Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 9-Apr-07
The Administration and Congress plan harsh protectionist trade sanctions against China

Web Log - April, 2007

The Administration and Congress plan harsh protectionist trade sanctions against China

The Chinese are "strongly dissatisfied" with a recent US decision to levy penalty tariffs on imports of Chinese coated free sheet paper. The US Department of Commerce last Friday announced its preliminary decision to apply US anti-subsidy law to imports of coated paper from China.

"This action of the US side goes against the consensus reached by the leaders of both countries to resolve disputes through dialogue," said Wang Xinpei, spokesman for China's Ministry of Commerce. "China strongly requires the US side to reconsider the decision and make prompt changes."

Coated paper isn't exactly a major strategic item, as those things go, but this new tariff policy signals the start of a whole series of protectionist trade measures targeting Japan.

In a separate matter, administrative officials have indicated plans to file formal trade complaints against China over pirated copies of American movies, music and software. (We can't even control our own "illegal" downloads of movies, music and software, so we're sanctioning the Chinese for the same thing?)

Chinese currency policy is a matter that's infuriating our people in Congress.

Democratic party Sen. Charles Schumer, and Republican party Sen. Lindsey Graham are cooperating on a "veto-proof" bill to FORCE the Chinese to revalue their currency. (Does any intelligent person really believe that the Chinese will accede to something like that if forced on them? Well, let's face it, "intelligent Senator" is a self-contradictory phrase.)

It's been my opinion for some years that the first major hostile act of World War II was not the Japanese bombing of Pearl Harbor, and was not any invasion by Hitler. Here's how I described in my 2003 book, Generational Dynamics: Forecasting America's Destiny, what happened after the 1929 stock market crash:

"Perfectly reasonable acts by one country can be interpreted as hostile acts by another country. Guns and bombs are not needed to create an impression of war.

And if one country's innocent act is a shock to another country and is viewed as hostile by that country, and if the people of that country are in a mood for retribution rather than compromise, than they may well look for a way to retaliate.

In that sense, the enactment of the Smoot-Hawley Tariff Act in June 1930 can be viewed as the first of the shocking, provocative acts that led to World War II.

The Act was opposed by an enormous number of economists as being harmful to everyone, but it was very popular with the public, because of the perception that it would save American jobs. Many in the public believed that the crash had been caused by withdrawal of investment funds by foreign banks, just as many in the public today believe that the Nasdaq crash of 2000 was caused by the illegal or improper actions of CEOs of Enron and other corporations. The public demanded the Smoot-Hawley Act in retribution, just as the public today demands the jailing of corporate CEOs.

Interestingly, the Smoot-Hawley Act is still debated by politicians today, with regard to whether it caused or aggravated the Great Depression or had no effect, with pro-free trade politicians taking the first position, and politicians supporting restrictions on free trade taking the second position.

Those discussions are entirely America-centric because, for the purposes of this book, it makes no difference whatsoever whether or not the Act aggravated the American depression. We're interested in the effect it had on foreign nations.

And the effects were enormous. The bill erected large trade barriers for numerous products, with the intention of saving American jobs. How many American jobs it saved, if any, is unknown, but it virtually shut down product exports to the United States. Both Germany and Japan were going through the same financial crisis America was going through, and they were furious that America as a market was closed to them.

Japan was the hardest hit. The Great Depression was hurting Japan just as much as it was hurting America but, in addition, Japan's exports of its biggest cash crop, silk, to America were almost completely cut off by the Smoot-Hawley Act. Furthermore, Japan would have been going through a generational change: The country had undergone a historic revolution some 70+ years earlier, culminating in a major change of government (the Meiji Restoration) in 1868, and the people who had lived through that revolution would be dead or retiring by the early 1930s.

So one thing led to another, and in September 1931, almost exactly a year after Smoot-Hawley, Japan invaded Manchuria and later northern China. Britain and American strongly protested this aggression, and Roosevelt finally responded with an oil embargo against Japan.

This is the usual pattern of provocative acts on both sides. America saw Smoot-Hawley as its own business, but to Japan it was a hostile shock. Japan saw the Manchuria invasion as "Asian business," while Britain and America saw it as attacking their own Asian interests. Roosevelt saw an oil embargo as a measured response of containment, while energy-dependent Japan saw it almost as an act of war, eventually triggering Japan's attack on Pearl Harbor in 1941."

As I've discussed many times on this web site, China is actively planning for war with the United States, and has indicated so in many statements I've quoted. China has over 100 million itinerant workers, and enormous income differences between elite and peasant classes, resulting in tens of thousands of large regional rebellions each year. Chinese premier Wen Jiabao recently said that China is "unsteady, unbalanced, uncoordinated and unsustainable."

So China has many troubles, and it blames many of those troubles on the US.

China is also aware that it has been subsidizing America's huge credit binge all these years, saving money only to lend it to Americans to spend on Chinese manufactured goods.

So after subsidizing America's credit binge for years, the Chinese, who are sensitive to disrespectful foreigners anyway, are going to be increasingly infuriated by further protectionist measures targeting China. As China's own economic problems increase, their anger at America will increase, as will their sense that America has been screwing them economically.

