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China Trade
By Peter O’Brien

President Trump and Emperor Xi appear to arrived at an understanding: tariffs on Chinese goods will go no higher, and China agrees to purchase "substantial" amounts of grains, energy (presumably oil), industrial and other items from the US, as well as designating fentanyl a controlled substance. The two countries will continue to negotiate to address their differences.

However, if no further progress is made by April 1st, the President will raise tariffs on most Chinese goods – currently at 10% - to 25%. The President's tactics have produced some results and the Chinese are negotiating. Good, one for our team.

But, we don't know what China is prepared to do if we raise the tariffs in April. One commonly noted concern is the question of China’s dominance in the rare earth market; rare earths are necessary in the production of a whole host of items that make up much of our modern world, and China is the largest single source of rare earths.

China, of course, needs to be careful about what it withholds. For example, withholding rare earths might seem "easy," but rare earths are, ironically, not terribly rare; they're just difficult to extract as they’re usually found together, requiring complex separation processes. Playing the rare earth card might well result in the US finding new sources and or new technologies, leaving China out of the market. Meanwhile, arable land and crop yields will be harder for China to "fix.”

But this really raises more fundamental questions: Where does this end? What does the US want? What does China want?

US long-term goals are actually fairly clear – and have been for quite some time: establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty. Those are more than mere platitudes in the Preamble to the Constitution. And everything that works to those ends is in our interest. (Granted, exactly how you specifically define each makes for interesting discussions, but we have, at least, this starting point.)

And China? China's goals are a bit different. China's goals revolve around the goals of the ruling clique, the Chinese Communist Power (CCP), which controls all that nation’s organs of power.

They say that action speaks louder than words and the action of China over the past decade and more speak quite clearly; careful, deliberate actions to take de facto control of the South China Sea – to include building of islands where there were none and then arming them; building the largest navy in the world in number of combatants (over 500); expanding economically into poorer nations across Asia and Africa, loaning huge amounts of money and establishing business relationships that would look familiar to Don Corleone, even as they purchase farm land across Africa to address their increasing need for more grains and other agricultural products.

All while continuing to steal intellectual property from the West, and particularly the US, at prodigious rates. China has established it’s first overseas base in Djibouti, at the southern terminus of the Red Sea even as it expands its control over the South China Sea, creating a "pincer” around the Indian Ocean, a strategy first described by the naval strategist AT Mahan.

China continues to expand its footprint in Pakistan and has begun the first tentative steps into Afghanistan and elsewhere in central Asia, slowly expanding its presence in the Asian heartland. Et cetera…

What does all this mean?

Nothing is impossible, but the odds are that China isn’t going to change its goals. Xi will attempt to "hedge his bets” come April 1st, but there’s no reason to believe China will stop intellectual property theft; in fact, they can’t survive without it. They will attempt to continue to work around the US Tariffs and can be expected to cheat. We will need to be diligent in watching their actions. Hard bargaining and tough negotiations are certain.

We must recognize that as long as the CCP rules China, they’ll continue their efforts to expand de facto control through Asia and elsewhere; to expand their political and military influence; to exploit free markets to their own good at the expense of the US and everyone else; to practice predatory pricing; and to continue theft of American technology and know-how.

The US won this round. But this is far from over and will probably get worse before it gets better.


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InBrief 11jul19

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