Against the intense leverage being applied by President Trump, last week Beijing doubled-down and threatened punishment against any company that would leave China and begin manufacturing elsewhere.
The totalitarian response was predictable and expected. However, also predictable was the corporate response to the threats.
As we shared: “China is counting on prior western investment being so significant that a corporation will be reluctant to withdraw. However, in this outlook Beijing seriously underestimates the free market because communist controlled China doesn’t understand the action of a inherently free market.
The first loss is the best loss. If walking away from an investment provides more financial security and stability than attempting to retain a grip on a tenuous position – corporations will walk away.” (more)
Now today – “Nintendo Moves Some Switch Production Out of China”:
TOKYO— Nintendo Co. is shifting some production of its Switch videogame console to Southeast Asia from China to limit the impact of possible U.S. tariffs on Chinese-made electronics, said people who work on Nintendo’s supply chain.
It is another example of manufacturers adapting to the tariff threat. Taiwan’s Foxconn Technology Group said Tuesday that it was ready to move assembly of Apple Inc.’s iPhones out of China if necessary, and Japan’s Sharp Corp. , which is controlled by Foxconn, said last week that it planned to move production of personal computers to Taiwan or Vietnam.
Kyoto-based Nintendo has traditionally relied on the Chinese factories of contract assembly companies to make its videogame hardware. That includes the Switch console, introduced in 2017. (more via WSJ)
As President Trump highlighted on May 13th, over time (and it won’t take long) there would be an exodus of multinational manufacturing away from China. Corporations will shift their purchase agreements, manufacturing and assembly plans to ASEAN countries outside the investment ‘risk zone’ that is now China.
Notice some of the nuance (specific references) within President Trump’s tweets. Japan (Shinzo Abe), Vietnam (President Trang Dai Quang), South Korea (KORUS), Philippines and India are positioned to pick-up business
While the Red Dragon does the only thing the Red Dragon knows to do, we enter the phase when corporate interests, particularly multinationals, recognize China is a communist state-run, controlled-market, system.
The reaction from China is immensely predictable; and creates a downward spiral. If any corporation is perceived as working against the interests of the state; the state will take control of the corporate interest. What western business interest would want to do business within China when that reality is the landscape of every economic decision?
The willingness of China to self-immolate is the golden arrow in President Trump’s economic quiver. The inability of China to modify itself based on downstream economic outcomes is the inherent weakness… Overlay that weakness with the zero-sum outlook and you get this quote from Chinese State-Run broadcast:
…“If the US wants to negotiate, our door is open. If you want to fight, we will fight to the end.”…
Think about the logical reality of this statement as expressed. Put another way: ‘if you agree to our terms we will work with you; however, if you don’t agree to our terms, we will self destruct.’ That’s the economic reality of the zero-sum dragon mindset. This inevitable position is what CTH has been outlining for several years.
President Trump has walked Chairman Xi into a trap. There is only downside for China in the current dynamic. In an effort to avoid the downside, China will bleed cash to retain their economic position…. However, this can only last so long.
Meanwhile President Trump, Secretary Wilbur Ross and USTR Bob Lighthizer are not backing down from the pressure. Trump, Lighthizer and Ross are sending a very deliberate message to U.S. companies. If you crawled into bed with the Dragon, don’t look for us to help make your bed more comfy… deal with it.
It always appeared that President Trump was fully prepared for this outcome. In hindsight it looks even more obvious how President Trump engaged with China while fully expecting to end-up with a direct and adversarial outcome.
Long before media pundits starting noticing/considering how serious President Trump was about structurally resetting the entire landscape of a U.S-China trade relationship, President Trump quietly and methodically laid the groundwork with personal visits to: Prime Minister Shinzo Abe (Japan); President Moon Jae-in (S-Korea); President Tran Dai Quang (Vietnam); and President Rodrigo Duerte (Philippines).
The November 2017 tour of Asia was President Trump traveling to meet directly, face-to-face, one-on-one with the manufacturing heavyweights of Southeast Asia.
President Trump has positioned this geopolitical trade reset perfectly. Trump began with the end in mind and is now applying Chairman Xi’s own “us -vs- them approach” toward confronting China. The supply chain investment Beijing needs to sustain itself is now being controlled by elements outside China. Beijing responds by attacking those in the international community who control the investment.
As things go forward, China cannot sustain a long-term economic conflict with the U.S. As each day passes the ASEAN alliance will see their investment grow as companies pull-out of China and invest in S-Korea, Vietnam, Philippines, India etc. The GDP of our allies (including Mexico) grows, and the controlled GDP of China, as an adversary, shrinks.
The confrontation between China’s communist controlled economy and the U.S. free market system is the most significant geopolitical event since the collapse of the Soviet Union. The consequences from this reset are far reaching, and extend beyond the tens of trillions of dollars within the combined economies.
The entire system of global trade and supply-chain economics has entered a state of flux.
This will not end well for China.
Watch as time goes along and more companies, and nations, slowly walk toward the exits with China. There is just too much inherent financial risk. China will have to make a deal fast yet their outlook, their inherent disposition, does not permit them to enter into a deal where they will lose status; and President Trump is in no hurry.
President Trump knows the strength of our U.S. position is that our economy is deep and wide. The U.S. is a self-sustaining economy. Almost 80% of our internal production and manufacturing is purchased within our own market.
In the big picture – economic strength is an outcome of the ability of a nation, any nation, to support itself first and foremost. If a nations’ economy is dependent on other nations to survive it is less strong than a nation whose economy is more independent.
The reality of China as a dependent economic model (heck, they cannot even feed themselves) puts them at greater risk from supply-chain consequences Trump is controlling and delivering. President Trump’s strategic use of geopolitical economic leverage is working by weakening the Chinese economy from multiple simultaneous angles…
Chairman Xi has met his match. While President Trump keeps pouring vociferous praise upon the Chinese leader; again, the exact same approach customarily used within China’s own cunning economic strategy; Trump is simultaneously delivering an economic death by a thousand cuts.