On China

 

As of 2019, China is the second largest economy or the largest if adjusting to the purchase power. China lacks a lot of natural resources and farm land and hence global trading is more important than us. China could have a recession in 2020 due to the trade war with the U.S. and her high debts in many levels could explode. It would affect all the global economies if it happens.

 

I expect China’s GDP would be 5.8% in 2020. With the high cost of offshore drilling, the islet disputes with her neighbors would be reduced. However, invasion of Taiwan could happen. That’s the reason I have several articles on China.

1          Can China say No to us?

 

In the last decades, Japan and some oil-rich countries could not say “No” to the USA, but China can to some extent and definitely can in 10 years.

 

China needs our farm products, jets together with Airbus, core technologies such as memory in the mobile phones, etc. We need China for their low-cost consumer products, rare earth elements, market for our global companies and buying our debts.

 

Being the major players in the global economy, a full-fledged trade war with China would mean global recession and actually we would lose more than China. A military war would likely cause market crashes starting in the US and Asia.

 

Today’s China is not your Daddy’s China

 

China is not as strong as the US, but the gap has been reduced in the last 30 years, and at that time China could not build a reliable bicycle.

 

China lacks natural resources that she can obtain from many countries. China can get many high tech products from EU and Russia such as jet planes and agricultural products from many countries including SE Asia and Australia. At the meantime, Chinese are advancing their products. China no longer is export-oriented. Basically it is moving to a developed country with higher-value products. With its huge internal market, Chinese can manufacture products cheaply due to the economy of scale.

 

China’s rise is primarily due to the USA playing China card against Russia and now the US plays India (and possibly Taiwan) card(s) against China.

 

Let’s examine some critical factors in this book starting with a little history. In about 250 years ago, the alliance of 8 nations forced China to trade. When China refused, they enforced it with battle ships and cannons. When the Brits had nothing to trade, they pushed opium obtained from India and killed millions of Chinese. The alliance asked for ‘damages’ that bankrupted China and led to the national humiliation for China. The US was generous to use the money to fund Chinese foreign students to the US. They returned and modernized China.

 

What if China withdraws all the debts we owe?

 

It would lead to the global depression starting in the US. It is too obvious and I go no further. China is one link in the global economy. It will survive without our trades. A full-fledged trade war would hurt us more than China. Our trading competitors are EU countries, not China as we produce similar products such as airplanes. China would be more cautious in lending us money and/or buying US properties/companies. As of 1/2017, China was demoted to #2 in US debt holder. Unlike businesses, creditors have no weight in our political decisions.

 

Chinese is still buying our Treasuries for their interest. If they stop, the interest rates would rise and it would cause a housing recession. As of Jan., 2016, our debt to China is just over 1.05 trillion, or about 28% debts held by foreign countries.

 

How about the deficit with China

 

We had about $347B in trade deficit with China in 2016. A lot of products such as Apple’s iPhones are counted as import. We’re a victim of our own success: A higher living standard means higher wages, more protections to our workers and more regulations for our environment. Our strong USD reduces the competitive edge of our export. However, we need China to take out the obstacles to our products. To illustrate, most of our consumer products cost a lot more in China than similar local products.

 

Modern warfare

 

Modern warfare is different from the 60s. We need better cyber security for both the government and the corporations. We need to fight against terrorists in our own soil.

We have enough nuclear weapons to destroy the entire world. N. Korea is not a nuclear threat unless the guy is really crazy and we drive him to the cliff. We do have to replace the 5" floppy disk though – it could be a security protection.

Aircraft carriers are a drain of the budget. It will not be useful as in the old days. They are sitting ducks for the carrier missiles... Why we need carriers with dual nuclear generators? In addition, China’s missiles can destroy GPS satellite which our guided missiles depend on.

 

China has modernized its arm forces via development, acquisition and espionage. China produces cheaper military drones, which have been tested in the Middle East. China has mastered stealth technology in their jets and submarines; the technology could be stolen from us. China becomes the largest export on the military drones due to low prices and no questions asked.

 

To conclude, China’s military might is not that primitive and not that advanced as proposed by our offense vendors who want to sell their weapons. By quality and quantity, today China cannot compete with the US in military, but she is improving enough to defend her territory.

 

We cannot afford another war

 

The two wars in Middle East have been draining our resources. We’ve been broke. We will become a real paper tiger when the wars continue for another ten years.

