I'll add a comment about the dodos who forecast China passing on higher costs via exports. to the extent their is global inflation, then all costs are rising and nothing is being "passed on," what hits China hits everyone else at the same time. If their is a country-specific hit from rising coal prices, it will be expressed via yuan depreciation as Chinese exports lose competitiveness. Each country's energy mix and how energy costs affect its balance of trade will become important factors moving forward.
Update: I neglected to mention a possible catalyst for today's coal move. Indonesia banned coal exports.
Indonesian coal miners want a quick resolution to a government coal export ban that has caused fuel prices to rise and could disrupt the energy supplies of some of the world's biggest economies.
The world's leading exporter of thermal coal on Saturday banned the shipments because of concerns it could not meet its own power demand, prompting President Joko Widodo on Monday to threaten to revoke business permits for any miners who failed to meet domestic market requirements.
The wider risk is of a knock-on impact on economic linchpins China, India, Japan, and South Korea, which together received 73% of Indonesian coal exports in 2021, shiptracking data from Kpler showed.
Trade weighed U.S. dollar versus all currencies. I expect the DYX will eventually move, but first emerging market currencies will lead the way down. If emerging market currencies remain more volatile and DXY hits 100, the chart below will hit a new two-decade high.
Dollar bears are looking at a 4 to 5 year H&S pattern forming with the right shoulder ready to descend towards the neckline. That's the effect of the euro. The overall elevation of the index comes from EM weakness.
Dark clouds are forming over Sino-US trade, Li Xiao, dean of the School of Economics and Finance at Jilin University, said that for today's China, the biggest crisis is not a trade conflict, but the world's most powerful hegemonic state has made public that it thinks of China as its main opponent,"The Chinese nation is in a new and dangerous time."
According to the WeChat public number of Jilin University School of Economics released on June 30, Li Xiao gave a speech entitled "National Destiny and Personal Destiny" at the 2018 graduation ceremony of the Institute. What is the essence of China-US trade war and what China should learn? Kind of lessons to present views. He said that the trade war launched by the United States is the most humiliating behavior of the United States against China. "But there is nothing we can do because we are too dependent on the US market."
He goes on to explain the Logic of Strategy and why those focused on GDP are seeing only a part of the picture:
Li Xiao pointed out that the more important national strategic interest of the United States is to contain China's rise. He believes that the purpose of Trump's trade war is probably not only in the trade field, but also in "Made in China 2025", more likely to force China to make greater concessions through trade wars, and it is likely to force China to be more open in monetary finance.
Li Xiao said that for the average country, they will lose a trade war on economics. "But for big countries, the key is who can afford to lose."
He pointed out that historical experience has proved that the contest between big powers, especially the "boss" and "number two", is so much an economic act, not for economic benefit, but an international political act for national benefit. International political competition is not a "positive game", but a "zero-sum game." The political logic is "as long as I win, defeat the opponent, sacrifice no matter how much, do not hesitate."
This is the Logic of Strategy as explained by Luttwak. I laid out my brief review of his book and combined it with my expectation of yuan devaluation, political change in the U.S. that would favor manufacturers and a retreat on free trade, back in 2014: The Logic of Strategy: Yuan Devaluation and the Road to Trade War.
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.
All that said, I think the scholar and many others assume far more planning than really exists. The Logic of Strategy isn't planned. It is emergent order based on strategic goals and the desire to avoid a war between great powers. It is based on interest groups, shifting social mood, and regulatory capture. A switch wasn't flipped in 2016, rather it was a tipping point when emerging trends converged. Previously, China policy was mainly decided by the Treasury and Commerce Department, which had been wholly captured by Wall Street. The 2008 financial crisis was the peak of Wall Street's political power as it extracted trillions of dollars from U.S. taxpayers through the federal budget and Federal Reserve. In short, Capital drove China policy. It wanted access to new markets and cheap labor. Losing in the debate were manufacturers, Labor and national security.
Manufacturers and labor unions have opposed free trade (or at least demanded concessions) for decades. American workers reached the breaking point after the 2008 crisis as opioid addiction burned through hollowed out communities. The Defense Department had long identified China as a threat, but other concerns such as Russia and jihadists gained the most attention. Economists such as Steve Keen exposed the flaws in free trade ideology. Falling social mood was the final piece of the puzzle that created the impetus for action. The United States had its own internal Logic of Strategy as manufacturers, labor unions, American workers in Middle America, the defense department, anti-Wall Street activists on Left and Right, foreign policy and economic dissidents converged.
