The Party knows this is an unsustainable system and has been racing against the clock, trying to steer an un-steerable, careening behemoth. It aims to transition the Chinese economy from the wobbly foundations of a heavily subsidized economy that relies on other economies buying their goods to something rarified, something more like what the Americans have: a stable, self-sustaining market where goods are produced and consumed domestically. To do so, it needs to cut back overcapacity in a controlled fashion and boost consumption by the Chinese consumer. Until that goal is achieved, the Chinese remain dependent upon imported technology, energy and raw materials, and upon exported goods to more stable markets. China’s real problem is that this entire sequence requires a global system that is open and safe as guaranteed by the Americans.
So far the Party has failed in transitioning the country onto more stable macroeconomic footing, fearing at each step that it will lose one or more of its most important constituencies. Put another way, the Party finds itself unable to transform its economy away from dependence on the Americans. It finds itself at the end of its economy’s ability to take on debt.
Which brings us back to the Phase1 deal:
The trade talks have followed an almost disturbingly predictable pattern: The Americans make demands the Chinese cannot possibly meet. The Chinese promise to comply. A few weeks later Chinese actions make it clear they have no intention of complying. The Americans levy more trade restrictions. Repeat.
All the Phase1 deal is is a bribe to the Trump administration: a promise to purchase a few tens of billions of dollars of American agricultural products and to start implementing protections for intellectual property (some of which were agreed to twenty years ago), in exchange for a slight rollback of the tariffs already in place and a promise to delay a new planned batch for the time being.
The next step in the drama is obvious: sometime in late January or February, the Americans will again say the Chinese are not complying, and that new batch of pre-prepared tariffs will slam into place. And incidentally, geopolitics aside, I can’t think of a better international backdrop for a populist president than to run against China in an election year.
So it’s time to call it. There isn’t going to be a meaningful trade deal with the United States because agreeing to the Americans’ demands would be the end of the Party. The Americans can afford, if they must, to cut China out. It isn’t “easy,” but it’s more akin to a cold than leukemia. In fact, a combination of cheaper resources like natural gas, advanced technology, highly educated labor, and geopolitical disruption all make relocation to North America easier at the same time that East Asia’s costs – from labor to risk – are going up. Some companies and industries have already moved into the NAFTA marketplace and we’re still in the early stages of all these trends. If the world’s largest, most important consumer market, and the physical guarantor of all Chinese supply chains simply walks away, the Chinese are simply out of options.
More likely, it will be (far) worse than that for the Chinese. If the Americans, instead of merely cutting out the Chinese instead get aggressive, things could quickly cascade. Even with a naval deployment policy that’s one-quarter of what it is currently, the Americans could easily – almost lazily – interrupt any trade flow on the planet. In comparison, the Chinese cannot even guarantee their maritime safety within a thousand miles of their own coast, and most of their oil comes from five times that distance along a path littered with threats and rivals. And the size of those oil inflows? Edging up to 12 million barrels a day – greater than what American total imports were at the height of American energy dependency in the early mid-2000s.
China’s crash will be much like its rise. Big, bold, brash, loud, all-consuming, and, in hindsight, completely inevitable.