A long game.

Sometimes many years need to pass before a strategy can be properly evaluated.

Almost 50 years ago and after a secret facilitation meeting between Henry Kissinger and then Chinese Premier Zhou Enlai, Richard Nixon journeyed to China to meet with the Premier, and Chairman Mao.

The leaders and their envoys (including Nixon’s adviser Henry Kissinger) spent 7 fateful days between February 21 and February 28, 1972 discussing many issues.

For Nixon, it was about creating a ‘peaceful’ new strategic framework with China to bring about stability in the Asia Pacific region, including de-escalating Cold War hostilities with the Soviets and finding a way to end the Vietnam War. In other words, re-balancing the world order under control of the only superpower in town – the U.S.

Short-term cost? Affirmation that “there is but one China and Taiwan is part of China,” and a year later Nixon would order the withdrawal of troops from Vietnam.

Long-term cost? 47 years later, Communist China becomes the world’s second largest economy and protégé superpower, in part as a result of exploiting the greed of the west in exchange for forced technology transfer. This cost (real and perceived) is a key factor in the U.S.-Sino trade war.

Last month Henry Kissinger in response to an escalating trade war suggested that it’s no longer possible for one party to dominate the other and despite the inevitable differences and the history between the two countries, the U.S. needs to understand that China is an equal rival.

Today, I wanted to review some history to put the trade war and Henry Kissinger’s recent comments into some perspective. If there’s anyone qualified to make comment, it’s him.

A bridge is usually a two-way affair.

In 1972, President Nixon spoke about building a bridge across 16,000 miles and 22 years of hostilities in an attempt to de-escalate hostilities. Usually, a bridge is a two way affair and whilst world peace was the headline objective, there were other discussion points required to grease the wheels of détente.

Those discussion points were around science, technology, culture, sports and journalism and the exchange of people and contacts in those areas which were thought to be of mutual benefit.

The two leaders discussed the importance of economic relations based on “equality and mutual benefit” because that was said to be in the interests of the peoples of the two countries.

They also agreed to facilitate the progressive development of trade between the two countries – and it’s in how this part of the bridge has developed that features in Donald Trump’s claims.

How China presented its aspirations in 1972.

On the second last day of Nixon’s visit, a joint communiqué was issued. You can read a summary here, however the following excerpt provides a window into how China presented itself to the world (and perhaps thought of itself) at the time.

“All nations, big or small, should be equal: big nations should not bully the small and strong nations should not bully the weak. China will never be a superpower and it opposes hegemony and power politics of any kind. The Chinese side stated that it firmly supports the struggles of all the oppressed people and nations for freedom and liberation and that the people of all countries have the right to choose their social systems according their own wishes and the right to safeguard the independence, sovereignty and territorial integrity of their own countries and oppose foreign aggression, interference, control and subversion. All foreign troops should be withdrawn to their own countries……….”

These comments need to be understood in an economic sense.

That is to say that in 1972, the U.S. economy was the world’s largest with US$1.2 trillion in nominal GDP. Conversely, China’s GDP was 1/11th of that size, weighing in at a less than modest US$114 billion and making it the 7th largest economy behind Japan and the usual European bedfellows like Germany, France, Italy, etc.

That was the situation under Mao.

And then there was Deng Xiaoping.

Five years later, Mao was out and Deng Xiaoping was in, out and in again in late 1977.

This was more as a result of having the numbers after the death of Mao and controlling the People’s Liberation Army, rather than Being appointed to any specific role.

Deng dismantled Mao’s centralist Cultural Revolution and initiated the Four Modernisations (agriculture, industry, defense, and science and technology), opening up China culturally and economically.

Hence, he is often referred to as the ‘Architect of Modern China’.

But he could only do this because Nixon (and Kissinger) went to China to build the bridge with Mao.

Closer to my home, it was Deng’s modernisations that created the super-demand for Western Australian iron ore, bulks and soft commodities that we have experienced over the past 15 years.

Short-term, the 7 days of bridge building in 1972-China successfully drove a wedge between China and the Soviets and started a de-escalation of regional hostilities, but it also created the perfect platform for Deng Xiaoping to later ideate, shape and commence China’s ascendancy into the bona-fide superpower it is today.

China’s rate of growth has been staggering.

The Chinese economy has expanded 119x since 1972.

The U.S. on the other hand started from a pretty high base and has grown by a more modest 16x as other countries have developed comparative advantages over the U.S.

Over the 46 years to 2018, China has grown at a CAGR of around 11% versus 6% in the U.S., although it wasn’t until 1992 and the renewed development activity created by Deng’s south China inspection tour of Wuchang, Shenzhen, Zhuhai and Shanghai that China really started to accelerate.

The chart below shows how Deng’s reforms and modernisations supercharged the Chinese economy.

Since 1992, China has grown at a compound annual growth rate of 14%, versus a significantly lower 4.5% in the U.S.