Overseas, the same logic will play out. Nations such as Vietnam can experience faster economic growth at the cost of falling into China's sphere of influence, or they can accept slower economic growth in exchange for greater sovereignty, particularly if a more self-interested United States continues shifting foreign policy in a pragmatic direction.
Back to Li, he sees a Cold War unfolding:
Li Xiao pointed out that the biggest crisis facing China is not a trade conflict, but the United States, the most powerful hegemonic country in the world, and has publicly regarded China as its main opponent. "In the peaceful period, using economic means to launch China. The comprehensive containment and attack, while also using its superior global military strength, is increasingly deterring China, creating peripheral conflicts and even crises to interfere with our peaceful development process."
Li Xiao believes that the Sino-US trade war is "essentially a national war" and will not be resolved in the short term. Taking the US-Japan trade dispute as an example, he pointed out that from the 1960s until the end of the 1980s, the long trade dispute between the United States and Japan played for 30 years. As a result, the Japanese bubble economy collapsed and fell into a "lost 20 years," and the conflict between China and the United States A big country game, I am afraid it will take at least 50 years or even longer. "Everything today is just the opening of a historical drama."
He mentioned that some Chinese media are "extremely irresponsible and unprofessional, and often use a narrow nationalist sentiment to fool people's feelings."
Li Xiao analyzed that when China is full of blind arrogance, the Sino-US trade war, especially the "ZTE event", is a strong clearing agent. In addition to exposing the huge technological gap between China and the United States, "it makes us even more I am soberly aware that China’s economic growth model has been unsustainable so far, and we must carry out more profound reforms in terms of economic structure and economic operation mechanism."
Li Xiao’s speech sparked a heated discussion on the Internet, which was called “the most sharp speech of the year” and “a public speech that was shocking.” Many netizens said that Li Xiao’s point of view is “pertinent” and “in-depth”, and that “this is definitely not an alarmist, the Chinese must be vigilant”.
However, some netizens do not agree with Li Xiao’s point of view, saying that this is “risk-talking” and that “the analysis is incomplete and the economic resilience is not considered”.
A trade war is looming between the European Union and the world’s biggest producers of palm oil, Indonesia and Malaysia, over proposals to strip biofuel off the menu of renewable energy sources member states may use to reduce their greenhouse gas emissions.
At issue is the US$39 billion palm oil industry. Indonesia and Malaysia are the world’s two biggest producers of the crop, used in everything from fuel to cosmetics to cookies.
Even so, Pandjaitan has warned the government may swear off Airbus aircraft for its military and for the state-controlled carrier, Garuda, if they think palm oil has been given a raw deal.
Pandjaitan’s colleague, Trade Minister Enggartiasto Lukita, has already put Norway on notice by threatening to ban fish imports after its parliament voted to exclude biofuels from government procurements.
Currency trouble is brewing again and gold is on the rise, but one of the last currencies that will see a new high in gold is USD. First up is non-USD currencies: emerging markets (gold on the cusp of a new high in Brazilian real, already at a new high in Indonesia rupiah) and the Australian dollar.
Gay sex, cohabitation, and sex outside marriage would become illegal and punishable with prison terms under proposals from Islamic parties that could soon become law in the world’s largest Muslim-majority nation.
Critics say the moves, which are being negotiated among Indonesia’s political parties and government legislative drafters, would, if enacted, be a major blow to democracy in this Southeast Asian nation of 250 million.
Imagine some group in Indonesia tried subverting the democratic will of the people and overturned the people's demand for Islamic laws, claiming it was a threat to democracy. Not only would that be a threat to democracy itself, but the Islamic parties might think, "Maybe this democracy thing isn't such a good idea." This is how democracy dies: its loudest defenders are its greatest offenders.
The leader of a powerful Indonesian Islamist organization that led the push to jail Jakarta's Christian governor has laid out plans for a new, racially charged campaign targeting economic inequality and foreign investment.
In a rare interview, Bachtiar Nasir said the wealth of Indonesia's ethnic Chinese minority was a problem and advocated an affirmative action program for native Indonesians, comments that could stoke tensions already running high in the world's largest Muslim-majority nation.
