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Generational Dynamics Web Log for 5-Apr-2018
5-Apr-18 World View -- China on path to repeat Japan's experience after Smoot-Hawley Tariff Act of 1930

Web Log - April, 2018

5-Apr-18 World View -- China on path to repeat Japan's experience after Smoot-Hawley Tariff Act of 1930

China's tariff retaliation plan would devastate China's economy

by John J. Xenakis

This morning's key headlines from GenerationalDynamics.com

China's tariff retaliation plan would devastate China's economy


A Chinese farmer gathering bundles of wheat (Getty)
A Chinese farmer gathering bundles of wheat (Getty)

The Trump administration imposed tariffs earlier this week on some 1,300 products in a broad range of sectors, from electronics components to medical devices, and from false teeth to detergent chemicals.

When China retaliated on Wednesday, its list contained only 106 items, mostly agricultural products. American soybeans as the number 1 target, followed by corn products, two types of cotton exports, wheat and meat. The list also includes frozen orange juice and whiskey, tobacco and cars. As a number of analysts have pointed out, while the Trump administration is targeting strategic products, China's reciprocal tariffs are not strategic but political, specifically targeting products that are developed in states where Trump is politically popular, in the hope of applying political pressure to Trump to drop the tariffs altogether.

What seems clear from both sets of items is that these mutual tariffs may harm small segments of America's economy, they will devastate China's entire economy, mainly because of China's enormous and growing food security problem.

China has only 7% of the world's farmlands, but has to feed 20% of the world's population. In order to improve yields, China's farmers have been using massive amounts of chemical fertilizers. The increasing use of these fertilizers has followed the economy Law of Diminishing Returns, in that additional use of fertilizers has been less and less effective and even counterproductive, as some farmland is being poisoned with overfertilization.

Exacerbating the shortage of farmland is the shortage of water. China's available water supply per person is only 25% of the average available globally. In parts of China, groundwater is being depleted for agriculture. The growing and excessive use of fertilizer and groundwater indicate that China's domestic ability to feed its growing population is lessening.

That means that China has to import enormous amounts of food from other countries. Many people were surprised to see soybeans at the top of China's tariff list, because importing massive amounts of soybeans is essential to China's economy. Of all the globally traded soybeans in the world, China imports 60% of them, including $12 billion worth of American soybeans.

If China stopped buying American soybeans, it would be almost impossible to replace them from another source. If China did find another source, perhaps in Brazil or Argentina, then these countries would raise their own soybean prices -- and, indeed, soybean futures prices in Brazil have already been increasing. But then the people who could no longer get their soybeans from Brazil or Argentina would turn to America's soybeans.

On the other hand, if China kept purchasing American soybeans but imposed its threatened 25% tariff, then the cost of the soybeans would be prohibitive for many Chinese, and would lead to price inflation. And price inflation would lead to social instability. China's history is filled with huge, massive internal rebellions (civil wars), the most recent of which were the White Lotus Rebellion (1796-1805), the Taiping Rebellion (1850-64) and Mao's Communist Revolution (1934-49). China is overdue for a new massive civil war, and a soybean tariff could be the trigger. Xinhua and Reuters and Nature and Zero Hedge

China on path to repeat Japan's experience after Smoot-Hawley Tariff Act of 1930

Chinese officials keep saying that they don't want a trade war, but they're not afraid of a trade war. Well, the first half of that statement is true, anyway, but the second half is definitely not true. America's economy would be slightly hurt, but China's economy would be devastated.

When America passed the Smoot-Hawley Tariff Act in 1930, during the Great Depression, it was particularly devastating to Japan, as it cut off Japan's exports to America of silk, its greatest cash crop.

I've written many times in the past that the 1930 Smoot-Hawley Tariff Act could be considered the beginning of World War II, so I was interested in a speech given by Japan's prime minister Shinzo Abe in 2015, commemorating the 70th anniversary of the end of WW II, where he explained how Japan was affected by a "major blow" -- the Smoot-Hawley act -- and how it led to Japan's invasion of Manchuria a year later:

"[After World War I] Japan kept steps with other nations. However, with the Great Depression setting in and the Western countries launching economic blocs by involving colonial economies, Japanís economy suffered a major blow [Smoot-Hawley]. In such circumstances, Japanís sense of isolation deepened and it attempted to overcome its diplomatic and economic deadlock through the use of force. Its domestic political system could not serve as a brake to stop such attempts. In this way, Japan lost sight of the overall trends in the world.

With the Manchurian Incident, followed by the withdrawal from the League of Nations, Japan gradually transformed itself into a challenger to the new international order that the international community sought to establish after tremendous sacrifices. Japan took the wrong course and advanced along the road to war.

And, seventy years ago, Japan was defeated."

The Smoot-Hawley act devastated Japan's silk industry, and its entire economy, causing it to take desperate measures a year later, invading Manchuria. Later, America and the League of Nations imposed a punitive oil embargo on Japan in 1941, and just a few months later, Japanese warplanes bombed Pearl Harbor.

It's quite possible that we're on a similar path with China today. China's economy is already in dire straits, with huge debt bubbles that could burst at any time, and anything resembling a trade war could lead to social instability, which would cause China to take desperate measures, such as invading India, Japan, Vietnam or the Philippines.

One could argue that China is a victim. They were victimized by Americans and the Europeans, who made it too easy for the Chinese to cheat on trade with illegal tariffs and to steal American's intellectual property, with the result that China became addicted to the drugs of illegal tariffs and stealing intellectual property. Now those drugs are being taken away, and China is at risk of showing the signs of drug withdrawal which, in this case, means launching a world war.

China is on a very dangerous path -- to itself and to the world. China's illegal tariffs and stealing intellectual property will not be allowed to continue. It's up to China to fix this problem, but we know that the Chinese people are so nationalistic and so xenophobic that they will not.

Generational Dynamics predicts that the approaching Clash of Civilizations world war will pit China, Pakistan and the Sunni Muslim countries against the US, India, Russia and Iran. In the Mideast, Generational Dynamics predicts a full-scale Mideast war, pitting Jews against Arabs, Sunnis against Shias, and various ethnic groups against each other. Cato Institute

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(Comments: For reader comments, questions and discussion, see the 5-Apr-18 World View -- China on path to repeat Japan's experience after Smoot-Hawley Tariff Act of 1930 thread of the Generational Dynamics forum. Comments may be posted anonymously.) (5-Apr-2018) Permanent Link
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