 

Obama’s administration saved the market at the expense of our national debt which is at its recent height. Our competitive edge will be reduced by servicing the debt instead of investing on profitable projects such as infrastructure. The debts will be paid by our children and grandchildren who do not have a voice today. Are we following the footstep of Greece? We complains on Chinese military buildup without mentioning our military budget is more than the total of the next five countries not including China due to unconfirmed data.

 

China, the victim

 

China has not been an aggressor to foreign countries in her entire history. The last conflict is a brief war with Vietnam in 1979 to teach her former ally a ‘lesson’ and lessen the Russia influence in the region. China had no choice in the Korean War and she benefited by getting rid of the former Chiang’s soldiers. The war with India was a joke as China could win it by redirecting the water flow from Tibet. China’s involvement in wars is relatively less compared to our endless participation in wars.

 

In Roman time, China was as strong as Rome, but they very seldom colonized any country as opposed to the Roman. In around 1420, Zheng He’s fleet was far larger in size and number than Columbus’s and they just wanted the foreign countries to pay annual tributes and for that they received compensations in return. It contrasts significantly with Columbus. During Tang dynasty (about 674), China was world power. They have not conquered and colonized any country.

 

For the last three centuries starting from the Opium Wars, China was the victim of aggressors. Actually the two dynasties of the last three were ruled by foreigners before Mao included these ‘barbarians’ as part of the Chinese minorities.

 

The late Deng X. P. said that China would recover most its lost territories in 100 years: many islets in South/East islets, Outer Mongolia (a buffer zone created by Russia), many farm lands from Russia… The boundary line between India and China was drawn by a British general favorable to India.

 

Why we identify China as an aggressor? Even they steal our intelligence properties due to our lack of protection - it is not the reason to start a war that would hurt us more.

 

Triggers

 

They could be China invading (or ‘reuniting’) Taiwan and the islet disputes in South/East China Sea. When China is richer and stronger in 50 more years or so, the national pride will drive China to reunite with China. Hopefully it will be achieved economically rather than militarily. Without the US’s full support of Taiwan, it would not be a tough job.

 

When the economy tanks, the US government would have to redirect our attention to other areas such as blaming China. Today we cannot as more jobs are replaced by lower-wage countries, not China. The job loss is also due to robots and less demands from the consumers since 2008.

 

China say “No” as the priority of political stability is more important than a trade war.

 

Will Chinese wake up and fight against the government?

 

It is the common thought of the China bashers. Most Chinese will not as most are busy in making money. After they taste the fruit of capitalism, no one is stupid enough to fight against the government and they learn the bitter lesson from Tiananmen Square incident.

 

Our investment in China

 

Currently, GM has about 25% profit from China and Ford has 16%. They will be replaced by cars produced in Europe and Asia. The first victim could be Boeing when China can buy jets from EU; it is worth more than $1 trillion in the coming 20 years. Walmart’s products will skyrocket in prices reducing the buying power of the low-income citizens.

 

Apple is a good example among many high-tech companies. Can Apple move their manufacturing back to the US to eliminate the 35% to 45% proposed tariff?

 

How can they find enough rare earth elements for their phones? They are available but most cannot be mined without damaging the environment. Many of these mines outside China were bankrupted. How can they motivate an army of educated workers for a new model with slavery wages and unions? It is easy to collect the generous welfare than working in these monotonous jobs. How can we get 40,000 technicians? How can Apple move all the component manufacturers from China? What is the impact on Apple in losing the China market (131 million iPhones vs. 110 million in US in 2015)?

 

One solution is to manufacture the individual parts in China and has the final assembly here in the USA with a label of “Made in USA” even the label is made in China.

 

Counting friends and enemies

 

The US used to have a lot of friends and formed powerful allies with them. When the allies embargo a country, they’re successful. However, our relationships with many of our allies are changing. Russia is not our enemy now and we have avoided some of the conflicts by not participating in actual wars. Russia is an important trade partner of China. Israel, our important ally, has been arguing with our political decisions more frequently than before. China is building two modern silk routes: one by sea and one by land to connect Asia, Africa and Europe better. The US has little use for these routes.