"It seems they do not become more generous, more fair," the cleric said, referring to Chinese Indonesians, in the interview in an Islamic center in South Jakarta. "That's the biggest problem."
Ethnic Chinese make up less than 5 percent of Indonesia's population, but they control many of its large conglomerates and much of its wealth.
..."Our next job is economic sovereignty, economic inequality," said Nasir, an influential figure who chairs the National Movement to Safeguard the Fatwas of the Indonesian Ulemas Council (GNPF-MUI). "The state should ensure that it does not sell Indonesia to foreigners, especially China."
...The ethnic wealth gap has long fed resentment among poorer "pribumi", Indonesia's mostly ethnic-Malay indigenous people. During riots that led to the fall of Suharto in 1998, ethnic-Chinese and Chinese-owned businesses were targeted, and about 1,000 people were killed in the violence.
There has been no blood-letting on that scale since then, but tensions have remained. President Joko Widodo was the subject of a smear campaign on the campaign trail in 2014 that falsely claimed he was a Chinese descendant and a Christian.
These stories shouldn't be overlooked. Social mood is relatively positive now, it is a bear-market rally in social mood. Not only in Indonesia, but much of the world. The odds of a policy or pogrom following these remarks is high. This is not idle conversation. Given the rise of China and its push into the South China Sea, there are also much greater odds of this anti-Chinese sentiment translating into international tensions.
Greg Fealy, an expert on Indonesian Islamic groups from the Australian National University, said GNPF-MUI is developing a national agenda following the Jakarta governor's conviction.
"They are trying to harness that movement to link the Islamist agenda with inequality. It is, in effect, targeting Chinese non-Muslims," he said. "This is all part of a pitched battle in the run-up to 2019."
China's embassy in Indonesia has expressed alarm at media reports accusing China of using a "biological weapon" against Indonesia, after four Chinese nationals were arrested for planting imported chili seeds contaminated with a bacteria.
The headlines splashed across Indonesian media have sparked a wave of anti-Chinese sentiment on social media in a country with a history of simmering resentment towards its giant neighbor and a minority ethnic Chinese community.
Indonesian authorities said the imported chili seeds confiscated on a farm about 60 km (37 miles) south of the capital, Jakarta, contained the bacteria erwinia chrysanthemi, which is harmless to humans but can cause failure in crops.
It was the first time the bacteria had been detected in Indonesia, the state-owned news agency Antara quoted the head of the country's quarantine body as saying.
Indonesians are among the most avid users of social media in the world, and conspiracy theories about the intentions of the four Chinese nationals running the farm quickly spread.
"Haven't people realized that Chinese attacks on thiscountry are real in many ways. From drugs, illegal workers, now chili bacteria", said a twitter user with the handle @BoengParno.
China considers killing two birds with one stone, turning Yongxing Island (Woody Island) into an offshore financial center. Aside from the economic benefits, it would secure China's political claim on the South China Sea.
Two of the country this year, the South China Sea once again become the focus of the parties. NPC press conference, spokesman Fu Ying was asked three times to the South China Sea. There are also proposals for motions involving the South China Sea. Two of the most notable of the CPPCC National Committee, deputy director of the Foreign Affairs Committee, submitted Han Fangming "Yongxing Island will build a Bermuda registered offshore" proposal.
Registered offshore, through low-tax policy or tax-free, loose financial regulation and open management program, set up to attract foreign companies registered offshore companies. Proposal suggested that the central and Hainan through policy and legal support, allowing the Xisha Yongxing Island, the development of offshore financial services, and thus promote the development of the South China Sea and the central economic zone in the South China Sea strategic layout.
I believe that, and regardless of the specific content of proposals, one on its own logic - the economic development of the island as a means of distribution of the South China Sea should be able to provide new ideas for breaking the increasing complexity of the South China Sea game.
In fact, economic development has become the main means to safeguard the sovereignty of the South China Sea. From the initial joint development of South China Sea oil and fishery resources initiatives, to the exploration of deepwater oil and gas fields, economic instruments are to highlight its significance. The difference is that the role of fisheries and oil and gas development is mainly reflected in the sovereign sea waters especially controversial declaration, and the development of offshore financial sector would help to strengthen the management of the actual controlled islands.
