Trump capitulated

[frankfurter + 562]

12 Oct 2019, I posted my prediction Trump would capitulate in the so-called trade war. Of course, certain members here derided me for this assertion, aggressively, vehemently, arrogantly, insultingly. 

Here we are in Jan 2020, and the so-called "Phase One" has been signed. Let's review the salient aspects.

Trump cancelled and reduced tariffs. US Tariffs increase the landed price to US consumers. US consumers pay the tariffs, not Chinese consumers. 

China agreed to buy those goods it had already intended to buy prior to the so-called "deal" and "war". None of these goods are manufactured goods.

Estimates are that at least half of the US trade deficit is represented by the offshored goods produced by the likes of Apple, Nike, Levi. These offshored goods are counted as US-imported goods, and thus are included in the trade deficit. Ponder the logic here.

Nothing in this "trade deal" brings any manufacturing jobs back to the USA, not now, not later. If Trump et al were serious about this goal, they would be changing the income taxation rules to ensure the tax would wipe out any arbitrage profits created by the disparity in labour costs. 

yet, Trump et al are shouting this to heaven on high as the greatest deal in history. Farmers win? No. They simply regain what Trump took away. [pity the 'murcans here: Trump taketh and Trump giveth].

The capitulation and ensuing propaganda were easy to predict. 

[Douglas Buckland + 6,308]

Your definition of capitulation is suspect.

[Enthalpic + 1,496]

Trump failed so bad he broke Oil price!  Well at the very least the pro-trump echos are softening...

[0R0 + 6,251]

16 hours ago, frankfurter said:

12 Oct 2019, I posted my prediction Trump would capitulate in the so-called trade war. Of course, certain members here derided me for this assertion, aggressively, vehemently, arrogantly, insultingly. 

Here we are in Jan 2020, and the so-called "Phase One" has been signed. Let's review the salient aspects.

Trump cancelled and reduced tariffs. US Tariffs increase the landed price to US consumers. US consumers pay the tariffs, not Chinese consumers. 

China agreed to buy those goods it had already intended to buy prior to the so-called "deal" and "war". None of these goods are manufactured goods.

Estimates are that at least half of the US trade deficit is represented by the offshored goods produced by the likes of Apple, Nike, Levi. These offshored goods are counted as US-imported goods, and thus are included in the trade deficit. Ponder the logic here.

Nothing in this "trade deal" brings any manufacturing jobs back to the USA, not now, not later. If Trump et al were serious about this goal, they would be changing the income taxation rules to ensure the tax would wipe out any arbitrage profits created by the disparity in labour costs. 

yet, Trump et al are shouting this to heaven on high as the greatest deal in history. Farmers win? No. They simply regain what Trump took away. [pity the 'murcans here: Trump taketh and Trump giveth].

The capitulation and ensuing propaganda were easy to predict. 

There is a point to the agreement's only pro US employment component being the quota for Chinese minimum purchases. But that is not the crux of it. 

It is the phase II components that are being implemented ahead of a negotiation IP, subsidies, theft, cyberattacks, cybertheft, legal framework for all of these...those are the important components. US tariffs remain in place with no commitment to take them off till the US is satisfied that China is keeping its word. 

The bulk of the agreement and negotiation had been about protecting US corporations. (1) to allow them production in China without theft, copying, sharing control with locals partners, and without technology transfer. (2) to restrict China from competing with US companies or their international suppliers by means of theft, subsidy, and sabotage, 

The rest is strategic technology cutoff for China outside the agreement. It is intended to stall and prevent China from obtaining entry into the top level technologies where they could control architecture and key components (chips) or use them to infiltrate Western operations. The tools are likely to be a threat to EU and UK clients that their potential China suppliers would not have access to chips so could not fill contracts, I would expect TSMC would obtain substantial rewards for locating operations in the US and Europe, or otherwise away from China.

With awareness of how Chinese bribe their way into technology transfer and theft, it is only a matter of obtaining commitment and cooperation from the respective governments and companies that have been targeted by China for poaching. 