 

Strange relationships

 

The chess masters are the US, Russia and China. Japan, N. Korea, Taiwan, Philippines, India, SE Asia countries, Israel and EU are the chess pieces. The US and Japan are friends and both want to ‘contain’ China. Russia and China are trade partners with advanced weapons. Trump seems to be friendly with Russia to build a partnership. However, if we have any war, Russia will be sided with China, but we cannot count on EU now. Many EU countries are busy in fixing their economies and some do not want us to be our puppets. They just want our contributions to their defense. We should be reminded we have a hard time to end a war. When we do not learn history from Vietnam and the Middle East wars, we will repeat history. Why we should always find an enemy?

 

The US used to play the China card against Russia and attributed to China’s rise by taking out the embargo. Now, it tries to play Russia card against China. This is another example of “my enemy’s enemy is my friend”.

 

Being a US citizen and born in Hong Kong, it will be my saddest day if there is a war which is predictable as unavoidable by many. I hope it will not happen in my life time.

 

Investors have to watch the development of the possible conflict. The only winners are offense sector and precious metals. The recent news of capturing of a submarine drone drove the market lower. What will the market react when there is a military war between the two countries?

 

I have different feed backs from readers with different backgrounds. Being born in Hong Kong, I’m naturally biased.

 

Afterthoughts

·         Taiwan bought a lot of weapons from us including the state-of-the-art fighter jets such as the $1.83 billion of military arms in Dec., 2015. We did not allow Russia to install missiles in Cuba and we clearly know the purpose of these fighter jets. I do not think China is over-sensitive. It provokes them to spend more in defense.

·         The US has been spending too much in defending other countries such as Japan, EU… We have too many problems to fix at home.

·         Trade wars between the countries have been started many times and both sides lose.

·         Most Taiwanese are those who retreated with Chiang after losing the civil war and their children / grandchildren.

·         Taiwan’s economy did not catch up with S. Korea primarily due to spending too much on defense, corruption as in most Democratic countries in Asia (have you heard of T.V. Sung?), mal governance…

·         China is Taiwan’s top trade partner (40% of its export).

·         Taiwanese are educated together with Cuba and Philippines. The difference is Taiwan has better living standard. I can attribute this as the other two do not have enough natural resources as explained in my Coconut Theory.

·         China has never expressed to be #1, but the US always does. That’s why we have the endless wars.

·         The recent Trans-Pacific Partnership tries to exclude China while China has its own partnership open to all. The hidden agenda is using the country’s currency as the reserve currency.

·         The Chinese maritime power is effective to defend its own shore, but not enough to secure the oil route; I estimate about 8% of current foreign oil from this route. With the aircraft carrier, China can invade (or reunite) Taiwan and the ‘lost’ territories in South / East China Sea easier.

·         I believe in “love over war” and also in free trade if both sides play it fairly.

·         Chinese accomplishments in 2016.

·         Here are nice articles on Trump and trade balance.

http://www.vox.com/latest-news/2017/1/19/14176896/china-facts-trump

https://www.thebalance.com/china-s-currency-the-yuan-or-renmimbi-3305906

·         Comparing US and Chinese military. Chinese PLA has shrunk from more than 3 to about 2.3 millions. Per capita China is less than the US.

http://www.businessinsider.com/chinese-us-military-comparison-2016-8

https://warontherocks.com/2016/05/how-good-are-they-the-latest-insights-into-chinas-military-tech/

http://www.cnbc.com/2017/02/04/new-york-times-digital-chinaas-intelligent-weaponry-gets-smarter.html

 

2          The rise of China

 

Almost every rise of a nation has harms and benefits to the world and the rise of China is no exception. I bet China’s rise has more benefits to the world than harms. China’s rise is natural considering its huge population of 1.38 billion. Around 1800, it produced a third of the global GDP. The Great Wall had done a good job to keep the northern barbarians away so was the ocean from Japan until the last three dynasties. Today and even in the near future, China will not be a leader in politics, military, technology and culture compared to the US. She will be leader in trading due to China’s needs to import energy, other natural resources and agricultural products and export higher-tech products at prices far lower than the West/US.

 

Harms

 

From recent history, the rise of Germany led to World War II. Britain’s Industrial Revolution and the advances of weaponry led to the semi colonization of China about 180 years ago.

 

In another 50 years, I suspect China’s military might be strongest in its territory but not as strong as the US. At most, China will use her might to reunite with Taiwan. Taiwan, under Chiang Kai-shek, wanted to invade China to reunite and used to have meetings with the ‘governors’ of every Chinese province.