Although China has already realized over the Paracel Islands and administrative development, its economic function has often been watered down. A real problem is that China's legitimate military and civilian deployment in these reefs, likely to cause unnecessary tension in neighboring countries, and become some of the United States, Japan and other countries outside the South China Sea issue of multilateral excuse. In this context, clearly some of the reefs controlled economic development function, can also be regarded as reducing misjudgment, an effective means of reducing external intervention.
I doubt outside parties will be mollified by China securing its interests, but it undoubtedly strengthens China's claims.
There are drawbacks though. Foreign investors will be wary of China's claim on the islands and China's legal system is unable to deal with offshore banking at this time:
Security Capital is also an important factor. The vast majority of offshore centers away from geopolitical disputes, and maintaining political stability through effective government. In contrast, the South China Sea tensions in the South China Sea islands and reefs will hinder the development of the financial industry has brought. This is why a lot of people are not optimistic about Yongxing Island Offshore Financial reasons development. Of course, this view underestimates the Chinese South China Sea as a "real master" determination to maintain peace and stability on the South China Sea. However, for Yongxing Island as an international financial capital registration, we also need to make some effort to highlight Yongxing Island demilitarization of use and so on.
In addition, the legal system, now known global offshore centers use the Law Department. This system was considered for a higher degree of financial innovation tolerance, and ease of integration with Western multinationals legal system. And China, as in civil law countries, the ability to "compatible" an offshore centers?
In short, the Yongxing Island, the reality limited by a variety of conditions, even if the island's offshore area can be entered substantive stage of development, it is difficult to attract transnational capital in the short term. However, we could have based on their own business, and then through a series of innovative laws, the financial system, reducing barriers on legal convergence.
Of course, both can develop from the Yongxing Island offshore financial business, the South China Sea policies are ultimately in order to safeguard China's sovereignty and territorial integrity. Under this theme, we might open my mind, bold innovation, and explore more effective path of development and rehabilitation of the South China Sea.
Growth was just 4.67 percent in the second quarter, the slowest pace in six years. What’s more, a recent MasterCard survey detected an "extreme deterioration" in consumer sentiment, which had plummeted to the worst levels in Asia.
Investors are already voting with their feet. The Jakarta Composite Index has fallen 13 percent from its April 7 record high, one of Asia's biggest plunges in that time. And foreign direct investment underwhelmed last quarter, coming in at $7.4 billion, little changed from a year earlier in dollar terms.
Latin America's largest economy has a 70 percent chance of losing its investment grade rating in the next few years, according to the median estimate in a Bloomberg News survey of economists. Standard & Poor's said last week it may downgrade the country's rating and revised its outlook to negative from stable. Brazil's bonds are currently rated BBB- which is one step away from junk. The company cited Brazil's political and economic challenges amid an ongoing probe into kickbacks at the country's state-owned oil company, Petrobras, which President Rousseff chaired at the time.
Using land reclamation techniques, China has constructed "territorial facts" in the South China Sea by turning uninhabitable "features" like rocks, shoals and reefs into islands. From these fabrications, China projects economic claims and military power.
...Hence, the warship binge. StrategyPage provided very approximate but illustrative numbers. In the next 20 years, Asian nations will buy some 400 major warships and 1,000 small patrol vessels and support ships. At least 80 (perhaps 100) of the major vessels are submarines. China loves subs. Chinese subs trail U.S. ships. But worried neighbors know that their diesel subs can ambush Chinese ships trying to protect, well, Fiery Cross.
Recent satellite images suggest that China has made rapid progress in filling in land in contested territory in the Spratly Islands and in building an airstrip suitable for military use and that it may be planning another.
“As China seeks to make sovereign land out of sandcastles and redraw maritime boundaries, it is eroding regional trust and undermining investor confidence,” Blinken said on Wednesday.
“Its behavior threatens to set a new precedent, whereby larger countries are free to intimidate smaller ones, and that provokes tensions, instability and can even lead to conflict.”
China should invite the seasteading people to go live there. They'll have far more productive use of the land, foreign civilians on their soil and a stronger claim of sovereignty over the man made islands.
Indonesian authorities blew up and sank 41 foreign fishing vessels Wednesday as a warning against poaching in the country's waters.
The vessels from a variety of countries were blown up in several ports across the archipelago, which has some of the world's richest fishing grounds.
