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U.S. Decoupling From China Forces Others To Decouple From U.S.
The U.S. is decoupling itself from China. The effects of that process hurt all global economies. To avoid damage other countries have no choice but to decouple themselves from the U.S.
Today's Washington Post front page leads with a highly misleading headline:
The headline above the article is also wrong:
Trump retaliates in trade war by escalating tariffs on Chinese imports and demanding companies cut ties with China
It was China, not Trump, which retaliated. Trump reacted to that with a tweet-storm and by intensifying the trade war he started. The piece under the misleading headline even says that:
President Trump demanded U.S. companies stop doing business with China and announced he would raise the rate of tariffs on Beijing Friday, capping one of the most extraordinary days in the long-running U.S.-China trade war.
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The day began with Beijing’s announcement that it would impose new tariffs on $75 billion in goods, including reinstated levies on auto products, starting this fall. It came to a close Friday afternoon with Trump tweeting that he would raise the rate of existing and planned tariffs on China by 5 percentage points.
Beijing’s tariff retaliation was delivered with strategic timing, hours before an important address by Powell, and as Trump prepared to depart for the G-7 meeting in Biarritz.
After Trump's move the stock markets had a sad. Trade wars are, at least in the short term, bad for commerce. The U.S. and the global economy are still teetering along, but will soon be in recession.
The Trump administration is fine with that. (As is Dilbert creator Scott Adams (vid).)
U.S. grand strategy is to prevent other powers from becoming equals to itself or to even surpass it. China, with a population four times larger than the U.S., is the country ready to do just that. It has already built itself into an economic powerhouse and it is also steadily increasing its military might.
China is thus a U.S. 'enemy' even though Trump avoided, until yesterday, to use that term.
Over the last 20+ years the U.S. has imported more and more goods from China and elsewhere and has diminished its own manufacturing capabilities. It is difficult to wage war against another country when one depends on that country's production capacities. The U.S. must first decouple itself from China before it can launch the real war. Trump's trade war with China is intended to achieve that. As Peter Lee wrote when the trade negotiations with China failed:
The decoupling strategy of the US China hawks is proceeding as planned. And economic pain is a feature, not a bug.
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Failure of trade negotiations was pretty much baked in, thanks to [Trump's trade negotiator] Lightizer's maximalist demands.
And that was fine with the China hawks.
Because their ultimate goal was to decouple the US & PRC economies, weaken the PRC, and make it more vulnerable to domestic destabilization and global rollback.
If decoupling shaved a few points off global GDP, hurt American businesses, or pushed the world into recession, well that's the price o' freedom.
Or at least the cost of IndoPACOM being able to win the d*ck measuring contest in East Asia, which is what this is really all about.
Trump does not want a new trade deal with China. He wants to decouple the U.S. economy from the future enemy. Trade wars tend to hurt all involved economies. While the decoupling process is ongoing the U.S. will likely suffer a recession.
Trump is afraid that a downturn in the U.S. could lower his re-election chances. That is why he wants to use the Federal Reserve Bank to douse the economy with more money without regard for the long term consequences. That is the reason why the first part of his tweet storm yesterday was directed at Fed chief Jay Powell:
In his order for U.S. companies to withdraw from China, some close to the administration saw the president embracing the calls for an economic decoupling made by the hawks inside his administration.
The evidence of the shift may have been most apparent in a 14-word tweet in which Trump appeared to call Xi an “enemy.”
“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” he said in a Tweet posted after Powell gave a speech in Jackson Hole that contained implicit criticism of Trump’s trade policies and their impact on the U.S. and global economies.
Jay Powell does not want to lower the Fed interest rate. He does not want to increase bond buying, i.e. quantitative easing. Interest rates are already too low and to further decrease them has its own danger. The last time the Fed ran a too-low interest rate policy it caused the 2008 crash and a global depression.
Expect Trump to fire Powell should he not be willing to follow his command. The U.S. will push up its markets no matter what.
From Powell's perspective there is an additional danger in lowering U.S. interest rates. When the U.S. runs insane economic and monetary policies U.S. allies will also want decouple themselves – not from China but from the U.S. The 2008 experience demonstrated that the U.S. dollar as the global reserve and main trade currency is dangerous for all who use it. Currently any hiccup in the U.S. economy leads to large scale recessions elsewhere.
