The black swan theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.
Old metaphor popularized by Nassim Nicholas Taleb
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday.”
Donald J Trump
Just when stock market participants had started to relax and look forward to a successfully completed US-China trade deal, along came a giant black swan in the form of the American president threatening new tariffs on China. As this is written, it is unclear if the next and presumably final round of the US-China trade talks will have a happy ending. If it does not, it would suggest that the stock market may have seen its best days for some time.
The American side claims the Chinese have reneged on commitments made earlier. No outsider knows exactly how the negotiations faltered. One theory is that the Chinese negotiators agreed to certain things but when they took them to get President Xi’s approval, he rejected them. President Trump did not take kindly to this. He is imposing the additional tariffs to punish the Chinese.
Economists, with few exceptions, regard Trump’s views on international trade as harmful and so much mercantilist gibberish. Specifically, there is his view that balance of trade deficits are somehow are negative. Add to that is his failure to appreciate how globalization has on balance improved the world’s, and specifically, the US’ standard of living. More recently, we have been treated to total economic nonsense about how the billions paid in tariffs on Chinese goods come out of Chinese pockets. And that the tariffs are partly responsible for the recent good performance of the American economy. Ridiculous! It’s Americans who pay the taxes on imported Chinese goods.
The optimists point to all the good things Trump has done domestically in terms of lower taxes and the repeal of regulations. And I agree they are good things. The optimists argue with some justification that there are serious non-trade issues between China and the US on the intellectual property and cybersecurity fronts. These do need resolving. The optimists argue Trump tweets are just part of “The Art of the Deal”. He’ll get the important issues addressed, and at least partly resolved, and we’ll all live happily ever after.
The pessimists worry that Trump really believes his anti-trade stuff. And that on the subject of international economics at least, he’s either crazy or has a more sinister motive.
There is the additional complication of cultural differences. Trump’s hard-ass New York real estate style of negotiating in public may not go down so well with Asians for whom face is very important. Trump’s aggressive public tweets put pressure on the Chinese leadership to not appear as if they are kowtowing to Occidentals delivering threats and insults. This happened often enough in the 19th century and the Chinese do not forget. According to the South China Morning Post, Chinese media insist that the Chinese government will not cave in to American threats.
These negotiations must be incredibly complex and deal with issues for which there is no perfect solution. For example, the top-down government-directed Chinese economy is quite different from the free market bottom-up American economy. This presents problems in a global trading world that aren’t easily resolved. For example, Chinese subsidies may disadvantage American companies that don’t get subsidies.
But in Asia, many suspect that the real motive driving the American approach is a fear of a China that is rising economically, technologically and militarily. With its 1.4 billion population that is obsessed with technology, material progress and hard work, there is a belief in Asia that China’s rise is a restoration of its historical position and the natural order of things. This view prevails even in countries like Vietnam which has historically (and currently) been fighting off the bigger and stronger Chinese empires. (The Chinese don’t help their own cause by occasionally bullying their smaller neighbors on such issues as the South China Sea; Or bragging about their progress by putting out propaganda like the Made in China 2025 manifesto.)
Many Asians believe the Trump Administration concerns with China are based on jealousy and are fundamentally racially biased. The fact that the US has criminally charged the CFO of Huawei with violating Iran sanctions does not go down well. There were no criminal charges against the managements of HSBC (HSBC) and Standard Chartered (SCBFF) when they were fined billions for similar transgressions years ago. The whole US campaign against Huawei is viewed with suspicion since the US has never presented any concrete evidence against the company.
Then there is the pettiness of certain aspects of the US dealings with China. For example, it has been noted that Chinese students in the US are being increasingly hassled in getting US visas. This is without any formal change in immigration laws. The same is true with Chinese professors wishing to attend conferences in the US.
One has to wonder why Trump is carrying out his campaign against China. The US economy right now is the world leader. US unemployment is at record lows, productivity is moving upward, and the stock market is doing well. He can take some credit for this. Why spoil Goldilocks? Does the world have to be held hostage to Trump’s mercantilist hallucinations? It should not be forgotten that Trump is also upset with US trade relations with the Japanese and the EU.
Unless there is a more sinister, second reason to punish China. This second reason might be to Make China Poor, as White House advisor Peter Navarro so lobbied for in one of his books. Make China Poor — because China is really an enemy — might be more important for Trump than the US stock market and the US economy. In the Navarro, Steve Bannon, Michael Pillsbury view of the world, American companies who deal with China are traitors and Wall Street is their public relations machine. Steve Bannon likes to profess how much he loves the Chinese people. It is the totalitarian Chinese government that he doesn’t like. Maybe. Does Trump share this underlying China hostility? We shall soon find out.
I would argue that were the Chinese government more like a Western democracy with elections and a more Western style rule of law, it would still demand the return of Taiwan, it would still bully its neighbors in the South China Sea and it would still push some version of the Belt and Road Initiative. The growth of the Chinese military would still be a problem. What the Navarro, Bannon, Pillsbury clique really dislike isn’t Chinese communism, but rather Chinese nationalism.
From my perspective, global technology has been accelerating, helped along no doubt by globalization and the de facto integration of the American and Chinese tech economies. This has benefited humanity and specifically the US and China enormously. Efforts by both governments to build walls between tech in the two countries are terrible mistakes.
The US and Chinese economies are joined at the hip. A no-trade deal is bad news for the US and Chinese economies and stock markets – and bad news for the world as a whole. A miscalculation on this — like a failure to reach a US-China deal — could bring on a major disaster. These disasters happen on occasion.
Trump should conclude a deal with China and take a bow.
But What about Iran?
The US has now imposed a total ban on the purchase of Iranian oil to be effective next week. China, India, South Korea and Japan are the major importers of Iranian oil. Will these countries, especially China, obey the US edicts? Is this issue mixed up with the US-China trade negotiations?
The US dollar is the world’s global currency. Dollar transactions have to clear through the US. The US can shut down any country’s access to dollars. If China disobeys the US edict, will America shut down Chinese access to dollars for use in international trade? What will happen to the multi-trillion dollar Chinese holdings of US Treasury securities?
Has the stock market thought about this? Will this alone kill a China trade deal?
What about North Korea?
I don’t pretend to have any special insights into the negotiations between the US and North Korea. But it appears that the number one objective of the North Koreans is a guarantee of regime survival. It’s not clear that the Trump team is willing to commit to that. Like Iran, it may believe that the US can and should achieve regime collapse with its sanctions.
Trump, depending on which tweet you look at, seems to hold China responsible for North Korean behavior. Will North Korea figure into the China trade deal or is it another negative?