By John Ross Source: guancha.cn Published: 2019-6-4
‘At least two other organizations have more power over [US financial] markets than the White House. They are the US Federal Reserve and the Chinese Communist Party. Trump does not directly control either of them.’
This brutal analysis is particularly significant as it is by one of the most senior and accurate Western specialists on financial markets - John Authers, Senior Bloomberg Editor for Markets and former Chief Markets Commentator for the Financial Times. It encapsulates the interaction of economic and political problems facing President Trump. As will be seen it also summarises the relative strengths of China and the US in the ‘trade war’, dictates the US administration’s tactics for attacking China, and determines the only policies which will prevent the Trump administration carrying out its attempt to block China achieving its development goals.
Analysis of these real facts of US financial markets and policy strongly confirms the analysis by Xi Jinping in his recent important speech in Yudu County that China has to rely on its own strength in resisting this attempt by the US administration to prevent China achieving prosperity and national rejuvenation.
While the situation of China itself in the trade/economic war is naturally the most important issue there are of course two sides involved in this conflict – the other aspect of the situation is within the US. Analysis of this, which forms the subject of this article, shows clearly why the Trump administration refuses to accept ‘win-win’ relations with China and what is the inevitable outcome of this administration’s ‘lose-lose’ logic. Such analysis in turn shows that comparisons made in China to the Long March or to protracted war are not simply rhetorical metaphors, or references to the historical traditions of the CPC, but provide an accurate framework to understand the situation.
The difference, of course, is that this is an economic war and not a military one. Therefore, the weapons are different and it is necessary to analyse what are the most sensitive pressure points on the US, and what armaments are most powerful for China. In turn this examination of the situation in the US economy fully confirms the analyses made of the situation in China and the reaction of different social layers to the present conflict with the US.
Trends in China and the US
Examining the Chinese side of the ‘trade war’ Wang Wen has presented an excellent analysis of the reaction of different social strata in China to the Trump administration’s economic aggression. This could only have been written by someone who is Chinese, and it is not appropriate for a non-Chinese citizen to comment on it. But its analysis can be noted: ‘The vast majority of ordinary people are highly supportive of the state's policy of counter-bullying in the United States, and the current fear of the US exists mainly in some social elites. For example, in WeChat, Weibo, new media and anecdotes, at meals, there are often some words, passages, comics, data and even some rumours attempting to demonstrate the irrationality of China's counterattack measures, to distort China's fighting and unbreakable position, to describe China's deteriorating status quo, to outline the future of China's eventual failure. Others have used some data and examples to exaggerate the strength of the US economic growth, glorify the soundness of the US capital market, fictitiously exaggerate the unity of the United States and international allies, and fabricate the friendliness of the American social elite.’
But it is particularly striking that this analysis of trends within China, made by a Chinese citizen, is fully confirmed from another ‘external’ angle – that of the situation in the US and the forces operating on the Trump administration. The facts of the US economy and politics show clearly that any weakness by China, in expectation of ‘mercy’ from the Trump administration, will in reality lead to heightened attacks by the US.
Trump’s economic policy is determined by the coming US Presidential election
The starting point of any analysis of the situation in the US is that President Trump is already entirely aware of the most important date he faces - 3 November 2020, the next US Presidential election. Securing re-election is his paramount goal and this therefore determines the shaping of the Trump administration’s policies. Three time frames are crucial for this.
1.The impact of events in financial markets, which can occur in a very short time frame - in some cases minutes/hours and almost invariably having a strong impact over a period of days to months.
2.The medium-term trajectory of the US economy to slow down during 2019 and 2020 – which is necessarily a negative factor for President Trump’s chances of re-election in 2020 and which interacts with the adverse effects of US tariff policy on US consumers such as price rises and falls in prices to farmers. (The reasons for this slowing of the US economy in 2019-2020 are analysed in detail in my book ‘Don’t Misunderstand China’s Economy’)
3.Attempts to slow China’s economy in the medium/longer term, through forcing or persuading it to abandon its socialist path of development – this, however, also has short/medium term effects in that lessening of the successful dynamic of China’s economy makes it less attractive to other countries and therefore weakens China’s alliances in the trade war.