That is why even long term U.S. ally Britain warns of such danger and is looking for a way out:
Bank of England Governor Mark Carney took aim at the U.S. dollar's "destabilising" role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.
The dollar's dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole, Wyoming, in the United States.
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Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.
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China's yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready.
The best solution would be a diversified multi-polar financial system, something that could be provided by technology, Carney said.
Carney speaks of a "new Synthetic Hegemonic Currency (SHC)" which, in a purely electronic form, could be created by a contract between the central banks of most or all countries. It would replace the dollar as the main trade currency and lower the risk for other economies to get infected by U.S. sicknesses (and manipulations).
Carney did not elaborate further but it is an interesting concept. The devil will be, as always, in the details. Will one be able to pay one's taxes in that currency? How will the value of each sovereign currency in relation to SHC be determined?
That the U.S. dollar is used as a global reserve currency under the Bretton Woods system is, in the words of the former French Minister of Finance Valéry Giscard d'Estaing, an "exorbitant privilege". If it wants to keep that privilege it will have to go back to sane economic and monetary policies. Otherwise the global economy will have no choice but to decouple from it.
I’ll make one comment in two parts.
PART 1
There’s no need to take sides here.
In the capitalist world, any given country needs two conditions in order to be the world’s superpower: industrial superpower and financial superpower. Think of it as the world of boxing: you have to have two belts in order to be considered the undisputed world champion.
In 1945, when Western Europe was on its knees, the USSR had just lost an estimate of 35% of its GDP and China was just restarting its civil war after a century of devastation, only the USA had its economy intact. That meant the USA was, in 1945, both the industrial and financial superpower. The only thing that stopped it from being the world’s superpower was the fact that the USSR managed to block access to a good portion of the globe, and the fact that China would be closed for the capitalists for more than 30 years.
In 1972, China was opened. In 1974-5 there was the oil crisis, which would, in hindsight, strip the USA from its industrial superpower status. But the problem, before that, wasn’t the USSR, but two small countries that lost the war: Germany and Japan.
The (re)rise of Germany and Japan is a telltale about the nature of capitalism, and why unipolar worlds are, in the long term, impossible in capitalism under a Nation-State configuration. Let’s talk about it.
In 1948, the Marshall Plan was passed and executed. With it, Western Europe was revived. But why did it work? Simple answer: the plan paid Western Europe in USD. Since the USA was the only industrial superpower in the capitalist world at the time, that meant the ravaged Western European countries could, with American currency, buy excess American industrial capacity to rebuild themselves.
Japan didn’t receive funds from the Marshall Plan, instead, it received the Dodge Plan, which was reverse Marshall Plan, and possibly the first documental evidence of what we would call today “austerity”. It was a monumental failure: there was a series of strikes in 1948-9, and the plan was quickly withdrawn. Japan’s redemption would only come one year later, with the Korean War. With the Korean War, American bases were installed on Japanese soil, and, with it, more than USD 1 billion (which was a fortune at the time, more than what, e.g. Germany, received through the Marshall Plan) was injected in Japan. The country was saved by an accident of History.
So, how did the USA exerted absolute power over the capitalist half of the world? We can visualize it clearly here: the other countries had to buy from the USA in order to rebuild and reindustrialize. For that, they needed USD. That, on its part, reinforced its financial sector and the US’s Treasury bonds (sovereign debt). In exchange, the USA could simply dictate the other countries’ foreign policies (see the Suez fisco for a very illustrative case).
But it is not possible for a country to be the industrial and financial superpower forever in the capitalist system: as the other countries reindustrialize, the amount of value on them also increases. That makes their trade accounts turn positive (i.e. “black”). If one’s trade account is positive, then that means another country (or countries) must be negative. As other countries begun to be awash with Dollars, they begun to be able to buy things with them not only from the USA, but also from each other. The Dollar weakened, but American exports didn’t become necessarily cheaper: the USD was now the standard world currency.
Since the Dollar didn’t weaken from the trade point of view, the USA begun to bleed out in this front: German and Japanese cheap industrialized goods begun to dominate. Then, as industrial competition begun to saturate, commodities also begun to get more expensive. The oil crisis of 1974-5 just wasn’t worse for the USA because it hurt Germany, Japan and, specially, the USSR more.
By the end of the 1970s, the American economy had clearly reached a point of exhaustion. After an agonizing double-dip crisis in 1980-2, the Plaza Accord of 1985 finally bring German and Japanese ascension dreams to an end — but it also buried the American ambition to continue to be both the industrial and financial superpowers. The USA was now only the financial superpower.