That means China has been growing 3 times as fast as the U.S. for 26 years.

That head snapping speed is nothing short of staggering, and Donald Trump is telling Americans that it’s been done at the expense of American industry, exports, profits and jobs.

Hey, that’s cheating!

In 2018 and in nominal GDP terms the Chinese economy was no longer 1/11th of the size of the U.S. economy – it was 2/3rd the size and growing.

In getting there, Donald Trump says China cheated. This is because up until recently the U.S. had offered almost unrestricted access to U.S. markets for Chinese companies. Whereas in China, US technology was effectively stolen via China’s so-called special economic zones (a Deng creation under one of the Four Modernisations) which offer access to Chinese markets in return for forced technology transfers from U.S. companies.

That is also why he believes any so-called phase one trade deal cannot be equal and why the trade war will continue unless and until he gets a deal that he likes.

You can get a refresher on the sequential escalations of the trade war here.

Interference.

And yet, flying in the face of an apparent desire to dial down the trade war, the U.S. Congress recently and overwhelmingly voted in the Hong Kong Human Rights and Democracy Act.

Beijing has said that this act has "seriously interfered” in Hong Kong's internal affairs. So far its retaliation has not included a trade aspect, and that might mean that Xi is serious about wanting to find some common ground on trade.

But even if there is a phase one deal, it is unlikely to be long lasting nor meaningful for the long term, and as I and others have suggested before, conceding a phase one deal is unlikely to be a big concession on either part.

Technological and military supremacy via hegemony and mercantilism.

The trade war is all about technological and military supremacy.

China’s ‘Made in China 2025’ is the centrepiece of its technological transformation to manufacturing high value items.

Its Belt and Road initiative pictured above is the largest ever infrastructure project in history and is aimed at securing power and influence (through trade access and infrastructure financing) across an economic belt of road, rail, ports and pipelines that are planned to stretch around 70 countries.

Surely that rates as ‘power and control’ and even regional hegemony?

Today, after the incredible transformation of China and in light of Xi’s new initiatives, one wonders whether Xi can hope to credibly repeat this more ancient ideology: “China will never be a superpower and it opposes hegemony and power politics of any kind.”

What he has said is that the Chinese dream, or the great rejuvenation of the Chinese nation is by no means a dream of seeking hegemony.

But looking at actions instead of words, Xi’s China does appear to be conducting a growing Asia-Pacific orchestra and cultivating/buying its superpower credentials in the northern hemisphere through the Belt and Road initiative, whilst vying for technological supremacy via technology transfer and ‘Made in China 2025’.

In response, Donald Trump’s protectionist/mercantile-like policies are clearly focused on maintaining the U.S. as the world’s unipower.

This not only applies to his stance on China, but any other country which seeks to dump ‘cheaper’ goods into America. This week alone he proposed:

• imposition of 100% tariffs on certain French goods (early estimates suggest c.$2.4 billion in value) in retaliation against the French digital services tax which he says specifically targets U.S. tech companies; and

• re-imposition of tariffs on some metallic imports from Brazil and Argentina has also been socialised this week.

His latest blunt instrument attack on China occurred on Tuesday when he said he wouldn’t be limited by December 15 to make a trade deal and that he might wait until after the 2020 election.

Markets took a hammering following those comments. However, on Wednesday night U.S. markets appeared satisfied that his comments had been sufficiently watered down by staffers. Thursday’s return to volatility might have been a mixture of trade and impeachment uncertainty.

Still, it doesn’t look like Donald Trump wants a quick end to his trade war, as I suggested in July, and regardless of how he is going about ‘Making America Great Again!’, Deng’s legacy has catapulted China into the A league on all of the levels which count, and the U.S. can no longer dominate China.

This is what Henry Kissinger thinks and he has diplomatically issued a warning.

The diplomat.

Back in November, Henry Kissinger spoke at the National Committee on U.S. China relations.

His message was simple. China’s all grown up and the days of the U.S. being the only superpower are over.

It’s just not possible for one party to dominate the other and despite the inevitable differences and the history between the two countries, the U.S. needs to understand that China is an equal rival.

He says that the U.S. is no longer exceptional. Period.

“The challenge to both sides is to see whether we can develop enough of a common conviction about the future, so that we can spare the world a conflict between two great societies." Henry Kissinger, 14 November 2019.

The Presidents.

“We are just trying to restore our place and role in the world rather than reliving the humiliating days of semi-colonial and semi-feudal era. In those days there were signs in Shanghai saying Chinese and dogs are not allowed inside — and we will not relive those days again. President Xi Jinping, 22 November 2019.

“I like the idea of waiting until after the election for the China deal. But they want to make a deal now and we’ll see whether or not the deal is going to be right. It’s got to be right,” and “The China trade deal is dependent on one thing: Do I want to make it? Because we’re doing very well with China right now and we could do even better with the flick of a pen.” President Donald Trump, 3 December 2019.

Hmm………………

Mike.

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