All three time frames however confirm a fundamental reality – that while China’s relations with most countries, and indeed with some previous US presidents, can be most successful based on ‘win-win’ this will not occur with the Trump administration, This is due to the fact that the Trump administration already acknowledges in practice that its policies will be a US ‘lose’, that is they will inflict pain on the US economy, and it is merely attempting to ensure that the ‘lose’ for China is bigger than the ‘lose’ for the US.
The Trump administration’s ‘lose-lose’ analysis
An illustration on a small scale of the Trump administration’s understanding of the need to attempt to limit the extent of economic pain on the US is its recent announcement of $16 billion of subsidies to US farmers – the bill for which will be financed by other US taxpayers as is increasingly understood in the United States. As CNN noted: ‘Just as Mexico was supposed to pay for the wall, but isn't, now China is supposed to pay for President Donald Trump's plan to bail out US farmers. Neither statement is true, of course.’
Affecting wider sections of the US population, calculations by the respected Western economics company Oxford Economics, which has no connection with China, found: ‘Chinese manufacturing… lowered prices in the United States for consumer goods, dampening inflation and putting more money in American wallets… trade with China… saved these families up to $850 that year.’ Regarding the overall impact on the global economy, including the adverse effect on US allies, Bloomberg and others calculate that the losses in a full year of the trade war would be $600 billion.
In addition to these tariff effects the Trump administration US is equally concerned about the consequences of consumer boycotts, or restrictions, on US companies which would be equivalent to those it has carried out against Huawei. The Financial Times noted for example that the immediate goal of the US sanctions against Huawei are not simply or primarily to stop the supply of chips and software but to destroy the consumer market for Huawei’s products in the West - where customers want guaranteed access to Google dependent products: ’Google’s decision this week to stop selling its Android operating system to Huawei for new handsets makes little difference in China, where Huawei should be able to convince buyers to switch to its operating system, now under development. But customers are more wedded to Android in international markets. Independent analyst Richard Windsor estimates it will lose all those sales.’ But the Financial Times simultaneously noted that consumer retaliation against China would have a devastating financial effect on Apple, one of the US’s core and most valuable companies: ‘Beijing has scope for retaliation. Levers at its disposal include blocking access to its market — a move that Goldman Sachs analysts estimate could reduce Apple’s earnings per share by nearly 30 per cent.’ This is one of the reason’s US companies are particularly worried about the damage to their financial position by the new ‘unreliable list’ announced by China. It is also a reason US companies fear actions on rare earths by China.
These specific examples clearly illustrate that in practice, despite its claims to the contrary, the Trump administration starts from the framework that its policies will inflict pain on the US economy, but that it will be able to limit this loss. China’s route to success is therefore to inflict pain on the US economy to a point that is unacceptable for Trump in seeking re-election.
US financial markets
A decisive reason that such pain for the US is possible is that while the sums noted in relation to US consumers, farmers, and allies above sound large the Trump administration can in fact deal with amounts such as $16 billion to farmers. But even such sums as the $600 billion loss for the global economy are small compared to potential impacts on the size of US financial markets. The loss of $600 billion in a year for the global economy is less than the amount that can be lost in US financial markets in a single day, while a loss of $16 billion can occur in seconds. Due to the sheer scale of US financial markets the Trump administration does not remotely have the resources to control the more than $30,000 billion US share market or the $16,000 billion US Treasury bond market. Pain inflicted on the US in such financial markets is therefore on a scale which is seriously destabilising to the Trump administration.
Examination of all three time frames operating on the Trump administration considered above would require three separate analyses or an inordinately long article. Therefore, due to their sheer scale, this article examines only the first, most short term, but extremely powerful of these issues – the impact of the trade war on US financial markets.