...The boats, seized from Chinese, Malaysian, Philippine, Thai and Vietnamese fishermen, were blown up on National Awakening Day, which commemorates the first political movement toward Indonesia's independence.
Foreign investors continued to sell Thai bonds as top policy makers expressed a preference for a weaker baht as exports sagged and the economy struggled for momentum.
India's rupee experienced its largest short positions since mid-August. Sentiment on the rupee had been bullish since early October last year before souring in recent weeks.
...In the previous poll published on April 30, views on most emerging Asian currencies turned bullish for the first time in six months amid views that the U.S. Federal Reserve may wait longer before starting to raise interest rates.
The latest survey showed long positions in the Chinese yuan fell only slightly even as the economy continued to lose steam in April despite a series of policy easings, including an interest rate cut on Sunday.
Overall optimism on the renminbi held firm as China's top officials including Premier Li Keqiang and PBOC Governor Zhou Xiaochuan have pledged to keep the yuan stable despite downward pressure exerted on the currency from the slowing economy.
Other emerging Asian currencies weren't so lucky, with sentiment turning negative on the slowdown in the world's second-largest economy and as the global bond rout prompted investors to dump government bonds in the region.
Following the global bond selloff and the recent rise in oil prices, the region’s bonds are beginning to show signs of outflows with yields, which move inversely to prices, inching higher in recent days. As investors’ risk appetite wanes, analysts from Morgan Stanley say currencies that have seen outsize inflows in recent months will be most vulnerable. They point to Thailand’s baht and note that the Korean won, Taiwanese dollar and Singapore dollar “also appear exposed, given the magnitude of inflow over the past month.”
As economies in the region grapple with a broadly stronger U.S. dollar and looser monetary policies, currencies have become the only tool for central bankers to spur growth. Weaker currencies can help languishing export sectors.
The failure of the TPP may mark the high water mark in this era of globalization. The next step will be an anti-China economic policies designed to cut China's military expansion. Community and identity have supplanted economics in most domestic Western politics. Sovereignty will rise above economics in international relations, as laid out in The Rise of China vs. the Logic of Strategy.
The U.S. military is considering using aircraft and Navy ships to directly contest Chinese territorial claims to a chain of rapidly expanding artificial islands, U.S. officials said, in a move that would raise the stakes in a regional showdown over who controls disputed waters in the South China Sea.
U.S. Senate Democrats delivered a major blow to President Barack Obama's trade agenda on Tuesday, blocking debate on a bill that would have smoothed the path for a Pacific trade pact.
...The failure to garner the necessary votes came after pro-trade Democrats, including Senator Ron Wyden of Oregon, insisted that fast track be bundled together with three other trade bills, including one that would impose import duties on countries that manipulate their currencies for unfair trade advantage.
The government said it would increase the defense budget by 12.2 percent this year to 808.23 billion yuan ($131.57 billion), as China seeks to develop more high-tech weapons and to beef up coastal and air defenses.
Will the United States eventually decide that the way to slow Chinese military spending is to slow the Chinese economy? As I mentioned in the prior post, there are growing economic arguments against free trade. Trade deficit nations such as the U.S. also benefit in the short-run from trade restrictions because it means the domestic economy must supply more goods and services. The odds are certainly above zero that a politician will see a way to boost the economy and appeal to nationalism with one policy.
There's an excellent post for anyone interested in China: Review of “The Rise of China vs. The Logic of Strategy” by Edward Luttwak. I just finished the book and I don't think I can add much to that complete and thorough review. Read through it to get an idea of the arguments put forth in Luttwak's book, plus a summary of all the players.
If you're lazy, the quick and dirty summary can best be given by a comparison with Germany and England prior to WWI, with China as Germany and the USA as England. Germany was the up and coming power and had surpassed England economically, culturally and academically. What got Britain very nervous was Germany's decision to build a large navy. England responded with a new ship, the dreadnought, and with a diplomatic flurry to move enemies into the neutral or friendly category. The result is well-known: although eclipsed in many areas, British superiority in diplomacy and war defeated Germany twice.