 

Hopefully, the islet disputes with its neighbors will be settled diplomatically. China’s leaders have repeated they will not be “Ba” (roughly translated as #1 bully or #1 policeman). No one can predict that far away. However, currently China has a policy of non-interference and does not expect other countries to interfere her internal affairs. She does not have much military alliance so far. With today’s low price for oil, drilling is not economically feasible and the world is moving to green energy. Hopefully we allow all conflicted countries to fish in the disputed areas.

 

Economically, it will compete with the US and the west in all sectors. Many developed countries will lose their current financial strongholds if they do not adapt. Since its trade is already the largest, its currency could eventually be the reserve currency. When we concentrate our effort on military, we pay less attention to economic.

 

Despite the younger population, India will not fare well with China’s rise. Both have similar problems with a huge population to feed and shelter. India’s protectionism does not allow the country to concentrate on innovation and quality to be competitive. China’s friendship with Pakistan does not fare well with India.

 

With the growing wealth, Chinese is eating better and using more resources of the earth. China is solving the energy crisis. She has signed contract on new natural gas with Russia that would not change the world current supply. China is also exploring green energy sources.

 

Poor countries find it is hard to compete with Chinese in farm products and energy products. China has about 10% of farm land but a 20% population. Many in these countries are supposed to starve as a lot of farm products are moved to China. I bet the high fertility rate is harmful for these countries and low wages will not fix their problems. With the severe climate, farming will be adversely affected. Hopefully, farming technologies and seed technologies would change the equation for the better.

 

Benefits

 

There are many and they should outweigh the possible harms. Here are some examples and some have happened already.

 

About 250 years ago, China was semi colonialized by the US, the west and Japan and was bankrupted after paying all the unfair treaties. In the 1950s, China could not build a reliable bicycle. China started late but the progress especially in the last 30 years has been amazing. Chinese learn the lessons: They have to be strong in all areas: economics, science, weapons...

 

China graduates more college students than any other country especially in science and technology. In most cases, China has been run by engineers whiles our country has been run by lawyers. China invests in technologies such as space exploration. China invests in infrastructure projects than any other country such as owning more than 60% of high speed rail of the entire world. China invests more and consumes less that leads to a better future but also excess capacity. Here are some examples.

 

·        Medicines will benefit the world. If you need a drug to save your life, do you care whether it is from the US or from China? With its fewer restrictions in drug development and the government subsidies, I bet China will be the front runner in this field. It is a question of when and not why.

 

·        Public health. Hong Kong is the frontier in many medical procedures and inventions. It is one of the top cities if not the only one that has experience to conquer the bird flu. A city of 7 million citizens can contribute that much - imagine what a country of 1.35 billion can contribute.

 

·        Shenzhen is the Silicon Valley of the East or the Silicon Valley will be the Shenzhen of the West in 20 years. To illustrate, the drone was arguably invented by a Hong Kong student and assembled in Shenzhen. It has most the components available within 30 miles area. Besides the innovation, these high-tech products can be assembled fast and cheap.

 

·        Cheap consumer products. They benefit even the poor in the US.

 

·        Many corporations such as Walmart take advantage of China’s low-cost products. Many high-tech companies such as Apple become wealthier to take China’s advantage.

 

·        Many poor countries copy China’s model successfully while some fail.

 

·        “One Belt, One Road” Initiative. It would make a lot of neighbor countries wealthy.

 

·        The world especially the poorer countries will benefit from China’s advancements. China benefits by learning the US and the West’s technical advancements. Now, China has some pioneer technologies including mobile, infrastructure… One example is the earthquake warning system.

·        The world including China has enjoyed our culture via movies and music. We will enjoy Chinese culture more than today.

 

·        China did not ask for foreign aids from the recent natural disasters. Imagine 20% (a little less today) of the world population begged for money.

 

·        China has aided many poorer countries such as Pakistan and many African countries to build their infrastructure.

 

Neutral

 

·         Weapons. From the centuries of humiliation, I do not blame China to invest in weapons. It helps China to defend herself from foreign invaders. China also exports to many developing countries who can only afford to the second-hand weapons. If they are used to defend themselves, it would be a benefit to the world but not for invasions.

 

Summary

 

China has to adapt to its rise, so are other countries particular the US. The balance of power will be changed and the eventual excess of capacity should be used for peace. We have to learn from the fall of China about 250 years ago and the rise of Germany during the WW2.