The real situation facing US presidents
John Authers’ blunt comment cited at the beginning of this article, reveals accurately the real domestic economic situation of a US President – which is very different to the frequent perception in China. Unlike China, under the US governmental system the President has little direct control over the most powerful levers of the economy – there is no large state owned economic sector which can be instructed by the President to increase its activity, the Federal budget is decided by the Congress not by the President, and interest rates are controlled by the Federal Reserve which under US law cannot be instructed by the President.
The new factor in the trade war which Authers drew attention to, which is also outside the US President’s control, is China itself. The facts amply confirm that the impact of China’s statements and actions on US financial markets is now very large – as will be demonstrated. Larry Summers, former US Treasury Secretary, clearly spelt out this numerically in a commentary for the Washington Post: ‘On Monday [13 May], China announced new tariffs on $60 billion of US exports, and the United States threatened new tariffs on up to $300 billion of Chinese goods. These actions were cited as the principal reason for a decline of more than 600 points in the Dow Jones industrial average, or about 2.4 percent in broader measures of the stock market. With the total value of US stocks around $30 trillion, this decline represents more than $700 billion in lost wealth.’
This $700 billion loss to US shareholders directly resulted from China’s response to President Trump’s announcement he was raising US tariffs against China from 10% to 25%. To illustrate this direct impact Authers’ accurately noted the difference on US share markets between the week following Trump’s announcement of raising tariffs against China, during which there was no announcement of a precise Chinese response, and the US financial markets’ reaction when China announced its counter tariffs: ‘It’s fair to say that Wall Street did not anticipate China’s retaliation to US tariffs. Last week, the negative reaction to President Donald Trump’s announcement of new tariffs on China was oddly muted. On Monday, after China’s response was announced just before the market opened, the S&P 500 fell by more than it had done in the entire previous week.’
Authers similarly noted the increasing skill of China’s response and its impact on US markets: ‘The problem is that China knows how to respond. China… knows it can attack the presidential weak spot by acting in a way that damages the Dow. Hence, it not only retaliated with tariffs of its own, but announced them just as the New York market was about to open, at night in China, for maximum effect.’
As already noted, the $700 billion loss in a single day on US share markets was larger than the projected loss to the world economy for an entire year due to the trade war – and over 40 times the $16 billion bill for Trump’s subsidies to US farmers. But even this sum is small compared to losses on US financial markets that can occur due to others of China’s economic actions. As Authers noted: ‘In the last five years, the event that scared the US market the most, by a wide margin, was the surprise Chinese yuan devaluation in 2015.’
The above figures are not given to propose any specific course of action for China. The author knows that numerous factors have to be taken into account both in trade negotiations with the US and in economic policy. Some of the key pieces of information for this are known only to those involved in the negotiations. Also domestic effects of policies, not only their impact on the US, have to be taken into account. But the data is given to indicate the extreme impact of actions by China in affecting US financial markets, and therefore the sensitivity of the Trump administration to this. The financial sums involved make clear why this impact it is much more rapid and greater than effects on farmers and consumers.
The real aim of Trump’s policy
This identification of the degree of pain which can be inflicted by China on US financial markets, and on the US economy, is crucial because Trump’s tariff policies cannot, indeed are not intended to, improve the situation of the US itself. Bloomberg columnist Noah Smith summarised the Trump administration’s real aim very accurately under the self-explanatory headline ‘The Grim Logic of Trump’s Trade War With China - Maximizing American prosperity probably isn’t the goal.’ Apart from comprador apologists for the US within China, noted by Wang Wen, this logic of Trump’s policy is by now well understood in China. But, nevertheless, it is worth quoting this Bloomberg analysis at length as it summarises very accurately from a US perspective the logic of the Trump administration:
‘So with… losses mounting, it looked like there was little reason to continue the trade war. Yet Trump is doubling down. Why?...
‘If Trump wants to slow China’s ascent as a superpower, a trade war might be an effective way to do it. If the harm to the US is modest and the costs for China are severe and lasting, Trump might conclude that the former are acceptable losses.’ On this logic: ‘Geopolitical primacy, not maximum prosperity for Americans’ was ‘the president’s true objective.’
