The Chinese Finger Trap

Remember the Chinese finger traps? Those bamboo tubes that you would stick your finger in one end, then the other end. And when you tried to pull out the “trap” closed on your fingers. The harder you pulled, the tighter the trap. You can still get those things at Amazon. Made in China, of course.

https://en.wikipedia.org/wiki/Chinese_finger_trap

Seems to me as though Mr Trump, in his dealings with China, has fallen prey to this old Chinese trick. Like the 4 year old pulling frantically to get loose, Mr Trump has stuck his tiny fingers of “tariffs” into the Chinese trap of “retaliation”.

There is an old saying : “When your only tool is a hammer, everything looks like a nail”. It seems as though Mr Trump has only one tool in his arsenal. Tariffs. And when tariffs don’t work, pull harder. More tariffs. Harder. More tariffs.

As in his dealings with China, Mr Trump just announced more tariffs with our second most important trading partner, Mexico. Unless they somehow stop immigration he will ratchet up tariffs. Keep in mind that about 40% of Mexico imports are actually dependent on US parts sent to Mexico for final assembly.  Tariffs will impact negatively on US industries .

Back to China. China has a long history of hardship and conflict with the West. The communists took over precisely because of the failure of the nationalist government to deal with foreigners. China is the “Middle Kingdom”. The two characters in the written Chinese language stand for those two words. China has always seen itself as the center of the universe.  Americans are tribal , but compared to Chinese ethnocentrism, Americans are downright globalists. The Chinese will not submit to humiliation. Never.

So, China can and will survive any hardships. After all, the leadership of China does not need to worry about elections. They can dictate  and absorb any economic downturn.

US trade with China accounts for about 13% of China’s trade with the rest of the world. A big chunk. But over the last 20 years China has been expanding markets to the rest of the world. Today, China has a higher percentage of trade with Australia than it does with the US. More trade with the EU. More trade, by far, with the rest of Asia. More trade with Africa and Latin America. In fact, China has focused on Africa and Latin America and has rapidly expanded into those markets. China can withstand a 13% trade hit. Can the US withstand a 16% hit on the other side?

So, Trump’s tariffs will not work. He is caught in the Chinese finger trap with no way out. He just pulls harder and harder.

Trump will not take advice. But on this one, he should. He should find a 5 year old. Because, as any 5 year old can tell you, getting out of the Chinese finger trap is easy. Just give in a little bit. Loosen the grip. Stop pulling so hard. Relax.

You would think the world’s greatest “deal maker” would know by now. Or maybe Trump never played with a Chinese finger trap. Or maybe he got stuck and could not extricate himself.  Perhaps he had to be cut out of the trap by his daddy? At any rate, he is stuck now with no way out.

Time to Do Nothing

In 1949 Mao Zedong and the communists took over China. They instituted communist policies . In response the US cut off all relations with the People’s Republic of China for many years. Mao was a dictator. Harsh. Ruthless. The US would have nothing to do with him. He was an enemy.

Then, in 1972 , Richard Nixon did what was necessary. Mao did what his subordinates did not want him to do. Nixon visited China, met with Mao and started the opening up of trade and cultural relationships. The rightwing in China and the US were outraged by this betrayal of ideals. They wanted conflict, not reproachment.

The world did not end. The US was not defeated. In fact, over time, China has become a major world player and dominant economic force. A major trading partner with the US.

In 1986 the Russian leader, Gorbachev, met with the US leader, Ronald Reagan. Gorbachev had opened up Russia and the Russian people to the possibilities of democracy. Perestroika and glasnost . Reagan, a fervent anti-communists, saw an opportunity to cooperate on arms control. Both men signed the arms reduction deal which helped defuse the 40 years of hostility and tension between the two superpowers. Both men were criticized as “weak” by hardliners at home.

While Russia has fallen back into a dictatorship, the arms deals have held. Billions that could have been wasted by both nations on military spending has been saved. Not to say that both countries still spend way too much on the military. More than either needs for its defense. It was a bold, unpopular move for Reagan and Gorbachev to make.

But Reagan took a step toward an enemy and helped change the world.

Vietnam was a communist nation. The US fought a long war before ultimately admitting defeat. The hatred of many toward the North Vietnamese (and to some extent the South Vietnamese) was overwhelming. They were ruthless. They were despicable. The hatred of Americans by the millions of Vietnamese who had family killed by the “invaders” was also overwhelming.

