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Trump vs China

By Michael Knox - posted Thursday, 13 September 2018

In approaching this piece I refer to two articles I have already written about Trump; one was a piece last year about the effect of China entering the world free-trade agreement. That piece was called "Deaths of Despair". The next piece that I did this year covered the same area but with more detail on the US economy. That piece was called "Is Trump Rational?".

In this piece I will attempt to show that President Trump has three objectives in his negotiations with China. One objective has already been achieved.

In the piece "Deaths of Despair" I opened it with a discussion on China's entry into the World Trade Organization. I noted that before China entered into the World Trade Organization, Chinese exports to the United States faced a low tariff but those tariffs were subject to annual review. The fact that those tariffs were subject to annual review, meant there was uncertainty in the situation of American firms wishing to locate to China.


Should an American firm (say) move its manufacturing plant from Wisconsin to China, it would engage in a huge amount of sunk costs and also technology transfer costs. That entire investment could be lost in one year when tariffs were increased, subject to an annual review. The result was, because of the RISK of tariffs, there was no transfer of US manufacturing to China.

That changed in 2001 when China became part of the World Trade Organization. From that time there were still low tariffs on Chinese imports to the United States but there was no annual review. From that time, there was the beginning of a very significant transfer of US manufacturing into China. Over the first decade of this century, starting from a position of 18 million US manufacturing jobs, six million of those jobs were lost. Those jobs were lost because the US manufacturers they were working for moved to China. This means that six million US manufacturing workers lost their jobs and they never ever got them back. From then on, manufacturing employment in the United States stabilised at a new lower level.

From then on, death rates started rising for US white workers with high school degrees, that is to say, people with grade 12 education but no university education. Death rates started to rise. A detailed examination of this health crisis was provided by Nobel Prize winner Sir Angus Deaton in March 2018 (see references). This is a unique effect in the United States. It doesn't happen in Europe. It doesn't happen in Australia. It doesn't happen in Canada. But it happens in the United States.

The rate of death of older workers begins to rise because of alcohol-related diseases and the rate of death of younger workers rises because of opioid abuse. This is because of the destruction of opportunity for whole communities because of US manufacturing moving to China.

Additional research conducted for the Brookings Institution, by Ed Glaeser, Larry Somers, and Ben Austin of Harvard, and published in March 2018, have expanded upon this analysis. They note that the economic convergence, of American regions has greatly slowed, and rates of long term unemployment have been diverging. The rate of non-employment for working aged men has nearly tripled over the last 50 years, generating a terrible social problem that is disproportionally centred in the eastern parts of the American heartland.

The researchers say that many measures of wellbeing suggest, that not working is far worse than low income employment. This motivates their focus on employment rather than incomes. They divide the USA into three regions: the prosperous coasts, the western heartland and the eastern heartland, the eastern heartland is comprised of areas which became states before 1840. The coasts have high incomes, but the western heartland also benefits from natural resources and high levels of historical education.


America's social problems, including non-employment, disability, opioid-related deaths and rising mortality, are concentrated in America's eastern heartland, States from Mississippi to Michigan, and generally east of the Mississippi and not on the Atlantic coast. The income and employment gaps between the three regions are not improving, but instead seem to be worsening.

It is from this crisis that the people from these areas became Trump voters. This is the Trump base and it is from these people that Trump got elected in 2016. Most of the academic and administrative establishments have been blind to this crisis happening in the US economy. That was a reason that Trump's election was such a surprise.

What Trump intends to do

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This article was first published by Morgans.


The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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