In other words, as was already shown in the case of farm subsidies, the Trump administration quite accurately does not believe that tariffs and other forms of economic aggression against China aid US economic prosperity - on the contrary they cause economic pain. But it decides to inflict this pain on US citizens and companies in order to pursue neo-con policies trying to block China’s prosperity and national rejuvenation. But this policy requires that ‘the harm to the US is modest.‘ The problem is that the more tariffs are imposed , and above all if China retaliates, the greater the pain not only for US financial markets but for US consumers – that is US voters. As Authers noted: ‘Meanwhile, the US can still impose more tariffs, but the goods it has chosen to attack have been largely invisible to consumers. Any further tariffs will take it into consumer products where price rises will be visible and painful, and might even, again, act as a spur to raise [interest] rates.’ The effect on US financial markets, as already noted, can be far more severe than the direct effect of the tariffs.
Why win-win will not work with the Trump administration
Understanding the Trump’s administrations real aim shows not only why its goal is not to improve the economic position of the US economy or US citizens but simultaneously makes clear why its policies will not be stopped by appeals to reason or ‘win-win’. Forces in China claiming that the Trump administrations attacks will be stopped by ‘appeasement’, or by appeals for mercy, are presenting the reverse of the truth – such policies will lead to the Trump administration becoming more aggressive. This flows inevitably from the fact that the Trump administration’s policy is not to seek a ‘win-win’ for the US but to create a ‘lose-lose’ with the aim that the ‘lose’ in terms of economic pain for the US should be ‘modest’. This logic of the Trump administration’s position means that any weakening of China’s position, any alleviation of the pain inflicted on the US, will lead to the Trump administration becoming more aggressive, not less.
This makes clear while most countries seek a ‘win-win’ with China, and can therefore rightly be approached on this basis, and indeed this forms the basis of China’s foreign policy, this will not work with the Trump administration because it is not seeking a ‘win’ – it is merely seeking that the ‘lose’ for the US it knows will occur should not be sufficiently large to threaten Trump’s re-election.
It follows from this situation that the only thing that will deter the Trump administration, and force it off its path of attacks on China, is if the ‘lose’ for the US is bigger than it had anticipated – that is if the economic pain is too large to be bearable from the point of view of the interests of the Trump administration. From what has already been analysed, it is also clear that Trump’s measure of what is bearable is not the interests of the US people, but whether it affects the President’s chances of re-election. In summary, only if the economic pain suffered by the US is sufficiently severe that it endangers Trump’s re-election chances will the Trump administration desist from its attacks on China.
The only ‘win’ which the Trump administration takes into account is, therefore, if the ‘lose/pain’ of the confrontation with China is seen as endangering Trump’s re-election chances and the ‘win’ is then simply the lessening of that pain to a point where it is no longer seen as endangering Trump’s election campaign.
Confirmation of the forces acting on the Trump administration
This situation of the Trump administration which flows from its ‘lose-lose’ logic is fully confirmed even in the extremely short term by the chronology of President Trump’s own personal responses to events in US financial markets in announcing the increase in tariffs against China from 10% to 25%.
On 5 May Trump announced on twitter the raising of tariffs against China from 10% to 25%, there was no immediate announced countermeasure by China, and the S&P 500 US share index fell by only 0.5% on the following day.
In contrast on 13 May China announced counter tariffs and the S&P 500 fell by 2.4% in a single day – costing US shareholders $700 billion as Larry Summers noted.
For the rest of the following week the Trump administration attempted to claim that trade talks would be resuming, and that Treasury Secretary Mnuchin would probably be visiting Beijing in the near future - the S&P500 recovered by 1.7%.
Having achieved this recovery in US financial markets President Trump then initiated a new attack on China by requiring US companies to have permission from the US government to sell components and software to Huawei.
China then responded to this strongly on 23 May. As the Wall Street Journal noted: ‘ The Dow Jones Industrial Average fell 286 points Thursday… after a Chinese official said the US should “adjust its wrong actions” if it would like to continue negotiations. The losses pulled the Dow industrials into the red for the week, continuing a dismal stretch as it hurtled toward its fifth straight weekly loss—which would be its longest such losing streak since 2011. ‘
In response to this fall on US financial markets President Trump then immediately softened his rhetoric by announcing at a press conference that there was a ‘good possibility’ that trade negotiations with China would get back on track and that issues with Huawei might be settled in that deal.
