The China Deal (by Binkius Hippo)

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Preface from Tim: as with the prior post from Binkius, this was not originally submitted as a post. Instead, it was a personal email to me. But, as before, Binkius has kindly granted me permission to reprint it here as a post. I frankly find his insights more insightful than anything else I’ve read about the US/China trade dealings, and I’m grateful to him for his continued unique perspective.

The infamous Roman emperor Caligula rashly decided that he could invade Britain. When the Roman legions stood on the shores of the English channel the Roman generals realized that the mad emperor could not put together a coherent logistical/economic plan to get the troops across. Eventually, Caligula lost interest in his folly and told his troops to collect seashells to bring back to Rome for a triumphal procession of his great military prowess.

Trump’s Trade war at this point has three likely outcomes.

  • Trump concedes defeat and the status quo continues.
  • China gives Trump a token that he can bring back to his base like sea shells to prove that he won a great victory… and the status quo continues.
  • Chinese technological containment at max damage for both sides.

The table below shows the reason. China will not back down. If China wants its place as a world power it must be able to import/acquire advanced integrated circuits and the knowledge to manufacture them.

click for a bigger, easier-to-read image

The Red Dynasty is reverting harder and harder back to its Stalinist (not Marxist) roots. The absolute totalitarian nature of this ideology will prevent: entrepreneurship, creativity, and invention. Because of Stalinist ideology, China is increasingly incapable of nurturing and sustaining the necessary technology to design and manufacture cutting edge integrated circuits. China is dependent on foreign sources for the machinery that powers the Information Age.

Without advanced integrated circuits, China will fall further and further behind as a world power.

China stands at a cross-roads. The economic system that can create advanced integrated circuits requires western constitutional democracy (advanced integrated circuits are mainly the creation of: USA, Japan and Taiwan — all of which are western constitutional democracies) which are based on: human rights, civil society and a free press. The Imperial Red Dynasty would not survive China’s move towards a constitutional democracy, so it has started the recent hard pivot back to the Communist party’s Leninist (not Marxist) roots.

I think the most likely outcome is -Caligula’s- Trump’s sea shell triumph in -Rome- DC. The Communists will give Trump a meaningless token to bring back home and crow about his victory. In exchange, the Communists will get a unverifiable, unenforceable trade agreement allowing the current status quo in trade.

The Communists will not back down. If Trump doesn’t back down and accept what they give him, the easy-to-win trade war goes hot. This is the next likeliest outcome. The Communists know that they can outlast Trump.

The Shanghai market is down over 50% from the peak and it hasn’t bothered the Red Dynasty (in fact, the Shanghai market is doing about the same as the NYSE since the start of the trade war). The Stalinist pivot in the Red Dynasty means that the Chinese stock market will become even less important to the Communists. However, a full-on trade war will tank the US markets. Trump will not survive that. The Communists will negotiate with the next American president.

With less than 1-1/2 months left, there simply isn’t enough time to iron out a verifiable, enforceable trade treaty that includes intellectual property rights. There is only enough time for Caligula to bring back the sea shells. Or worse.