But even then, how did the USA manage to keep its proeminence? Well, one important factor was that, albeit Germany and Japan were industrially strong, they were small: there comes a point where scale is decisive. But another very important factor was China: after 1972, the US industrial elite begun to outsource its manufacturing infrastructure to China, in order to enjoy its huge population. Since China was a Third World country, it imposed no immediate threat to the USA.
The post-1972 world then had a sole superpower (in the capitalist world) that actually was a binary system: USA with the financial, China with the industrial titles.
After the fall of the USSR (1991), the Eastern European markets were open and its assets sacked. This gave the USA little bit more time, roughly correspondent to the Bill Clinton governments (1993-2000). But it was only that: borrowed time.
[End of part 1].
Posted by: vk | Aug 24 2019 21:41 utc | 27
PART 2
This part is dedicated to why the capitalist world behaves like it does since the post-war.
Contrary to other mercantile systems (e.g. Late Bronze Age, Antiquity), capitalism has a novelty: the capitals’ account (the “financial part”).
That happens because capitalism is the first system capable of putting production under unconditional command of commerce. To put it another way, people work (i.e. produce) in order to sell, not to consume the produce themselves. The “world (free) market” therefore determines what is produced, under what conditions, and by how much.
How does it happen? By reducing human labor to the form of abstract labor (i.e. labor in general, as a substance). This “substance” is value. With value, you can transform any labor in a quantitative form. This quantitative form is time. But you can’t exchange time, and, even then, time oscillates: some workers are faster than others, or work under more ideal circumstances. The solution to this is money: money is a historically determined commodity which is “elected” as a universal means of exchange. It is stripped from its original use (“retired”) and is ascended to the post of being useful only as money. Money is, thus, the universal commodity, the commodity whose use is serving as being the one capable of being exchanged for any other commodity.
By reading this quick explanation, you must be asking? Where are the Nation-states in this story? Well, the fact is, capitalism doesn’t need Nation-states to exist. Not only that, but, in the long term, Nation-states are prejudicial to capitalism. It’s goal is what Marx called the “world market”; to that, Nation-states are an obstacle.
Why then do Nation-states exist? Simple: because that was the concrete political reform the bourgeoisie found to topple feudalism. That, and the technological limitations of the time (which exist until our times). They had to swallow reality and try to build the “world market” through Nation-states. Call it “really existing capitalism” for ironic purposes, if you want.
The USA is a Nation-state that issues the USD, which is the universal fiat currency of the post Bretton Woods era. But the USA is still a capitalist Nation-state in a capitalist-dominated world. That means its tendency is still to form the world market, not to be a self-sustaining fief.
So, it is the Nation-state that is responsible to — in the context of the world market — produce the most valuable commodity in capitalism: money.
If you produce money, you don’t have, from the capitalist point of view, the need to produce anything else: money transforms into any other kind of commodity (fetichism of the commodity, alienation of labor). Americans can simply print money in order to import whatever they need to survive. It’s up to the rest of the world to sustain its value, since they need USDs to make international trade. That’s why the USA is the only country in the world that doesn’t suffer from inflation when it prints money; instead, the crisis breaks at the weakest link of the trade chain (usually, a Third World country).
But the price is deindustrialization: as the USA imports increase, it becomes cheaper to produce anywhere else (as in “another country”). And even that can only go insofar as the rest of the world doesn’t break (i.e. until the Third World can sustain it).
The 2008 crisis was impressive not because it was a financial one, but because it had its epicenter at the USA (as in opposition of at another random Third World country, as was the case of 1997). 2008 was a structural, not a cyclical, crisis.
The system itself broke. 2008 only didn’t collapse the USA because the Fed acted quickly and essentially ransacked the American people in order to keep the big banks et al afloat. There was some allocation to Third World countries (such as Greece), but the overall effect was limited. The capitalist part of the globe is now effectivelly a zombie economy: the First World countries can’t rise the interest rates because that would bankrupt their precious big corporations; but they also can’t lower then anymore because they are already essentially in negative territory.
This left us with China. Why didn’t China go down in 2008? The answer is equally simple: because it is not capitalist. Needless to say, Cuba and North Korea were also left unscathed by the 2008 meltdown.
[End of part 2].
Posted by: vk | Aug 24 2019 22:10 utc | 32
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