As I've discussed in the past, nations and populations tend to become increasingly xenophobic during generational crisis eras. That's been happening in the US between Anglos and Latinos, and in fact American hostility to illegal immigration has been growing steadily. It's happening throughout Europe, in the mutual level of distrust between Muslims and ethnic Europeans.

And it also flared up last month in a confrontation between Japan and China over comfort women, an issue that both sides had thought resolved years ago.

Usually, xenophobia takes the form of conflict between natives of and immigrants to a country. But xenophobia can take many forms, and they all come to the fore during generational Crisis eras. All of the examples we're giving -- comfort women, trade protectionism with China, stricter immigration laws, conflicts between Europeans and Muslims -- all of these illustrate exactly the same thing: The growth of xenophobia, hostility and even hatred toward other national, religious or ethnic groups. And they all illustrate what happens during generational Crisis eras.

China has been increasingly belligerent towards America, especially over the subject of Taiwan, and now America is becoming increasingly belligerent towards China in the form of protectionist trade sanctions. We saw this with Japan in the 1930s Smoot-Hawley act, and now we're seeing it with China in the 2000s.

This is also an illustration of the entire Generational Dynamics concept that when you examine a country's policies and trends, you can't just examine the words of a few politicians or economists. You have to look at the attitudes and behaviors of large masses of people, entire generations of people.

In the case of the Smoot-Hawley law, it was opposed by President Hoover and by economists. But the American people were looking for someone to blame for the stock market crash and the Great Depression, and they blamed foreign exports for stealing American jobs.

Today, we're in a similar position, and we aren't (yet) suffering anything even close to the pain Americans suffered after the 1929 crash. Still, Americans are suspicious of the Chinese, and China-bashing politicians like Schumer and Graham just pander to these suspicions by passing (or at least threatening to pass) laws that do America no good whatsoever, but will infuriate the Chinese.

Stephen Roach, Morgan Stanley's chief economist, has been concerned about this issue for some time, and he also compares the current craziness to the 1930 passage of the Smoot-Hawley law: "[The] notorious Smoot-Hawley Tariff Act of 1930 – a policy blunder of monumental proportions [played] a key role in `sparking a global trade war and the Great Depression. Some 77 years later, his spirit was very much in evidence as the Senate Finance Committee gathered to debate the 'China threat.'"

Roach blamed America's economic problems with China on America itself, and gave three reasons:

"One, America’s extraordinary saving shortfall sets us up for chronic trade deficits with China and a host of our other trading partners. Two, China is focused on a major rebalancing of its own economy that, over time, will provide structural relief to its trade surplus. And three, America’s middle-class angst – which is driving the politics of China bashing – reflects a US economy that failed to prepare its workforce for the pressures of an IT-enabled globalization. There was little or no response to anything I said."

Roach points out that China would not respond to protectionist legislation kindly, but would seek retaliation:

"In these more extreme scenarios, any number of possible Chinese actions might be expected – ranging from retaliatory tariffs of its own to restrictions on foreign direct investment to limits placed on overseas portfolio inflows. Then, of course, there is China’s ultimate trump card – the asset allocation decisions that pertain to its massive reservoir of over $1 trillion in foreign exchange reserves. In the event of a major trade sanction imposed on China by the United States, I think this option could well come into play – not in the form of outright sales of existing positions of China’s dollar-based holdings but more from the diversification of new inflows of foreign exchange reserves into non-dollar-based assets. In that event, America would feel the full force of China’s wrath in the form of a sharp decline in the value of the dollar and a concomitant increase in real long-term US interest rates.

Yet one thing is now for certain: America’s anti-China brinksmanship is escalating. ... For their part, the overwhelming majority of investors remain steeped in denial – convinced that nothing like this could ever come to pass. The ghost of Reed Smoot [of the Smoot-Hawley Act of 1930] is a haunting image of an increasingly treacherous endgame."

The third of Roach's three possible forms of retaliation is particularly telling: China has hundreds of billions of dollars worth of American treasury bills in its reserves, representing the hundreds of billions of dollars that we owe to China. And yet, here we are telling China what to do, when it's China that should be telling us what to do.

Roach's examples of retaliation are all economic, but he neglects to mention that possibility that American protectionist laws may trigger a panic in China, leading to war.

From the point of view of Generational Dynamics, war with China is coming with almost mathematical certainty. As usual, Generational Dynamics tells where we're going, but now how we'll get there. In the past I've described several different possible scenarios that could lead to war: a bird flu pandemic, an international financial crisis, a Chinese economic recession, a threat from Japan, or a Taiwanese action that could be interpreted as moving towards independence.

These and other triggers could cause the Chinese public to panic, in the same way that American panicking is causing Washington impose protectionist trade sanctions on China. Panic plays a very important part in wars during a generational Crisis era, as shown by how Israel panicked in pursuing the summer, 2006, Lebanon war with Hizbollah.) Just as we're panicking now, and Israel panicked last summer, any of a wide variety of incidents could trigger a Chinese panic, leading to full-scale war. (9-Apr-07) Permanent Link
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