China's rise was similarly peaceful, but China's aggressive military buildup and claims to South China Sea territory have all of the surrounding nations on alert. Due to the advent of nuclear weapons, logic dictates that total war will be avoided in Asia. However, the U.S. and a group of allies could effectively deter Chinese aggression in the Pacific, and even though the U.S. has not sought out a coalition, Chinese aggression has pushed Southeast Asian nations (and even Mongolia) into the arms of the U.S. Finally, due to its size and the desire to avoid an outright conflict, the United States has a very powerful weapon if it can overcome the free trade ideology: economic policies designed to slow China's economic growth. Using economic policy, the U.S. could deliver an effective blow to Chinese growth that will keep its military from exceeding U.S. capabilities without requiring a massive buildup in military spending, a policy which would further slow GDP growth in China. If the U.S. and regional economies prefer U.S. influence in the region to that of Chinese influence (and putting aside all ideology, the distant hegemon remains more attractive than the near), they can choose a path of slower economic growth designed to keep China from becoming the dominant power.
The reason for this policy is not a U.S. desire to keep China from rising. Instead, it is China's increasingly aggressive policies in the region that make neighbors nervous. China makes claims to territory based on very loose evidence, such as a map from hundreds of years ago. Using the same logic, Italy could claim all the land formerly held by the Roman Empire or Sri Lanka can claim India (one example given by Luttwak). No one would fear a claim by Italy or Sri Lanka, but imagine Italy was among the fastest growing economies in the world, rapidly building up its military capabilities and it was openly making bold claims to territory. Everyone in Europe, North Africa and the Middle East would be nervous.
There's a talk by Luttwak on the topic of his book:
The "logic of strategy" coincides with social mood and current events. Protectionism is on the rise due to economic factors tied to declining social mood, but Luttwak's book adds a geostrategic grounding for protectionism as part of an economic cold war in the Pacific designed to restrain China's ambitions. Luttwak doesn't delve into economics in his book, but it is very easy for me to imagine the path to protectionism.
There are three U.S. China policies according to Luttwak. The first is the Pro-China Treasury Department. This wing also represents the capture of American government by Wall Street and the financial industry: Treasury doesn't care about manufacturing and pursues a China policy solely almost aimed at profits for Wall Street. The Treasury also represents the idea of free-trade as ideology. Manufacturers have almost no voice in American policy these days.
Next is the State Department, which confronts China in Asia. The State Department is mainly concerned with the "Asia Pivot." It was not U.S. policy to encircle China by forging closer alliances with Southeast Asian nations, rather China's own aggressive posturing pushed these nations into proactive efforts to attract the United States. There are areas where the U.S. was proactive though, such as working to strengthen ties with India.
Finally, there is the national defense establishment. They view China as potentially the main enemy of the future, though this is as of yet undecided. China is a cyber threat and potential military threat. The Defense Department is involved with strengthening regional military ties, such as the naval visits to Vietnam.
Prediction
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.
But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?
The obvious answer is that you don't. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo's model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the "new" model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.
Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo's argument would be considered, but it has never been seriously addressed.
Ricardo also assumed that British businessmen wouldn't uproot their life and open a factory in Portugal. As the real life modern example of free trade has shown, thanks in part to modern travel and telecommunications, that is exactly what happens. Not only does the factory close in America, but the capital follows it to China. Instead of building a new industry in the United States, the entire manufacturing sector is hollowed out. There are small diverse benefits to lower consumer goods prices, but the vast bulk of the gains go to two groups: workers in the destination country such as China, and to the holders of capital, which are mainly the nation's wealthiest citizens. The nation's capital base is sold off or relocated, with the profits going to the top. The median male income is flat since the 1970s in the U.S., with trade playing a huge role (along with the increase in labor supply from immigration and feminism, both of which also benefit the wealthiest Americans who own most of the capital).
With a growing economic case against free trade, a shift in social mood making anti-free trade opinion more popular, plus the loss of political support for the financial sector, free trade will become a centerpiece issue in American politics. The trigger will be one of two factors. One is economic. China's credit bubble isn't going to slowly ride off into the sunset. There will be pain, it is only a matter of where it lands. The path of least resistance is devaluation of the yuan, something I have been looking for here for several years now due to the growth in credit. A target of ￥8 to $1 is a reasonable ballpark figure, with ￥10 to 1 not unbelievable given the rise of the shadow banking sector. The actual number isn't as important as the size of the devaluation: it will likely be large and set off the anti-China arguments that have been growing in the United States. The left and right have their beef with China's economic policies and the right has provided the main rhetorical cover for business. When that goes, there will be a bipartisan push for policies that counteract China's "predatory" currency policies. A Chinese devaluation could be the trigger.
