Oncoming Recession and the Chinese/US Trade War

So, it’s been a long time since the last recession and indicators are turning negative. While this is never a science, odds are good for a recession in 2020 or early 2021 in the United States.

This is not due to the China/US trade war, but that conflict will make things worse. There is an argument for what Trump is doing. However, even if this has overall good effects for the US, in the long run there are significant dislocation costs when moving production back to the US and there are always going to be losers, because the US does sell a lot to China even if it has a trade deficit, and those people will lose markets. (Hello, soybean farmers!)

Meanwhile the Chinese are ratcheting up their rhetoric. Multiple newspapers have suggested embargoing rare-earths to the United States and this seems like a near certainty if there isn’t a deal soon.

Rare earths exist other places than China, but China has been able to mine them more cheaply than anywhere else, so no one has bothered to create significant production, as it isn’t profitable. China produces 80 percent of rare earths. So, if there is an embargo, other sources can be developed, but that will take time: again, dislocation costs.

The last time a rare-earth embargo happened, I noted that it was insane to have only one country producing all rare-earths and that sensible policy would subsidize production somewhere else just to avoid this scenario. But modern trade rules make subsidizing production of most items (except agriculture and defense) essentially illegal, so we have to wait for a crisis to do the sensible thing.

Chinese rhetoric around the trade war has become very serious, with the People’s Daily newspaper (official Communist newspaper) writing:

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” …The expression “Don’t say we didn’t warn you!” is generally only used by official Chinese media to warn rivals over major areas of disagreement, for example during a border dispute with India in 2017 and in 1978 before China invaded Vietnam.

I’m going to discuss the oncoming new trade-era more in the future. For now, note that this isn’t just about Trump. Moves in this direction had already started under Obama (the Trans-Pacific Partnership was meant to isolate China).

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

What is different about Trump is that he prefers unilateral negotiations to multilateral (WTO) or plurilateral (a few countries).

This is not stupid. Out of anyone in a singular deal, the US will always be the stronger partner. It prevents other nations from ganging up on the giant, and trying to use numbers to make up for their weakness.

The US can almost always inflict more damage on any one other nation than that nation can on the US.

Again, not stupid; entirely rational and good negotiating tactics.The larger issue is that the US is, itself, dismantling a trade order created, largely, by the US. That trade order had significant disadvantages for the US working and middle classes, but it also was to their advantage geopolitically. The US chose who could industrialize or re-industrialize (its allies – Taiwan, Japan, Germany, South Korea), and so on.

This worked well for the US (not so much most other people) until the Americans got stupid and greedy under neoliberalism. Then, the US corporate class, looking at China, lost their heads: Especially as China went out of its way to make sure that various Americans made a lot of money helping China industrialize.

The difference, of course, is that China is the world’s natural leading power. Has been for most of the last two thousand years. China would be an actual competitor with the US, if it was allowed to get back onto its feet.

And it was.

As a Canadian, I have a dog in this fight. Canada is an American subject state, and we’ll be on the US’s side, because we won’t have a choice. Nor am I particularly a fan of how China is run.

But this is the cycle of great powers. There is always a new challenger, and the old Hegemon always resists (and is virtually always in a late Imperial stage of incompetence and corruption).

When giants clash, ants (you and me) are advised to beware.

Make money now, before the recession, if you can. If your income or wealth is tied to trade, try and mitigate your exposure.

Meanwhile, we may as well enjoy the show.