Game Theory: Predicting Xi-Trump Trade Talks

If Wall Street can do that CPC will give Wall Street more share in growing Chinese economy which has already become the engine of global supply and is set to become the engine of global demand. Wall Street knows if it cannot tame in Pentagon and China hawks, China will have to rely even more on state enterprises for economic growth which will further erode Wall Street power in the global economy.

Players and their Interests

Communist Party of China (CPC)

The CPC wants to move ahead with state-owned enterprises led demand generating investments in China and abroad. CPC is following this course since the 2008 financial crisis. This is because US market since the crisis is failing to generate enough demand for Chinese industries. This is clear from the fact that the US current account deficit fell from 4.6% in 2007 to 2.3% in 2017. Between 2000 and 2007 average US current account deficit was 4.9%. Between 2008 and 2017 it has fallen to 2.5%. Thus CPC has to generate enough demand through strong state enterprise led investments which are often non-profit making with gestation period. Since 2013, CPC has epitomized Belt Road Initiative (BRI) which is about globalizing the state enterprise led demand generation model. It is said that CPC also has geopolitical designs through BRI.

Wall Street

Since the late 1970s, Wall Street led financial capitalism emerged in the US where geopolitical influence is used to make US dollar reserve currency across the globe and through reserve currency status huge amount of cheap credits are channelled into US asset market. Using these credits, US asset prices are inflated and thus asset trading becomes profitable. To get rid of economic stagnation of the early 1970s the US capitalists found profit-making investment in asset trading business. Thus the US specialized in unproductive speculative yet highly profitable asset trading business while productive manufacturing sector gradually went to cheap labour based Third World countries especially China.

Since 1the 980s, China started to grow economically by exporting to the US as profits from asset trading generate huge consumption demand in the US. After the 2008 financial crisis, Chinese GDP became too big to depend on the US market. China under CPC began its own state enterprise investment led BRI model posing threat to Wall Street-centric global economy. CPC even created Asian Infrastructure Investment Bank (AIIB) and New Development Bank (NDB) to counter USA alias Wall Street dominated IMF and World Bank. Wall Street understood that the global economy is going out of control.

Pentagon

The US geopolitical influence and hence Wall Street led global economy to wrest on Pentagon’s military power. Pentagon with $900 billion annual budget and 900 military bases  is stretched across the globe. Its 70% budget goes to pay salaries to military and non-military staffs. Though its budget is more than total sum of budgets of the next six economic powers including China and Russia, it was not enough to win in Afghanistan, Somalia, Iraq, Yemen. Even in shadow wars, it failed miserably in Syria against Russia-Iran alliance. Pentagon is proving to be ineffective in countering China in the South China Sea too. It is seeking alliance of other nations to counter China, Russia and Iran in their respective neighbourhood. This has resulted in the loss of many allies. Saudi Arab and Israel are not solely relying on the US to counter Iran any longer. They are seeking Chinese and Russian help for the purpose.

South Korea has started to build relationships with nuclear-armed North Korea without consulting the US. ASEAN countries clearly want to take no sides between China and the US. It has shown interest in signing a code of conduct agreement with China. India, Japan, Turkey also bargaining between US and China-Russia to maximize their own goals. But it must be mentioned Pentagon’s alliance with neighbours of Russia against the later has gained momentum with Poland, Ukraine accepting US troops and US military bases. Again this success has scared and angered Russia further for which it has formed the alliance with China and doing everything to make the US weakened further.

The U.S. Demand in Trade Talks

US demand is basically three:

• China must allow more imports and reduce trade surplus.

• China must make Intellectual Property Laws that allow US investors of the high tech sector in China to have more long-term fixed profits.

• China must sacrifice its state enterprise led socialist economic model and accept private property rights above all based capitalist model.

To fulfil first demand Chinese currency yuan must be given more room in global transactions and as global reserves. Already, yuan role as a global reserve currency has risen from 1.08% in 2016 to almost 2% in 2018. Only if yuan role in global economy rose substantially, China can import more and export less. But to make it a successful Chinese geopolitical role at least in its backyard needs to be increased. Will Pentagon accept that?

Second demand shows how much eager US capitalists are to invest in China especially in the high tech sector. If they are guaranteed with handsome fixed long-term returns by forming ideal intellectual property laws, they are ready to invest more with China.

Third demand clearly shows US capitalists led by Wall Street are not comfortable with CPC led socialist system. They want their financial capitalism to be imposed on China.

Actions of Different Players

The CPC quite predictably has confirmed on first two demands but refuse to abide by the third one. This shows CPC will never move away from official Marxist Leninist goal of the socialist path to reach communism. Moreover, the powerful US Chamber of Commerce in China and Henry Kissinger clearly agreed that China has the right to follow its own development path. Another technical problem for China to follow financial capitalism is that Chinese geopolitical influence is nothing when compared to US geopolitical influence in the 1970s when US financial capitalism emerged. Without such influence, Chinese asset market can never have access to enough cheap credits to inflate asset prices and make asset trading profitable.

Wall Street players formed New Economic Forum in Singapore to rival Davos based World Economic Forum. So they don’t want to antagonize China further as they earlier did by refusing to accept Chinese demands in reforming IMF. Wall Street players also played a great role in making China the largest recipient of foreign investment in the first half of 2018 after 2014. The first half of 2018 saw fall in FDI inflows in the US by 73% compared to 2017. In this time, China attracted largest FDI of $70 billion, then Uthe K $66 billion and then theUS $46 billion.

China hawks inside Trump administration like Navarro clearly said that this act of Wall Street is done to weaken Trump’s bargaining power in up-coming trade talk with Xi. Later Navarro was sidelined. The US Vice President Pence’s barbs against China failed to hide the fact that Trump has decided to give Xi a walk over in APEC Summit and reduced the enmity by not going to Asian Summit.

Conclusion

If China hawks start to counter BRI with their own version like Build Act, then Chinese model can be said to be copied by others which will crowd out money from US asset market eroding Wall Street. In 1944 when US global domination began with Brettonwoods Agreement, US GDP was 45% of global GDP in terms of PPP. In 2017 it is reduced to 15.7%. But US dollar role as global reserve currency fell from 75% to just 62%. Clearly, US production base is not big enough to hold on to the responsibility that the US dollar is entitled to. The US dollar has to leave room for Yuan to keep the global economy working. If the global economy does not work, the state will replace private profiteers more from the economic domain. In other words, Pentagon has to be reduced more for Wall Street than for CPC.

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy and position of Regional Rapport.