As you pointed out, the trade deficit is an accounting misnomer, where the US border is actually around the operations of the US companies rather than at the physical US border. A relic of imperial accounting when trade was nearly entirely internal to empires. 

You can rail against this as negative for US workers, but it is as in Japan, there is more to be gained from managing operations abroad than bringing them "home". It isn't as if the modern automated production would ever employ a substantial portion of the population. Steel plants don't do 5000 people today, they use 12 for operations and 100 for technical and logistical support. Assembly is being replaced by additive manufacturing (3D printing) and handling by robots. It is of little impact to employment levels, it is only important for pricing and logistic security and secondary economic effects of the higher income jobs that it does produce. What does require armies of production floor workers will largely remain outside the US unless there is some mechanism put in place to subsidize trade skills in vocational schools and internship programs. Those are happening but not nearly at the levels required to justify "reshoring" that kind of work. The cost of material inputs should be lower in the US so that the wage paid for US workers can be higher than a foreign worker without harming the competitive position. 

The US advantage in cheap energy and petrochemical feedstocks is being pushed to have China purchase secondary goods as much as possible over primary inputs. However, China has made a large investment in doing this manufacturing step inside the country. This is a move towards pushing their current account down further in the strategic containment strategy, and establishing further dependency.on the US and the West. 

. 

[Boat + 1,315]

Over the last 20 years or so dangerous tech is being transferred. For example, India may decide to buy 200 fighter jets with more later. In this new world of trade India will demand factories built in India to help offset the billions spent. Now India not only gets the jets but hands on experience building the latest war tech. 
We love to pick on China but never talk much about willing war tech transfers to make a buck. India of course is just one small example.

Washing machines, refrigerators, computers and phones are one thing but that military tech has hundreds of billions of taxpayer money behind it. Not to mention the incredible destructive power of these weapon systems.

Then there is the danger of countries making those systems themselves since we taught them how. Come on Trump, give me a tweet. You like it?

[0R0 + 6,251]

Presumably India would remain friendly. Also, the defense contractors know how to keep prying eyes away form key tech. India will get a potted aluminum sealed black box to assemble into the planes etc. Never see the board let alone the chips. 

Not that big  a bother compared to the US having to put more people on the ground, sea etc.

[frankfurter + 562]

4 hours ago, 0R0 said:

There is a point to the agreement's only pro US employment component being the quota for Chinese minimum purchases. But that is not the crux of it. 

It is the phase II components that are being implemented ahead of a negotiation IP, subsidies, theft, cyberattacks, cybertheft, legal framework for all of these...those are the important components. US tariffs remain in place with no commitment to take them off till the US is satisfied that China is keeping its word. 

The bulk of the agreement and negotiation had been about protecting US corporations. (1) to allow them production in China without theft, copying, sharing control with locals partners, and without technology transfer. (2) to restrict China from competing with US companies or their international suppliers by means of theft, subsidy, and sabotage, 

The rest is strategic technology cutoff for China outside the agreement. It is intended to stall and prevent China from obtaining entry into the top level technologies where they could control architecture and key components (chips) or use them to infiltrate Western operations. The tools are likely to be a threat to EU and UK clients that their potential China suppliers would not have access to chips so could not fill contracts, I would expect TSMC would obtain substantial rewards for locating operations in the US and Europe, or otherwise away from China.

With awareness of how Chinese bribe their way into technology transfer and theft, it is only a matter of obtaining commitment and cooperation from the respective governments and companies that have been targeted by China for poaching. 

As you pointed out, the trade deficit is an accounting misnomer, where the US border is actually around the operations of the US companies rather than at the physical US border. A relic of imperial accounting when trade was nearly entirely internal to empires. 