The second factor is geopolitical. Do take the time to read the lengthy review linked above, and/or watch the video. Luttwak's main point is that China cannot simultaneously build up its economy and influence at the same time it builds up its military, and not run into resistance from surrounding states. He cites the Chinese policy on the island disputes as the case in point: instead of increasing China's power in the region, it has pushed Vietnam, the Philippines, Japan and Indonesia into the arms of the United States. An anti-China coalition is building up due to each nation following the logic of China's inevitable rise in power along with the perception of an increasingly aggressive China. China has "tipped its hand" so to speak and these nations are moving preemptively. Due to the nuclear arsenal of the United States and China (to say nothing of Russia's interest in the region), there isn't going to be a major war for survival. This reduces the options for confrontation, with one of the most powerful being economic. If there is a minor military confrontation that is too large to be ignored, the most politically acceptable response will be economic.
Either the economic or the geopolitical event can happen first then, but in time, the two will be seen as inseparable. Once events move in this direction, the logic to continue down the path is compelling.
Anyone can run GDP numbers for the U.S. and China. One simple calculator is here: Catching the eagle. The default is 7.1% GDP growth, 4% inflation and 2.9% yuan appreciation for China. For the U.S., 2.4% GDP growth and 1.4% inflation. With these numbers, China's economy overtakes the U.S. in 2019. If growth is more like the 4% that Marc Faber believes (and the debt growth/gdp growth ratio suggests is correct), China overtakes the U.S. in 2022. Lowering that GDP growth to the 3% low end forecast of Michael Pettis adds one year, to 2023. However, take down the inflation number (due to credit deflation) or factor in a devaluation of the yuan, and China quickly falls behind the U.S. and can "never" catch up. See: China may not overtake America this century after all.
The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty. For East Asian nations, a distant hegemon is better than the near one with an appetite for your territory.
Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.
Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.
Indonesia's ban on exports of key mineral ores - unless they are processed in the country - risks backfiring as weaker commodity prices mean it is not cost-effective to invest in expensive smelters and refineries.
The ban, which came into effect on Jan. 12, was unveiled in 2009 as a commodities boom began to froth and Jakarta sought to extract more value from its mineral resources. But metals prices and margins have since fallen, leading to oversupply and less need for building more processing capacity.
It works more slowly for economies that import cheap labor which makes it not cost effective to invest in capital goods. Net result: lower productivity and lower wages.
A great example of social mood in The Australian today. I searched for articles on Indonesia, looking for economic and financial news, and came across this headline: Fear and doubt about Indonesia.
Except this article isn't about the economy.
The gap between popular suspicion and warm official relations has been shown by Lowy Institute polls but the latest 91-page study is more detailed and has added significance because it reveals a government anxious to know what underlies the often awkward state of public opinion.
......In the survey, the No. 1 policy issue troubling Australians was people smuggling via Indonesia.
Only 9pc thought Indonesia had made a "strong effort" to do something about this, 31pc acknowledged a "moderate effort", and 18pc believed our neighbour had made no effort at all.
People were more concerned about the welfare of cattle sent to Indonesia than about fair treatment of our citizens in Indonesia's prisons and courts.
Two words that Australians most immediately associate with Indonesia were "holiday" and "Muslim", while nearly one fifth of those surveyed thought Bali was a country all its own.
Even by comparisons to the 1997-98financial crisis, the current account deficit was exacerbated by large amounts of dollar-denominated debt held by companies, a situation that is different today in which companies’ balance sheets are much stronger. Fifteen years ago, Chatib said [Finance Minister M. Chatib Basri], the banking system was weak, with non-performing loan ratios at more than 30 percent, but now that ratio is less than 4 percent.
“We always perceive ourselves as the only one country in the world. In perspective of many countries, we can see Indonesia more calmly and more clearly,” Chatib said. “We are not in a situation that all is well. The fact that the government is announcing the four policy packages shows that we have to anticipate that the situation can go toward [a crisis]. But now, for example with liquidity measure, we are not like [the situation] in 2008.”
The 10-year government bond in Indonesia is up from 5.5% in April to 8.5% in August. All of the numbers look good before a crisis and turn bad once the crisis gets underway. China also has very low non-performing loan ratios today, but that doesn't mean the system is sound.
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