Trump’s China Wrecking Ball Express

The recent arrest in Canada, under a request from the US, of the CFO of Huawei, the leading Chinese telecom equipment manufacturer, doesn’t seem to be an accident. In the context of the growing commercial dispute between China and the US, it will undoubtedly inflame the Chinese. In our view, it is a catastrophic strategic error. Was it merely an agency of the US government acting without Presidential instruction? Was this bad political governance or just an errant bureaucratic mistake? Either way, the consequences seem horrendous.

One has to have a lot of confidence in the bromide that “Americans always get it right after they have tried all the other alternatives,” often attributed to Winston Churchill.1 The question American investors now have to answer is what their portfolios will look like after the Trump confrontation ends, if indeed it does end. It certainly won’t end in 90 days!

The latest iteration is the arrest in Vancouver of the CFO of Huawei, the leading telecommunications equipment maker of China. John Bolton, Trump’s National Security Advisor, says he knew in advance of the pending arrest of Meng Wanzhou, daughter of the founder of Huawei, although he claimed he was not sure that President Trump knew on Saturday when the President declared a 90 day truce in the pending tariff war escalation. Who is kidding whom?

When the President knew is irrelevant. What the Trump wrecking ball is doing, however, is strategically dangerous if not altogether counterproductive, unless we assume that the President wishes to declare a permanent commercial war on China. It is now doubtful that even as a short-term tactic it is sensible. Trying to impress the Chinese how serious the President is in obtaining major trade and intellectual property concessions in this fashion will almost surely backfire. What her arrest is likely to do is galvanize Chinese entrepreneurs into supporting the Chinese Communist Party’s narrative that America wishes to exploit China, much as colonial powers in the 19th century exacted concessions from the weak Ch’ing Dynasty government. This is well known music in China, but it is a strategic error if the President seeks to draw the Chinese to the negotiating table.

Such tactics are reminiscent of the continuing mistakes made by Presidents Johnson and Nixon with regard to the Viet Nam bombing campaigns in North Viet Nam. Remember that the justification used by Johnson and later by Nixon, supported by Henry Kissinger, was based on the faulty notion that inflicting pain on North Viet Nam would bring them to the negotiating table. As is well known, the results were just the opposite for a very identifiable reason: North Viet Nam didn’t think the way we did. Viet Nam soldiers responded by increased willingness to die for their country. Ironically, McNamara, who had initiated the strategy didn’t pay much attention to the bombing surveys done after WWII in Germany despite his own personal participation in their post war statistical analysis. The results were the same. Germans supported the Nazi regime. Great strategy is borne by trying to get into the opponents decision loop and not presuming he thinks like you do.2

The Trump strategy of commercially bombing China will fail for the same reason, namely, because the Chinese narrative of being a victim of western imperialism will be amplified to the very entrepreneurs and citizens of China who might wish for a more liberal democratic regime.

Entrepreneurial capitalism thrives on minimal governmental restrictions. China has used the entrepreneurship and energy of its people willing to take risks and the result is impressive growth. But, this event allows China can dramatically embellish the view that the West, and in particular, the United States, is trying to throttle Chinese development. The consequence is that Chinese entrepreneurs will clearly support their Government.3 There is no chance that current US policies will point to them to the alternative of liberalizing China.

What is more likely to happen is that US private foreign investment in China will be more limited due to further Chinese Government actions against Western investors, while American investors will see the environment for innovative capitalism even more threatened by Trump policies.

Slowing foreign investment in China will bring on a more top down Chinese Government-directed actions in Chinese development. Chinese patriotism will be harnessed to individual attempts to improve personal wealth. That can lead only to more Chinese cronyism, with the chief beneficiaries being key personnel in the Chinese Government. Do we need to encourage this shift?

Huawei was founded by a Chinese engineer from the PLA. The PLA’s entrance into business development was the quid pro quo for the PLA supporting Deng Hsiao Bing’s revolutionary introduction of modified capitalism in China in 1979-1980. Current Chinese leaders can now “prove their case” that the US wishes to throttle Chinese innovation and growth.

Will this be a benefit to Trump politically in 2020? Almost assuredly not! This kind of policy, together with his Europe bashing, will surely turn off the business community’s willingness to financially support a Trump re-election campaign.

The real puzzle is how Trump expects to find his way back to the White House in November 2020 without adequate financial support and increased opposition of American businessmen. It does seem that this President delights not only in shooting off his mouth, but shooting himself in the foot as well as.

Market reactions to these latest Trump indulgences are distinctly different from fears of an interest rate curve inversion. Trump is creating the very conditions for a recession that will sink his re-election campaign. Trump’s main argument that his policies were working was the high and rising level of equities, until by early September it became clear that his war on Iran and China were serious policy efforts of this Administration.

His prosperity argument to investors is crashing. What investors should worry about is that many are still on board the train that he is wrecking.

  1. In fact, I am unable to come up with reliable documentation that this witticism is Churchill’s. Other attributions include Abba Eban, the former Israeli Foreign Minister and Representative to the UN. []
  2. The decision loop is often termed the OODA loop, coined by one of America’s great strategists, John Richard Boyd. See the biographies of Boyd, by Grant T. Hammond, THE MIND OF WAR: John Boyd and American Security, and Robert Coram, BOYD: the Fighter Pilot Who Changed the Art of War. []
  3. The recent “revelation” that Jack Ma, founder of Alibaba and undoubtedly China’s richest entrepreneur, is a Communist is a clear signal of the “lineup” of Chinese entrepreneurs behind Chinese government policies. Driving potential allies away is never good strategy. []