 

It is dangerous for us to isolate China. We should understand Chinese culture as they understand ours.  We should not use our standards to judge China or any other country as China should not use their standards to judge us. Our politicians should not use China to buy votes.

 

If China and the West do not adjust to each other, we will have economical conflicts that would lead to wars that the entire world cannot afford.

 

Links

 

Technology dominance (First of Part 3, Computer; great but a little pro-China to me). China still lags behind the US in many sectors. US has the benefit of immigration of many top scientists/engineers. Search for “China Technology” under YouTube such as this one and this one, and you should find many. Military link. Space link, 2.  Economy 1  2 3 4. General 1 2 3. Diplomat magazine (many articles). High Speed Rail 1 2.

 

China should develop public transportation more than cars. Local brands in China can only compete in low prices that have thin profit margins. EVs can only be popular in China when they have enough fast charger stations and/or better batteries. Most Chinese live in apartments.

 

 

#Filler

 

3          Shenzhen

 

Let’s start with a video from Professor X. Click here or type the following in your browser:

https://www.YouTube.com/watch?v=SGJ5cZnoodY&t=923s

 

Shenzhen has become the Silicon Valley of the East, or in the next decade we would say the US’s Silicon Valley is the Shenzhen of the West.

 

If you bought all the stocks in the Shenzhen Exchange, you could be very wealthy and there is no need to read my books on investing.

 

For example, it would take 9 months to assemble a new product but only 3 months in Shenzhen as most of the components are readily available next door or in the next street. Shenzhen’s advantages are no longer tax credit and cheap labors (but highly-trained Chinese technicians, engineers and researchers). Many tech companies from over the world come to Shenzhen to set up shops in order to be successful.

 

There are many high-tech products from Shenzhen and they’re sold all over the world. Unless you’ve been living in a cave for the last 10 years or you are blinded by your dumb nationalism, you should know China is catching up with technology, science and infrastructure.

 

Under Deng’s vision, Shenzhen has become one of the (if not the) wealthiest city in China.  Your home work is to study the many articles on Shenzhen starting with Wikipedia or enter the following in your browser.

https://en.wikipedia.org/wiki/Shenzhen

Extra credits. There are several other YouTube videos on this amazing city. Why copying the current technology to make it better or using it for a new product is creative and profitable? Any other countries copy Shenzhen's model and will they be successful? Do you agree from the video that open source encourages copying technology without compensation? What does our 9-year old most likely do with no homework? Is it too early for the Chinese 9-year old study electronics and programming? Have a good day, class and no video game today.

4          One belt, one road

 

Chinese is building two modern silk roads, one by land (one belt) and one by sea (one road). It has been participated by more than 60 countries. It is a $3 trillion infrastructure campaign funded mostly by China. It would take about five years to complete. The idea is from President Xi and was initiated in 2013.

 

It is natural for China: use of excessive infrastructure industry, higher wages in China, rising internal demands of foreign products, converting the U.S. treasuries into other assets, and most importantly creating alternate routes for energy / ores as described below in more detail.

 

·         Obama announced “return to Asia” or “refocus on Asia” by sending about two thirds of our naval power to Asia. China realized that it was aimed to them. By blocking the sea route, China’s oil supply would be cut. It is a strategic action to find another land route to these resources.

China and Myanmar have opened a cross-border pipeline into south-east China. It would save a lot of transportation expenses and avoid the blocking in the Malacca Strait.

 

·         China has built up a lot of USD reserve from the trade surpluses with most of her trading partners. It would be less risky by converting this reserve (especially from our U.S. Treasuries) to other investments such as the loans in building infrastructures in foreign countries. In case of a war, their U.S. Treasuries held by China could be frozen.

 

·         Improve transportation of products between China and Europe and resources / energy from Middle East to China.

 

·         China exploits the excess capacity in building infrastructure. China leads the world in building high-speed rail, bridges and tunnels. Japan (with no experience in building rail in hot climate), India (with few successful projects by foreigners) and Vietnam have been experiencing many problems in building high-speed rail that are not built by Chinese.

 

·         Enrich the wealth and living standards of the countries that are in OBOR projects. Even the U.S. and the West would benefit by reducing their foreign aids to these countries.

 

China’s objective is to make the poor countries richer as a responsibility to the world. Most affected regions should increase the GDP by 5% on the average from my rough estimate.