The short term pattern was therefore extremely clear. When there was no reaction from China, US financial markets did not fall, and Trump continued his aggression against China. When, on the contrary, China responded strongly, US financial markets fell and Trump attempted to present a picture he was lessening his attack on China.
In addition to these short-term movements analysed above the same process over a longer term also explains the dynamic of the ‘hardening’ and ‘softening’ of the Trump administration’s positions in the course of its negotiations with China.
During 2018, when the US economy was experiencing economic strengthening, during a normal upswing of a business cycle, and with a strong share market, Trump acted aggressively to China – launching the first set of anti-China tariffs and threatening to expand them to a wider range of goods and increase their rate to 25%.
Then in late 2018 the US economy began to slow, the Federal Reserve was raising interest rates, and the US share market fell. In response to this, at the beginning of 2019, Trump ‘softened’ his position – postponing the raising of US tariffs against China from 10% to 25%.
When the US economy appeared to recover in the first quarter of 2019, with the Federal Reserve suspending increases in interest rates, and the share market rose, Trump then announced new aggressive actions against China by raising tariffs from 10% to 25%.
This therefore clearly reflects the ‘lose-lose’ framework in which the Trump administration operates. When the ‘lose’ or ‘pain’ in US financial markets is not great the Trump administration proceeds to attack China. When, on the contrary, China’s reaction increases pain in US financial markets Trump acts more reasonably. That is, whenever the Trump administration feels in a stronger position it increases its attacks on China, whenever the Trump administration feels weaker due to the pain in US financial markets it acts more reasonably to China.
What is the Trump administration’s bottom line?
While the above clearly shows why the Trump administration will not respond to a ‘win-win’ framework, but only to economic pain, to avoid any misunderstanding it should be made clear that it does not lead to the conclusion that the US and China are locked in a ‘war to the death’. All the evidence is that President Trump is less interested in the long-term interests of the US than most Presidents. The precise economic pain which is unacceptable to his administration is that which would lead to endangering his re-election in 2020.
A relevant comparison which helps understand this dynamic is that is to a real war, not just a trade one, which the US lost – the Vietnam war. Vietnam’s tactics in this were skilful in that political impacts guided military goals. The two largest Vietnamese offensives of the war, the Tet Offensive in 1968 and the Easter Offensive in 1972, were launched in US presidential election years. Neither resulted in US military defeat but the political damage done to US presidents ensured Vietnam’s victory – Johnson was forced to abandon as hopeless any attempt to run for re-election as president after Tet, and Nixon was so convinced that his position as president would be threatened by the war that he started a progressive US military withdrawal after 1968 and decided on a total US withdrawal of US forces after the 1972 Easter Offensive. In short, the ‘bottom line’ for Vietnam’s victory against the US was not total military defeat of the US, which was never achieved, but inflicting such pain on US presidents that to safeguard their own position they were forced to withdraw. The military struggle in Vietnam was the means by which the decisive political victory in the US was achieved.
But the precondition for that US political defeat was the military struggle in Vietnam. If Vietnam had ceased inflicting pain on the US, both economic in terms of the gigantic cost of the war and in terms of losses of American forces, then the US instead of withdrawing would have increased its attacks on Vietnam. This can be clearly seen in the opposite case in which the US achieved a great victory – the destruction of the USSR. Gorbachev attempted to appease the US and beg for mercy. The US did not lessen but increased its attacks as a result - culminating in the catastrophic disintegration of the USSR itself, characterised by Putin as ‘the greatest geopolitical catastrophe of the [20th] century’. After this tremendous defeat of Russia this again did not lead to a lessening but to further intensification of attacks on Russia by the US – incorporating almost all of Eastern Europe and large parts of the former USSR into NATO and launching of attacks on Russia’s position in its strategically decisive neighbour of Ukraine.