You can rail against this as negative for US workers, but it is as in Japan, there is more to be gained from managing operations abroad than bringing them "home". It isn't as if the modern automated production would ever employ a substantial portion of the population. Steel plants don't do 5000 people today, they use 12 for operations and 100 for technical and logistical support. Assembly is being replaced by additive manufacturing (3D printing) and handling by robots. It is of little impact to employment levels, it is only important for pricing and logistic security and secondary economic effects of the higher income jobs that it does produce. What does require armies of production floor workers will largely remain outside the US unless there is some mechanism put in place to subsidize trade skills in vocational schools and internship programs. Those are happening but not nearly at the levels required to justify "reshoring" that kind of work. The cost of material inputs should be lower in the US so that the wage paid for US workers can be higher than a foreign worker without harming the competitive position. 

The US advantage in cheap energy and petrochemical feedstocks is being pushed to have China purchase secondary goods as much as possible over primary inputs. However, China has made a large investment in doing this manufacturing step inside the country. This is a move towards pushing their current account down further in the strategic containment strategy, and establishing further dependency.on the US and the West. 

. 

excellent observations.

question:  as more US 'goods' flow from US into China, would not the US suppliers become economically dependent upon China, at least to some extent?  

 

Edited January 20, 2020 by frankfurter

[John Foote + 1,135]

Pay close attention to see how semiconductor tools sales are going. China is still mostly on the outside looking in for state-of-the-art tool acquisitions. But they are building new 200mm fabs and beginning to place large orders. Trump is trying to block the sale of high end equipment from ASML, a Dutch company. ASLM has had older equipment end up in Chinese hands and completely cloned, so they are probably willing to support. I don't know the status to Tokyo Electron, but in general the Japanese are quite learly of tech transfer. American ones are typically happy to sell, continuing to gamble that the rate of technology change protects them.

[frankfurter + 562]

https://twitter.com/RobinNiblett/status/1221128162555375617?ref_src=twsrc%5Egoogle%7Ctwcamp%5Enews%7Ctwgr%5Etweet

Returning to the topic posted, we see a few developments since. The twiter above is rather interesting. Niblett is director for RIAA.

The Wall Street Journal reports: “Commerce officials have WITHDRAWN proposed regulations making it harder for US companies to sell to Huawei from their overseas facilities, following objections from the Defense Department as well as the Treasury Department, people familiar with the matter said. The Pentagon is concerned that if US companies can’t continue to ship to Huawei, they will lose a key source of revenue – depriving them of money for research and development needed to maintain a technological edge, the people said.”

Not just a key source of revenue, but THE MAJORITY of the chip-makers' revenues.

April 2018.
The US banned chip exports to the Chinese handset manufacturer ZTE in retaliation for violation of Iran sanctions, closing ZTE. President Trump negotiated a massive fine in return for resumption of deliveries. Classic mafioso extortion - a true hit.

August 2018
Only four months later, Huawei announced its Kirin chipset for smartphones, claiming better performance than Qualcomm’s market-leading product. 

September 2019
Huwaei ships 5G base stations having zero US components. 

December 2019 
Huawei begins shipping smartphones having zero US components.

December 2019
Nikkei Asian Review. Huawei begins “mobilizing Asian suppliers for a production surge,” leading “a split from US technology.”

Taiwanese companies who, for years, had begged for Huawei’s business are now flooded with orders. Taiwan has the world’s best chip foundries, and Huawei depends heavily on Taiwan semiconductor manufacturing – for the moment. Chinese companies hire 3,000 Taiwanese chip engineers at double pay, to build chip foundries in the mainland.

January 2020
Huawei employs over 100,000 engineers, and its 2020 R&D budget is expected to be $20 billion.

[Meanwhile, US R&D spending is barely half of its Reagan-era level in proportion to GDP.]

The US has failed with other 'initiatives'.  Huawei uses chip design technology from Britain’s ARM, owned by Japan’s Softbank. In October 2019, ARM announced its exports to Huawei do not violate US content rules.

The Pentagon and Treasury objections to the proposed export controls indicate the balance of power in the global chip industry has shifted towards China.

The proverbial pendulum has swung. The writing is on the wall, in Twitter, in blogs, in media, in classified memos. Trump capitulated.