Wanderer Financial Stock Trading Newsletter - Trade War With China

What We Thought We Knew About China

China is a backward, communist country that is overpopulated with poor, oppressed people—or so I was taught. Today, I still hear Americans refer to China as a backward, communist country. But propaganda is a funny thing. It’s similar to an accent, where you think only other people are afflicted with a strange voice, but you are somehow immune. The fact is, no matter how open or closed society is, we are all subject to propaganda. Even an honest reporter is influenced by his or her own experiences and opinions. Don’t believe it? Read your local paper, and then read a foreign newspaper. You will see the same topic is covered, but with a completely different narrative. World travelers are very familiar with the way a major event captures the world’s attention differently, depending on country and culture. One of the reasons we encourage wandering, especially to countries we have a hostile or volatile history with, is because it changes the way we see the world. It starts to become more natural to view a topic from your “opponent’s” perspective, in addition to your own. By looking at both sides with an open mind, your perspective of the world changes.

Wanderer Financial Stock Trading Newsletter - Travel Changes Your Perspective of the World

While growing up, I was taught that communism is evil and must be destroyed, even if it means war. Any country that was communist was an enemy of the US. Since China was communist, they were no friend of ours. Furthermore, anything made in communist China was considered to be cheap junk that was certainly a bad knockoff of a US product. Buying Chinese products was supporting communism and harming American workers. My US-centrist view of China remained with me into adulthood when my traveling began, and my sphere of influence widened. I still believe that communism is evil. At the very least, it enriches the party insiders at the expense of the working class, making them poorer as time goes on. At worst, well, history is rife with examples of that. Either way, communism is not a government model I would want to live under.

However, the idea that Communism and cheap Chinese goods go hand-in-hand is not the full picture these days. No doubt, you can buy low-cost, low-quality products from China. It is also well known that they have a history of “adopting” proprietary technology and making it their own (though it’s rather naive to think America isn’t doing a bit of this themselves). These are legitimate concerns that need to be and are being, addressed.

With my US-centrist view of China, it could be easy to believe that Mr. Trump holds all the cards in the current trade war. After all, we are supposed to be the biggest, baddest nation on the planet, and there is no way a poor communist country is going to stand a chance against our beacon of capitalist freedom and American exceptionalism. Right?

Yet, something in my brain keeps nagging at me. If the Chinese system is so backward and inept, why are so many of the things I have in my own home made in China? Shouldn’t it be the other way around? Shouldn’t the bumbling Chinese, who have no incentive to produce, beyond their daily existence, need to rely on our capitalist productivity to survive?  Why aren’t their houses full of goods we make, instead of the other way around? These discordant questions have been creeping into my consciousness to the point that they could no longer be ignored.

I think the world has proven that the communist experiment doesn’t work. Without a profit or self-improvement incentive, there is no impetus to innovate, and society does not improve. If there is no reward for extra effort, why bother? When that attitude applies to an entire society, it isn’t long before daily necessities like food and clothing are in short supply and must be imported. But enter the current China/US situation where Mr. Trump’s biggest beef is that China doesn’t import enough. Hmm, there’s that nagging in the back of my brain again.

Fact is, it’s the other way around. We are buying their stuff. So the question becomes, why aren’t the Chinese starving for our products? How are they getting along without our largess? We’re Capitalist, and they are Communist, so the trade numbers should be turned around. How is a communist country so productive that it managed to fill our store shelves and their own with everything from tools, to clothing, to luxury goods, to high-tech electronics? Why don’t they need our products? Something doesn’t add up.

Wanderer Financial Stock Trading Newsletter - Global News Different Perspectives

In the US, the financial news repeatedly points out that China will be the big loser in a trade war. We continuously hear that Mr. Trump holds the upper hand because we buy more from China than they do from us. We’re told our tariffs will bring them to their knees and scare them into accepting Trump’s demands, regardless of how reasonable they may be. Yet, so far, a deal with China has proven much more elusive than most anticipated. Why haven’t Mr. Trump’s threats of more tariffs caused China to cry, uncle? With these thoughts in mind, I decided to do a little boots on the ground investigating to see how this trade war is viewed through the eyes of the Chinese people. With my computer in my backpack, and my wife along with her ever-present camera in hand, we booked flights to Shanghai.

What We Learned About China

Wanderer Financial Stock Trading Newsletter - Travel to China to Report on the Trade War

In a former life, I co-owned a clothing brand that gave me a lot of experience dealing with factories in China. An agent that I often used to source products became a good friend of mine, and we kept in touch even after we exited the business. Given our long-standing friendship, it was a no-brainer to reach out to my former agent Raymond when I touched down in Shanghai. He is uniquely qualified to provide insight into the changes that are taking place at warp speed in China. Born poor and in the countryside, he remembers quite well when China actually was communist in practice, and not just in name. He remembers the ’70s and ’80’s when adults were assigned a job and provided housing by the government. He remembers when beef was a rare treat few could afford. Pork and rice were the main staples on his small family farm. Everyone in his village seemed content with their meager belongings. There was no worry of keeping up with the Jones’s because the Jones’s were just as broke. A desire to improve one’s lot in life was a concept unknown. No one was truly happy or fulfilled, yet few were truly miserable either. It was also interesting to hear him say that the stresses and pressures of getting ahead that we experience today didn’t seem to exist then. There was no “rat race” as we all know it so well today.