The strategic conclusion of the present US attacks on China fully confirms the important speech by Xi Jinping emphasising that ‘The most important thing is to do our own thing’. China has not been seeking a confrontation with the US, a lose-lose. On the contrary China has been seeking a win-win. But once the Trump administration embarked on the course of a lose-lose confrontation then such a struggle can only be won by China relying on its own strength. Sufficient pain must be inflicted on the Trump administration that it decides it is better to abandon the lose-lose. And the criteria by which it will judge whether the pain in the ‘lose-lose’ is bearable is the effect on its chances of re-election.
Fortunately, the present struggle is an economic war and not a real war. The ‘small arms’ in that economic war are not rifles and revolvers but tariffs against farmers and the subsidies these require, its medium weapons are consumer boycotts, its heavy artillery are such issues as the impact on US financial markets analysed above. It is a measure of the gigantic historical progress made by China since 1949 under the People’s Republic that it now only has to deal with economic attacks by the Trump administration – for a century before that China had to deal with actual military invasions.
The sacrifices made by the heroes of the Long March were far greater than anything the people of China face today in the economic attacks by the Trump administration – a situation of the strengthening of China that was precisely due to those earlier heroes. But the comparisons made by Xi Jinping to the Long March are entirely apposite and not at all merely references to the CPC’s historical tradition.
The Kuomintang’s Fifth Encirclement Campaign, the origin of Long March, was designed by the KMT to destroy and annihilate the forces opposing it – why it is also called the ‘Fifth Extermination Campaign’. It was purposeless to have attempted to appease or beg for mercy from the KMT, which was determined to destroy the forces which later created the New China. Any appeasement, or appeal for mercy, would have been met by the KMT crushing and massacring the forces they opposed. Only resistance to the KMT created the possibility to later create the People’s Republic of China and lay the basis for China’s national rejuvenation.
Similarly, the Trump administration is determined to block China’s national rejuvenation. As already shown, there is no point to attempt to appease it or beg for mercy from it, this will merely lead to it becoming more aggressive. The ultimate aim of the neo-cons at present directing the Trump administration’s policies is to block China’s national rejuvenation and the final way to ensure that is to ensure that that China should suffer the same historical catastrophe as the USSR under Gorbachev.
Early last year I made a comparison to the polices of the US under the Trump administration as those of a tiger – there is no point to ask for mercy from a tiger, it will only attack you more, and it will also regard any sign of weakness as a further reason to increase its attack. Only if the tiger is scared will it stop its attack. Some people thought that comparison was very harsh. But the facts as shown above show it was totally accurate.
Who is the ‘elite’ of Chinese society?
Finally, as can be seen clearly from outside, it is particularly important that recent articles refer to the ‘social elite’ in China – perhaps also parts of the economic elite. Because sometimes there is a reference in China’s media to the ‘elite’ in an undifferentiated sense. Recent events show clearly why this is incorrect. Analysis in China shows it is ordinary people who have understood the aggressive actions of the Trump regime and supported the firm positions against this taken by President Xi Jinping and other CPC leaders.
It is some parts of the ‘social elite’ which have entirely misunderstood the situation and believed that appeasement and appeals for mercy would lead to the Trump administration lessening its attack on China. The latter forces are the exact opposite of an ‘intellectual elite’ – because to be an intellectual elite means to see the situation accurately and, as seen, they are entirely in error. It is the ordinary people of China who have shown they are the ‘intellectual elite’ in accurately understanding the Trump administration and supporting the positions taken by the CPC leadership. Those who wrongly analysed the situation may or may not be a social elite but they are an intellectual ‘non-elite’ – those who fail to see the situation accurately and have naïve illusions.
The analysis of the situation of the US economy and financial markets therefore fully confirms the analysis made by others of the situation in China.
It shows why the Trump administration cannot be dealt with on the basis of ‘win-win’.
It shows that within the ‘lose-lose’ framework of the Trump administration the situation on US financial markets is such a key point of pressure.
John Ross is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.