In 1994, almost 20 years after the US left Vietnam, Bill Clinton lifted the trade embargo. Once again US companies could do business in Vietnam. Vietnam could be brought fully into the world trading system. Trade between the two nations now has reached billions of dollars a year. Former enemies have become trading partners.

Which brings us to Kim Jung -Un. The dictator of North Korea. Yesterday Mr Kim called for talks with his neighbor, South Korea. And South Korea responded positively. Both sides see no reason for increased hostility and increased fear. The president of South Korea, Moon Jae-in, has asked the US to postpone joint military operations as a gesture of good will. He wants to open up talks with his enemy to the north.

Would it not be nice if North and South Korea opened up more and more trade relations? Would it not be nice if these two nations could tone down the rhetoric and begin more cultural and economic interactions? Hasn’t history taught us that even the most hated  enemies can, over time, become trading partners? And once nations forge strong trade partnerships they both have a stake in keeping the peace and developing economically.

Nixon taught us that. Reagan taught us that. Clinton taught us that. Have we learned?

Let us hope that the US encourages this new interaction between the 2 Koreas. Or at least does not do anything to undermine the possibility of peace. Then, 20 years from now the people of North and South Korea may be able to freely visit each other and take advantage of increased trade and wealth.

If the US just lets it happen. Sometmes just doing nothing is enough.

 

Lesson of Brexit

Much to the dismay of the leadership of the UK, the citizens of the UK have voted to leave the European Union. Not by much. The vote was 51.8% in favor of leaving. A scant majority. But enough to overturn an established economic order.

Still, entire regions of the UK voted NOT to leave. Scotland was overwhelmingly in favor of staying joined (62%). London also overwhelmingly in favor (60%). Northern Ireland wanted to remain (56%). But the majority in the rest of Britain did not. And the majority ruled.

Link to map of voting:

No one knows the long term results of this separation. The pundits are having a field day. Mr Obama was sad. Fox News was joyous. As was Donald Trump. Doom and gloom and happiness and joy.

Some see this as a catastrophe for the economy of the UK. With repercussions throughout Europe and even the USA. Nothing investors fear more than instability. No one wants to put their money where it may be unsafe. Especially big investors. Will London cease to be the financial capital of Europe?

Others see this as a strike against globalization and free trade agreements. A strike for independence and freedom for the Brits. The end of the EU. A triumph of nativism and nationalism. Will the rest of the EU follow suit and secede, fragmenting Europe once again?

Of course, the Brits were never fully integrated into the EU anyway. They kept their own currency. They kept control of their borders, except for the flow of capital. And the Brits have always seen themselves as a nation apart (superior to? ) the rest of Europe.

So, what is the lesson learned?

For me the lesson is simple. Representative democracy is not a terribly effective system, but it is the best system human beings have been able to devise. Brexit is an example of what happens when elected leaders refuse to lead. They let emotions, rather than reason, prevail.

Brexit is a good  example of  “direct democracy” in action. A referendum. Letting the people decide. Absolutely idiotic. Referendums are emotional snapshots. They are not the way to make major decisions about longstanding relationships. Run a few more commercials and some people change their vote. Take the same vote next week and have a different result. Appeal to the anti-immigrant sentiment and the complexity of the issue becomes lost.

People are easily swayed by emotional and nationalistic slogans. Make the UK Great Again! Freedom from Tyranny! The EU is taxing us and we get nothing in return!

I can guarantee that most of the people who voted in this referendum know as much about the EU-UK relationship as you or I. Whether they voted for or against, how many actually understood the ties that bind the UK to the EU? How many actually understood the London financial markets and the effect on the pound and euro? How many knew the long  term effects on trading partners like the USA and China?  How many anticipated the slowing of growth over the next 10 years and how that will effect their jobs and income?

Put 10 economists in a tree and shake it. Each one that hits the ground will have a different theory of the effects of Brexit, with all kinds of “data” and predictions. And only one, perhaps none, will be correct.

So, how is the average citizen supposed to understand the complexity of this UK-EU relationship? He simply cannot.  So, he votes based on emotion.

This direct democracy is a failure. Because no matter which side of the issue you were on, the economists and politicians in Parliament and 10 Downing Street understood the issues much better. That is why they were elected. To lead. To make decisions. Not to pass the buck.

So, my lesson learned? We should never have a referendum on the law. Or other important issues. While representatives may not always represent us as we want them to, at least a good portion of them understand issues. And while they USUALLY act slowly, it is better than giving into the whims of emotion. (Think of the Patriot Act as the exception that proves the rule).

The lesson of Brexit? Stick to the awful system of “representative” government. It is still better than the alternatives.