 

·         Eventually most China’s higher-value products will catch up with the West and the U.S. When the developing countries are richer, they are the target markets for China.

 

·         China’s Yuan has been used as the reserve/trading currency instead of USD though it is a long way to replace USD as a reserve currency. China has set up an exchange for trading energy in Chinese currency. Other commodities will follow if not already done.

 

·         It could reduce some conflicts. Philippines received billions on the loan and has downplayed the islet conflict with China. Hence the chance of Chinese military interference would be reduced.

 

·         It would strengthen the economics, politics and culture ties of China and the affected countries. Western China has not been developed due to the remote and less habitable conditions. 

 

·         It would make U.S. very unhappy and U.S. would take counter actions to protect her interests.

 

Many developing countries and provinces in west China will benefit. Many projects will be financed via Asian Infrastructure Investment Bank (AIIB), which is mainly funded by China. Today most of these projects are financed by IMF and World Bank, which are controlled by U.S.

 

China may supply most of their services such as building factories or improving ports. However, China will not see their profits from the investments in the short term. Some loans will be partly donated to friendly allies. Many countries may not be able to pay back the loans in cash.

 

China should concentrate on soft power by promoting mutual respect, understanding local cultures and reducing military conflicts such as islet dispute with Vietnam. All the signed contracts could be overturned when a new governor comes into power. The participating countries should be careful on the ability to pay back the huge debts.

 

US is not participating in this campaign. We will not benefit from these agreements and we will lose our influences to the developing countries. However, some big projects require advanced technologies and they will be supplied by US corporations such as turbines from GE. Honeywell and Caterpillar will likely benefit. India may not participate due to the road thru a territory claimed by Pakistan.

 

As in most projects, China will face problems and challenges. Thailand and Indonesia are modifying their original railroad projects. The project is easily accepted in developing countries but not in developed countries such as EU. China is having its own economic problems. Some projects may not pay back and China would end up losing money. China needs to analyze the projects carefully.

 

It is better to invest in profitable infrastructure projects than selling destructive weapons. Many finished projects such as the major railway in Africa and an empty airport do not benefit China and even the host so far. They need to select those projects that are beneficial otherwise it would be a waste of resources. A train started from a Chinese city to arrive in London and another one to Madrid. In general, it is faster than sea route and less expensive than air fright. Or, it is more expensive than sea route and more time consuming than air fright. Many products such as red wine are suitable to ship by train. It also depends on how far the products are from the closest seaport or railway station. In general west China and their neighbors will benefit more.

 

China has or will face challenges and problems. The finance would drain China’s reserve funds. Many top officers in the countries receive maximum benefits while their citizens are not. Need to resolve them by making more jobs available to common citizens. Some current highways would be abandoned. India will object due to her animosity with Pakistan. Russia may have the own ideas and/or not investing enough in the part of their infrastructure. The southern route would weaken the importance their northern route. The rails among countries are not uniform and that’s why they have dry docks to transfer goods from one rail system to another.

 

There will be reactions from U.S. and Japan who would lose their influences esp. in Africa and S.E. Asia. China have made the ports in Germany and Greece busy and bought in a lot of wealth. China invested in Greece’s port when Greece was in deep financial crisis. For a successful project, China would get about 1.8 times the return while the receiving country would get 3 time the return.

 

Many countries in South East Asia have already been benefited by Chinese investment and infrastructure. There are many conflicts such as corruption by local governments, cultural differences and traditional military conflicts with countries such as Vietnam. Under YouTube, search “Cambodia China Anthony”. Here is one of the series.

 

Iran

 

Middle East could cause WW3 and Iran could be a strong factor. Iran is rich in oil and gas. In recent history, the oil right was controlled by U.K. and partially by Russia. U.S. and her allies embargo Iran on their terrorist actions (some claim U.S. army are terrorist), and the nuclear development. To me, trading oil not using USD is one of the major reasons. The recent murder of the number two leader did not get the approval of our allies. Iran bombed the U.S. bases to save face. The reason of not a full-fledged war could be due to Russia and China who may not want to do so now. China, a country without sufficient oil and gas, is eager to develop the land route to Iran’s energy.

 

5          Decoupling

 

Trump proposed decoupling with China. It has materialized to some extent as of 4/2020. The U.S. citizens and the two political parties blame China for all their ills. Many jobs will not move back to the U.S. but to Vietnam and India. There will not be a lot of jobs gained and they have to pay higher prices at worse quality as illustrated by banning tires from China. Our corporations will suffer too losing China’s educated labor and the huge market in China. It also motivates China to advance to higher-value products and China will not dependent on U.S. such as the computer chips. 

