Bannon on China: We Can Take the Whole Thing Down, Total Victory for USA

What I started warning about 4 years ago is now happening. The United States is unleashing a trade-centric China containment strategy. The comments from Steve Bannon below indicate the U.S. will press for total victory. Either China will open up its markets to foreign competition (effectively breaking the CCP's control of the economy) or the U.S. and regional partners will reroute supply chains into their countries, starving China of GDP growth and ensuring it can never converge economically or militarily with the United States. Steve Bannon has definitely read the The Rise of China vs the Logic of Strategy (link on the top left).

I've been expecting this would happen since reading Luttwak's book in 2014. Below are prior posts discussing the coming trade war and laying how we arrived at this point.

A confluence of factors made me believe this was a likely outcome (nothing is certain in life). Foremost was reading Luttwak's book, since that put many puzzle pieces I had in my mind together into a clear picture. As for those pieces. One is I expected yuan devaluation. I've been discussing the potential for yuan depreciation for years. My latest detailed piece is here: A Rising Dollar Will Crush The Yuan. I expect a large depreciation that would have (if it happened earlier) resulted in U.S. retaliation. The U.S. will probably still retaliate unless there is a global consensus amid a crisis. I disagree with Bannon that China won't devalue. If they do a large one-off devaluation (as they did in 1994), they can forestall most reserve outflows. Also, I believe depreciation is inevitable given the credit creation of the past decade.

Another price was Socionomic theory, I believe we are in a period of negative mood, one that increases the likelihood of conflict both within and between nations, as well as political upheaval. Bet on change, bet against the established order. This includes economics. Critics of free trade orthodoxy such as Steve Keen (referenced in the Logic of Strategy post below) made compelling arguments as to why free trade doesn't work as intended.

The third part follows from social mood: domestic political upheaval. A big political change was brewing and once the outlines of this change began to form, an emerging protectionist/nationalist economic agenda became to take form. The key for me was not Brexit, but the victory by UKIP in the European parliamentary elections. If you paid attention (not even the "experts" paid attention, or if they did, they lied in their reporting) you would have seen UKIP start on a platform of a EU membership referendum, but switch to an immigration strategy because that's what voters were talking about. UKIP seized the opportunity and scored an impressive result. That was the signal that immigration was about to be a major issue. Since the establishment in most countries to this day refuses to consider even modest immigration restrictions, let alone a near total ban that voters might get in a few years. It created an elephant sized opening for any politician to walk through. I saw Donald Trump as a potential candidate in 2014 based on this because he was frequently talking about immigration (see the final link on this post).

This is the best post for background on the idea of trade as a national security strategy, and laying out the framework for the coming trade war including the emerging political coalition that would bring it.

2014: The Logic of Strategy: Yuan Devaluation and the Road to Trade War.

I was off on my progression of events. I expected a major yuan depreciation to lead the way to a trade war, but I forecast the rise of protectionism, the political coalition in the U.S. that was forming to deliver it. The main thrust of the article is discussing the book Rise of China vs Logic of Strategy. Edward Luttwak argued for an economic containment policy, slowing trade (GDP) in Pacific nations/USA to slow China's rise and defend sovereignty. For example, Vietnam would rather have the U.S. as the dominant regional power and China actions in the South China Sea since the writing of the book would only strengthen that case since the U.S.A. make zero claim to territory in the SCS.

March 2016: Trade Will Be Key Component of New China Containment Strategy
China doesn't care about anything in this NYTimes editorial board ghostwritten piece. What it is concerned about is what is not mentioned at all: trade policy.

China is in a similar position as the USA in 1929, but worse. China has a larger credit bubble, with more overcapacity and a far greater reliance on trade. More importantly, countries have a security interest in thwarting China's economic rise.

If a President Trump were to renegotiate trade deals, the logic of using trade against China becomes inevitable. As laid out in The Rise of China vs. the Logic of Strategy and as I discussed in The Logic of Strategy: Yuan Devaluation and the Road to Trade War, the idea of limiting China's rise with trade policy already exists. The main actor doesn't even have to be the United States, but Vietnam, Philippines and other nations battling China over the South China Sea among other disputes. These nations cannot use trade policy today without defecting from the global trade system and facing punishment, but if the U.S. defects even a small amount and solely as an economic strategy, the door is opened for other nations to defect as well and make trade policy a component of national security.
April 2016: Steel Trade War Is Glimpse of Future: Great Political Changes Underway
In conclusion, the case for countervailing duties is clear. China is by far the largest steel producer and due to its own sclerotic economic policies, increased production by 15 percent since 2013. Now it says the world must share the burden of overproduction, but China can't even make it's own local governments shut down local production. Meanwhile, the rest of the world wants China to absorb all of its own self-inflicted losses. The political climate has changed and I would bet on Donald Trump winning the presidency at this moment, but even if Clinton wins, the U.S. will at least side with the steel makers on this narrow issue. Tariffs are having positive effects in the U.S. Everything is working in favor of a protectionist U.S. policy on steel, which will very likely be replicated across other industries with the implementation of a national economic policy under a President Trump. With a President Clinton, there is likely no change in the free trade orthodoxy and both TPP and TPIP will pass, despite what she says during the campaign. (One reason why I expect Trump will win is that voters will want the sure thing in November on trade.)

