Trade with China

The Chinese people grew accustomed over time to reading which way the wind blew from the Chinese Communist Party. It looks like those who are politically astute and involved in business are in “fire sale” mode with the West.

This is a very interesting development. Every time an Asian nation cuts itself off economically from the West it is eventually forced back into normalized trade. However that won’t stop the Chinese Communist Party from using international trade as a lever for domestic control, and looking hard for ways to alleviate diminished trade with the United States. They’ve been working hard for at least the last two decades now to build up regional trade relations to the point where the US becomes less of a threat to their national prosperity.

So why is this? Well the biggest reason is that Trump is lobbying to stop treating China as a “developing economy.” Trump is correct that China is not a developing economy. It might not be a fully developed country, but the economy is not the rate limiting factor for that. If China loses the special trade privileges of being a “developing economy” and has to fight fair as a developed economy, then Chinese manufacturing will slow, or possibly go into a temporary decline.

The second big thing is the tit for tat tariff tango that Trump and Jinping have been dancing. China actually holds the upper hand, as it really needs commodity crops like corn, soy, and wheat. Unfortunately, the US is such a player in the world grain commodity markets that adding additional tariffs on US grains only raises the price because Brazilian Soy and Ukrainian Corn become that much more valuable. Which is one of the big reasons why Russia is investing so much in non-traditional grains like corn, because it expects to have a “special relationship” with China to fill some of the void that the US will leave.

Russia became the worlds largest exporter of wheat in 2016, and exports are on track to continue to rise:

So, China needs raw materials, petrochemicals for feed stocks and energy, and more grain than it can grow itself. Russia, in the face of US led sanctions for actions against Ukraine, needs to sell grain, petrochemicals for feed stock and energy, and various ores and raw materials. China and Russia are already linked by rail, albeit not a standard gauge as trains need to swap wheel widths or cargo containers cross loaded, but the cost of doing so is trivial compared to business with the United States.

So, what you are seeing is China and Russia normalizing trade with each other, and focusing their economic might to boost each other up to provide a counter to the US and EU as trade blocs. The Chinese business men in “fire sale” mode are grabbing resources now for the inevitable down turn in economic activity that comes from doing business with Russia.

What does this mean to the United States? Well, cheap stuff is going to get more expensive. We’ll see manufacturing shift to South Korea, Philippines, Vietnam, India, Bangladesh, and other smaller nations who still have “developing” economies, in order to keep “cheap stuff” prices in Walmart and Amazon. It will be an adjustment, but fundamentally will not change the US economy, we are kinda stuck in a “services” based economy for the foreseeable future (the dollar is just too strong to support exporting manufactured goods that aren’t major end items like aircraft, boats, vehicles or precision machinery).

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