 

China did not want to decouple from the U.S. However, it may not be up to China’s choice and China is more frustrated with us. In 2019, China ships about 18% of their total export to us. It is high but not much compared to Hong Kong (14%).

 

The decoupling may not be totally agreed upon by both countries and that could lead to first a cold war and then a military war. In any case, we will be more isolated except with Canada and Mexico. Iran and Russia already have a strong tie with China.

 

The following summarizes briefly the consequences.

 

Affecting both countries

·        Our trade deficits with each other will be zero from a total decoupling.

·        Chinese stocks will be delisted in U.S. exchanges. It will hurt these Chinese stocks for a few months.

·        Our firms such as MacDonald’s and GM will be withdrawn from China. Their assets (not including the names and trademarks) will be sold to Chinese companies.

·        Citizens of both countries would have a record, unfavorable attitude towards each other.

 

Affecting us

 

·        In a survey dated 5/2020, 96% of U.S. corporations do not want to leave China even our government pays the moving expenses due to increasing the costs of goods and losing China’s huge market. They may not support Trump’s election.

·        China would sell our debts. It would shake the USD as a reserve currency.

·        China would ban exporting rare earth elements to us. There are not too many substitutions and the prices for these elements would skyrocket.

·        China would ban exporting active drug ingredient to us.

·        There will be zero Chinese tourists. Chinese tourists have the highest spending among all foreign tourists. Coupled with the pandemic, many retail stores would close.

·        There will be zero Chinese students. The 370,000 Chinese students in 2019 had been financing the U.S. colleges as most pay tuitions. Coupled with the pandemic, many colleges would be in tough time.

·        The Chinese goods will be replaced by other countries. They will cost more and at worse quality. The previous example is replacing tires from other countries when Chinese tires were banned.

·        We may not gained a lot of jobs as they will be moved to low-wage countries such as countries in S.E. Asia.

·        Huawei will ask Verizon and other companies to pay royalties in using their technology and even worse banning using Huawei’s patents in their 5G components. If they refuse, Chinese will freely use the U.S. patents without paying royalties.

·        U.S. companies making chips will lose her needed export to China and eventually they would become competitors to Chinese chip makers in the global market.

·        Apple would face losing the market and manufacturing capacity in China.

 

Affecting China

 

·        China’s economy will deteriorate for at least 3 years. However, China’s government has a lot of cash reserve and Chinese are still happy to go back a decade or two when the country was poorer.

·        Many small factories are out-of-business. Many factories are moving to South East Asia. It affects the lower class of workers in South China and many workers have been moving back to farms where they came from.

·        Chinese will pay more for farm products that are replaced by other countries.

·        China will concentrate more effort on agriculture and farm land. Today Chinese do not really need American farm products. China is close to feed her citizens by her own agriculture, which would be enhanced.

·        Chinese high-tech will suffer initially. However, if they can get them from foreign countries other than U.S., they should be fine. U.S. is trying to stop our allies to import these products to China. If U.S. do not or cannot stop TMSC (a Taiwanese company) to manufacture chips for Chinese companies, China should be fine. Huawei’s phones and 5G network do not use U.S. chips.

·        For the first time for the last 30 years in my memory, there are no Chinese students entering M.I.T. this fall of 2020. The return of Chinese students has been helping China to advance in technologies.

 

Affecting the world

 

·         The trade war between China and U.S. is taking a break until the pandemic is controlled in the U.S.

·        There will be global recession for at least a year.

·        World supply chain will be changed.

·        De-globalization would make products more expensive.

·        Low-wage jobs are being moved to low-wage countries. High-value products are being moved to Japan, Taiwan, South Korea and even U.S.A. Mexico is benefiting for jobs in between.

·        Japan, Taiwan, Saudi Arabia, Canada and Mexico would stay with us. EU countries will take side initially and they will side with China for economic reasons. Finally Australia will side with China due to economic reasons; today about one third of their exports to China and Chinese accounts to 15% of the foreign tourists.

 

Summary

 

There will be no winner in decoupling. The worst is that it would lead to a military war. We no longer force China to accept our standards and our way to do business. The global order is the same as U.S. order that China does not abide by.