Trump has created the coalition I predicted in The Logic of Strategy: Yuan Devaluation and the Road to Trade War

The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.

Trade Conflict Inevitable

One way or another, China will see the terms of trade changed and it will not be in China's favor. The best way for China to strengthen its position without any negative diplomatic effects: slash overproduction. If China doesn't cut production, it will hold the weak hand because it will bear the entire brunt of a trade war.

As touched upon in The Logic of Strategy: Yuan Devaluation and the Road to Trade War, once trade is subordinated to national security, once free trade orthodoxy is removed and trade becomes negotiable, you will rapidly see a coalition of business, foreign policy, military and security interests which will emerge to support a new trade policy. Countries such as Vietnam will likely jump on board with a policy to slow China's economic growth, and thus its military spending and ability to project power into the South China Sea. If China understood even a hint of what may be coming, they would be rolling tanks into the steel mills.

The Bigger Political Shift

Very few people predicted the rise of Trump, but I laid it out back in 2014. (Immigration Issue Set to Explode in America; Prepare for Political Volatility) Once he rose, experts didn't think he could win. Now the same people think Trump won't win in November. I expect he will win an electoral college landslide because major changes are underway as negative social mood has finally found its political agenda.

I explained the political shift here: Political Revolution Comes to America Via Immigration Issue.
2017: Second Age of Globalism Ending
Chinese Access to U.S. Semiconductor Industry May Be Curbed
The report, being prepared by President Barack Obama’s chief science adviser and due to be published before he leaves office this month, will include recommendations aimed at bolstering protection of an industry deemed critical to national security, according to people familiar with the study.
The logic of this action is not significantly different from the logic of slowing global trade, if one is basing the decision on national security grounds. The more resources China has, the more resources it can apply to a problem. If China is enough of a threat to be denied access to U.S. technology, it's enough of a threat to sacrifice a small amount of American GDP growth to create a larger slowdown in Chinese GDP growth. If China is put on a trajectory of slower growth, it will never catch the United States economy.
July 2018: Logic of Strategy: New Crisis as U.S. Identifies China as #1 Threat
China's expansion (and claims of territory) into the South China Sea is driving the logic of strategy. China is pushing many nations towards the United States. Australia, for example, has been more proactive than the U.S. when it comes to regional security. Many economists correctly criticize President Trump for poorly implementing tariffs, offending long-term allies such as Canada and the United Kingdom. (#AnglosphereNow) However, they miss the question of sovereignty for nations such as Australia, Vietnam and the South China Sea nations. The Logic of Strategy argues they should voluntarily slow their GDP growth by reducing trade ties with China, thus also slowing China's growth and its military modernization. The greater goal is protecting national sovereignty.

Trade is no longer a purely economic issue beholden to free trade ideology, but one component of an overall national security strategy. On the one hand, by blowing up the TPP and shifting U.S. policy, President Trump has made as Pacific alliance less likely, but on the other hand, his direct confrontation with China has advanced the issue. Using Europe as a counterpoint, many NATO allies are upset at President Trump's demand that they increase their military and monetary contributions to NATO. They don't want to increase military spending and don't like that the United States will either reduce its military presence or find other means of extracting monetary support. However, in the Pacific there is a desire for greater security cooperation. The best way for Pacific nations to reduce trade tensions with the United States will be through greater military and financial support for joint security.
This next article has links to a bunch of earlier articles discussing yuan devaluation, going back to 2011. The Chinese yuan has been showing signs of depreciating back to 2008. Each time deflation breaks out again (2011, 2014, 2018) the yuan depreciates.

2013: Chinese Yuan Could Devalue 50% Or More
2014: The Informational Power of the Offshore Yuan Exchange Rate


What has happened to this point is the end of the beginning. These events will play out over years, not weeks or months. Tensions will escalate from here. The risk of cyber, financial and kinetic war will rise if America continues to antagonize Russia and collapse if Trump can turn the corner on Russia relations. Trump's North Korea gambit also looks far more important now and possibly linked to a wider China strategy. Watch for developments in the region, watch Vietnam, Australia, Malaysia, Philippines, Indonesia and Japan.

The "interesting times" are underway.


  1. Hi 罗臻, thanks for your intriguing comments. Not sure if you saw this other interview with Bannon where he explains the economic war plan in more detail: https://spectator.us/2018/07/steve-bannon-we-have-to-end-the-cold-war-with-russia/

    I seem unable to load the podcast now but I recall that Bannon lays out five prongs of the strategy about halfway through.

    1. Ok I managed to load it. The relevant part of the podcast starts at 24:00. The five prongs Bannon refers to:

      1. Take China off the banking system or limit their access to capital markets - too much of a blunt instrument
      2. Scale of the tariffs – half a trillion dollars
      3. Section 301 investigations – no more forced technology transfers through joint ventures
      4. Executive actions on ZTE – “There's 50 ZTEs. You could liquidate all of them in 30 days.”
      5. Proposal to ban investment in sensitive US technologies by companies with 25% Chinese ownership – limiting Chinese access to technology

      "If we were to go full on and pull the trigger on that, and converge those all in a point, you bring 'em to their knees right now."