China Has The Upper Hand
By: Russell Meyers
Tags: Trade, China, Politics, United States, Economics

The debate over US-China trade relations continues to rage.

One concept gets very little coverage. The fact that it is nearly impossible to purchase any durable product assembled in America which does not incorporate raw materials or pre-made components which come from China.

Many people and pundits state how tariffs and sanctions are hurting China. Yeah, hurting China so much that they stopped buying oil from us and sold $3 billion worth of US bonds as a warning shot.

China trades globally or nearly so. While the US can make the same claim, let’s postulate what would happen if China chose to stop trading with the US entirely. That would not only affect US import trade but also our export trade. If manufacturers obtain raw materials or components from China, they would have to cease production until they could secure new sources for those materials.

Chinese products incorporate virtually no components that come from the US. They would be impacted primarily on a limited range of food items, which they have been working to expand trade with other source countries already. Mostly South America with increasing supplies coming from Africa.

No matter what the eventual outcome would be in such a scenario regarding production, one thing is certain- it would cause extreme inflation in the US and force the increase of the price of goods we export, still giving China a strong advantage on trade.

No question the US government would try and impose international sanctions on China but when other countries are dependent on trade for goods and materials, that would not be recognized by other countries. Other countries are already resisting US sanctions against Iran and Russia.

When sanctions fail, concurrent to the sanctions the US will attempt legal and military threats. No question bringing up intellectual property. However, that would be an issue to be brought before an international court to mediate and would take years to resolve. The entire UN would reject US military efforts based on trade disputes that have no military aspect involved. More so when most member states depend on trade with China.

The US is also threatening Russia with a naval blockade to limit their oil trade, not even attempting to fabricate claims of humanitarian rationale. Though Russia is also the world leading exporter of grain, so a naval blockade would also impact the global food supply.

Now consider that Russia and China are allies in a sense. Both are technologically advanced, both have strong military forces. Should the US choose to threaten both with naval blockades regarding trade, impacting the global supply chain on food, oil and virtually any other product you can name, what would be the logical outcome of this on the international stage?

Of course, we can increase our production. However, that takes time from where we are right now. Our production did not decrease overnight, it happened gradually. It takes steel and computer components to build modern steel mills and production lines. It takes raw materials to feed those production lines. While production lines and mills are being constructed, virtually no retail or export sales are occurring.

Yet we would still be buying components that come from China during that time. Products assembled in other countries (like cars from Mexico) usually incorporate Chinese steel and other components. So the Chinese trade routes simply move. You’ll still be buying Chinese products in some form, whether you know it or not for the foreseeable future.

We cannot blame China for this situation. They have done what any rational business entity would have done. They have taken trade deals offered to them. Their trajectory has largely mirrored the US Industrial Revolution, including pollution problems, only in a shorter time frame.

These problems have arisen as a result of mostly US corporate business practices, enabled by US corporate-friendly trade policies. China has specific policies regarding intellectual property which US companies know before having anything manufactured there. If those companies object to those policies, they always had the option to have their products manufactured somewhere else. Like in America.

Back to those Treasury bonds. China sold $3 billion worth of US bonds this week. They still hold over $1.2 trillion in US Treasury bonds. If they suspended all trade with the US in a true trade war, they could also sell off ALL the remaining bonds at once. That would send the US dollar plummeting, as other bond holders globally would see that and rush to sell as well. That could happen in a matter of hours. Other bond holders would sell out of fear that the US will default on their bonds. Which would be a real possibility at that point.

All of the nationalistic chest beating, crocodile tears, tariffs, sanctions and threats in existence will not change the reality of the situation. If the US wants to step back in as a manufacturing and trading power, that can be done. My fear is that if that happens, it will be in a way that turns this country into a third world nation more than it has already become. Only the rich will benefit and the rest left out to dry. We will return to the era of the Robber Barons.