China Begins to Question Their Economic Ability To Withstand U.S. Trade Pressure – Bamboo Forest Too Dense For Local Panda Population…


There is an article from Bloomberg which finally concedes the obvious economic and trade dynamic within a U.S. -vs- China confrontation.  The media paradigm shift is based on new statements from Chinese Ministers admitting they cannot win a trade confrontation with U.S. President Trump.

The summary reason is simple, we have discussed it frequently:

China is a production-based economic model, they do not have the ability, or wealth, to consume their own durable goods production; they rely on exports.

The U.S. is a more balanced economy; we consume 80% of our own production.  We are self-sustaining, China is not.

Without a market to sell their products, the Chinese economy cannot survive.

Conversely, China has focused so intensely on durable-goods manufacturing, their consumable goods market (food) is dependent; they cannot feed themselves.  The U.S. can survive without exporting food, China cannot survive without importing food.  The U.S. economy can survive without importing durable goods; the Chinese economy cannot survive without exporting durable goods.  This is the unavoidable trade reality.  As a consequence President Trump has all the factual leverage.

In stunning, and carefully worded economic writings, Chinese academics and economic ministers are now talking about the inherent weakness of the Red Dragon policies:

(Bloomberg) Xi Jinping vowed to match Donald Trump blow for blow in any trade war. Now as one gets closer, some in Beijing are starting to openly wonder whether China is ready for the fight — an unusually direct challenge to the leadership of the world’s second-largest economy.

The essays have raised concerns that the ruling Communist Party underestimated the depth of anti-China sentiment in Washington and risked a premature showdown with the world’s sole superpower. Such views push the bounds of acceptable public debate in a nation where dissent can lead to censure or even jail time, and are particularly bold given Xi has amassed unrivaled control while leading China to a more assertive role on the world stage.

[…] “It seems like Chinese officials were mentally unprepared for the approaching trade friction or trade war,” Gao Shanwen, chief economist for Beijing-based Essence Securities Co., whose biggest shareholders include large state-owned enterprises, wrote in one widely circulated commentary.

[…]  The essays have been noticed by key officials. Gao’s piece was circulated last week among bureaucrats at the Commerce Ministry, which has been on the front lines of the trade dispute, said one agency official, who asked not to be named because the discussions were private.

Other officials expressed skepticism about the senior leadership’s strategy in discussions with Bloomberg News last week. One Finance Ministry official said the country had made a “major misjudgment” of the U.S.’s commitment to a long-term confrontation with China.

[…]  “People are going to look back at this year as the pivot point when Xi Jinping overreached and sparked an international backlash against the party and China’s development model on multiple fronts,” said Jude Blanchette, China practice lead at Crumpton Group in Arlington, Virginia, and a former Conference Board researcher in Beijing. “There can’t be a domestic backlash because most of what they spend their time doing is thinking about how to stop that.”  (read full article)

Plant your trees in another man’s orchard, and don’t be surprised if you end up paying for your own apples!

Again, the key dynamic: The U.S. economy can survive without importing durable goods; the Chinese economy cannot survive without exporting durable goods.  This is the unavoidable trade reality.

Now, frame that in a similar way for NAFTA.

The Canadian and Mexican economy (due to NAFTA) cannot survive without importing cheap durable goods from China to use in their assembly-based economies, and then trans-ship into the U.S market.   However, the U.S. economy can survive, it can actually expand BIGLY, without accepting trans-shipped assembled goods from Mexico and Canada

Put simply, without NAFTA, the assembly processes just moves INTO the U.S because the market *is* the United States.  We are the $20 trillion customer. We hold the leverage.

Example:

NOTE: “Donnelly said in his opening remarks that there was already a rise in product being diverted to Canada in recent years and signs of even more since the U.S. tariffs began this year.”..

This is evidence of multinationals exploiting the NAFTA loophole to avoid U.S. tariffs. This fatal flaw is at the very heart of the issue within the U.S. trade policy inside NAFTA.  As long as Mexico and Canada remain gateways for foreign good assembly and shipment into the U.S. there will never be a way for the U.S. to demand fair and reciprocal trade.

Canada knows their decades-long designed economic position as shipment/assembly trade-brokers is the central issue is the heart of the confrontation with USTR Lighthizer, Commerce Secretary Ross and President Trump.  As multinational corporations seek to avoid Trump tariffs they only exacerbate the issue.

If Canada and Mexico don’t try to stop their duplicitous NAFTA benefit scheme, they will end up with even bigger trade surpluses and become even bigger targets for President Trump.  In essence, the reason for Canada and Mexico being subject to even more encompassing Trump tariffs’ grows.

If Canada and Mexico do nothing to stop this influx; Trump will levy more than just steel and aluminum tariffs; he’ll likely tax their auto-sector.

As a consequence Canada moves do back-down Red Dragon:

 

The Canadian government is preparing new measures to prevent a potential flood of steel imports from global producers seeking to avoid U.S. tariffs, according to people familiar with the plans. The Canadian dollar weakened and shares in Stelco Holdings Inc. soared.

The measures are said to be a combination of quotas and tariffs aimed at certain countries including China, said the people, asking not to be identified because the matter isn’t public. The moves follow similar “safeguard” measures being considered by the European Union aimed at warding off steel that might otherwise have been sent to the U.S. It comes alongside Canadian counter-tariffs on U.S. steel, aluminum and other products set to kick in on July 1.  (read more)

The bottom line is U.S. market access is what all production countries need for their goods and the sustainability of their economies.  The same dependency dynamic applies to German autos and Angela Merkel.

Trump wants three key issues resolved with Germany and he’s holding all the leverage to achieve it.   1) He wants Germany to pay for more of NATO defense and quit shirking their own responsibilities.  2) He wants the EU protective trade restrictions removed; and 3) He wants full EU support for sanctions against Iran.

The way for Trump to achieve these three objectives against the EU is through the threats on the auto-sector (20% tariff); which mostly impact Germany.   Chancellor Angela Merkel is the EU:

EU Parliament

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