like Japan and USA? Part of the answer must be the dwindling population of affluent and bored housewives, not just fewer overall births. 

One unexpected consequence of being home alone? Well, being alone. In an era when technology is supposed to make it easier to connect with locals, websites and apps are still driven by advertising and sponsorships, meaning the new "friend" you meet at an event might be getting a commission or other kickback from the venue. (I once tried to buy a book directly from a small publisher and was told I could only buy it if I downloaded the Venmo app.) Instead of meaningful connections, the internet has increased loneliness for many people by providing greater opportunities to make fake friends and yet, we're shocked, shocked, fake news has become prevalent. 

Despite expecting routine, I didn't anticipate the steepness of my productivity decline. By week two, staying inside all day in my underwear was an acceptable schedule, and going out became an event worthy of careful color-matching. When younger, I noticed stay-at-home dads and moms tended to be nice and well-dressed. It's that way when you're always looking for friends around the corner until eventually, you start nibbling any bait in front of you. Those jokes about sleeping with the mailman or delivery agent? They're not jokes. They're the realistic output of a silent-suffering society starving for connection. I've heard of older women taking part-time jobs at retail establishments like Williams-Sonoma for the employee discount, but now I know the real reason for Williams-Sonoma and every other "upscale" retail establishment--they, like every other successful business in America, peddle cures for loneliness. 

Thankfully, it's not all snake oil. Relationships thrive on routines. Give your girlfriend her favorite Starbucks drink at the end of a long day for a week, and you might have added a full year to your relationship's probable longevity. As for online discourse, it degenerated the moment we no longer had to expend paper, ink, and a stamp to deliver our thoughts, but the joy we feel when a verified user (or his or her PR team) responds to a tweet or comment remains legitimate. 

Speaking of relationships and online messaging, the ability to instantaneously connect with one's spouse during the working day has probably increased divorce rates. In the first week of my isolation chamber, er, stay-at-home vacation, I snickered at a NY Times' piece about a husband's failure to put away a shirt. By the second week, I snickered no more. When alone, everything is magnified, and your life revolves around finding interesting things to say, do, and see, a battle you don't always win. So if a friend says she's going to bring or mail you an item in three days, the related anticipation might be the highest of highs--and, if she happened to forget, the lowest of lows--in Day 3. 

If someone was visiting, I'd jump in the shower and freshen up better than any desperate housewife. I've bought cologne and pomade exactly twice in forty years, but had I seen the right discount online, you'd better believe my inner "metrosexual" was making a comeback. Given such efforts, I expected similar levels of effort on the other end. Did a full minute pass between my text and a response? Congratulations! You're now on my personal "Do Not Call" list. By the second minute, I'd already contemplated a hundred scenarios in which my friend had died, preferably via self-immolation--oblivious to my own unreasonableness. (Husbands and wives, take note: what you and the rest of the world consider reasonable does not apply in the vacuum of an adult-free home, with children or without.)

Ever wonder why America has so many churches? Stay-at-home parents need places to go, and the American government has failed to adequately promote affordable childcare or child-friendly policies. Last I heard, Congress tried to prove it cared about taxpayers by passing a law giving federal employees--and no one else--paid family leave. As someone who favors small government, I am always surprised to learn the true extent of religious institutions' influence--almost all my local city and county council-members went to private Catholic schools and/or Catholic universities--because I am single and childless and try to avoid hospitals, schools, and "nonprofits." In context, once one sees an invisible mass of humanity alone at home, struggling to make meaningful human contact, the political picture becomes clear: if government does not actively enter the transportation, healthcare, and childcare markets, voters and non-voters are asking to have their public institutions supplanted by anyone peddling snake oil--as long as there's free food at the 3pm event. 

Now if you'll excuse me, I think I hear a knock at the door. I need to practice my flirty face. 

© Matthew Mehdi Rafat (December 2019)