Wanderer Financial Stock Trading Newsletter - China Trade War - Perspective from China

But Raymond’s life changed when he came across a help-wanted ad from a foreign clothing brand looking for a local person to source garments for them. Raymond landed the job, and it began a very successful 20-year career as an agent for international clothing brands. Want 100,000 knit hats? Raymond knows just the factory that will give the best quality for the best price. How about waterproof, breathable jackets? Yup, he knows what region of China excels at that type of sewing and seam sealing. He also knows what parts of China pay high wages, and what parts are still affordable. His experience with foreign nations and his knowledge of different regions of China proved to be invaluable in my search for what the playing field over there is like from the Chinese perspective.

What I have been told about China, and the China I saw with my own eyes, was so different, it seemed impossible that I landed in the right place. The sign said welcome to Shanghai, but the poor, oppressed place I was taught to expect was nowhere to be seen. Instead of hungry peasants, I saw a city full of international businessmen and women. The place was bustling with energy. Everything seemed new and massive.

Wanderer Financial Stock Trading Newsletter - Busy Shanghai China

In the last twenty years, China has transformed itself in a way that is difficult to describe. A walk in central Shanghai is a massive shock to the system–in a good way. Never before have I seen so many lit up skyscrapers, luxury stores, Gucci clothes, Maybachs, Porsches, Mercedes, BMWs and ultra-exotic vehicles in one place. The shops, street vendors, and restaurants are bustling with customers that are dressed to impress. Teenagers are glued to their smartphones while wearing the latest Western brands (but made in China) from head to toe. The image of poor, repressed, unhappy communists was nowhere to be seen. I mean nowhere. I asked Raymond if he considers his country communist, and he laughed out loud. Literally.

There were small business owners cleaning the front of their stores, cafes of every nationality, and street vendors offering items I didn’t even know existed. There were modern conveniences in buildings, sidewalks, subways, elevators—and street signs that were straight out of a sci-fi movie. A walk through a luxury brand mall felt very much like a mall in Manhattan or Palm Beach on steroids. There were swarms of customers with armloads of shopping bags. The biggest Nike store (another Western brand manufactured exclusively in Asia) I’ve ever seen was in Shanghai, and it was packed with young, paying customers.

Wanderer Financial Stock Trading Newsletter - China's wealth

Shanghai today is much how I would imagine New York City was 100 years ago. New York’s first skyscraper was built in 1902. With its construction began a building boom that included the completion of the Empire State building and the Chrysler building in 1931. During those years, New York transformed itself. Suddenly everything was new and grand as each building seemed to outdo the previous one. Those were heady times in New York City. The feeling of optimism was in the air, and there was work for almost any able-bodied person. Shanghai is going through the same kind of boom today. As incredible as New York City is, those grand structures that were built in the 1920s are now 100 years old. They can’t help but look a bit dated compared to the brand-new, futuristic skyscrapers sprouting up at a record pace all over Shanghai today.

But what about the narrative that China needs us more than we need them? It is impossible to watch the US news and not hear that narrative. Domestic news tends to report news from a local perspective, so you hear the story from one side. A simple example is an article that I read in a US newspaper that claimed the Chinese people are angry at President Xi Jinping for being too nationalistic and not acquiescing to Mr. Trump’s demands on trade. The article described a grim view of China’s economy and noted that a trade deal with the US was vital to China’s well-being.

When I asked Raymond how the Chinese citizens want their president to deal with Trump, he was adamant that their leader Xi not back down. He explained that from their view, it was President Trump who walked away from the negotiating table and is being unreasonable—a cultural “slight” that they consider rude. The Chinese feel fully justified in sticking to their guns, regardless of the consequences. But what about the harm from all the tariffs? After all, we do buy a lot more from them than they buy from us, so they will be the biggest loser if a deal isn’t made. At least, that’s the US news narrative.

No doubt the tariffs are having an impact. Their stock market dropped 32% in 2018, partly due to the tariffs. From the way Raymond describes it, the pain has mainly been felt on the little guy. It is the smaller factories that produce products for just a few customers that can’t afford to lose any. If one or two of them happen to be American, the pain is disproportionately felt. Many of these small businesses have gone bankrupt. Meanwhile, the remaining customers that weren’t American can migrate to the larger factories that have a broader international customer mix.

Wanderer Financial Stock Trading Newsletter - Trade War with China

Does China Really Need Us As Much As We Think They Do?

Raymond described in detail a phenomenon that is taking place throughout rural China. When he started sourcing sewing factories for foreign clients, the average sewing worker made $150/month. The hours were—and mostly still are—long, and the conditions are brutal by Western standards. These aren’t sweat-shop factories, but they aren’t cushy desk jobs either. It is no wonder we can’t compete on price when it comes to garments. But what a change the last decade has brought! China is growing so rapidly and offers so many job opportunities, that clothing factories are losing workers despite much higher wages. A specialty sewer can now command almost ten times the salary, and still, the factories are losing workers. There are too many other, less difficult jobs available in the rapidly growing cities. One small factory that Raymond has worked with for the last fifteen years has gone from 150 workers down to 30 currently, and it’s unrelated to tariffs. The average age of the sewers is approaching fifty years old. Their children have no interest in the back-breaking jobs of the China of old. If that sounds familiar, it should.

The shift to other nations besides China for low-cost goods had been underway well before Mr. Trump began his trade war. China has transformed itself from a country dependent on manufacturing goods for other nations to one that can hardly keep up with internal demand. Standing 1843 feet high on the observation deck of the 2073-foot-tall Shanghai tower, I watched a literal convoy of ships importing raw materials to feed a seemingly insatiable rate of growth. The story doesn’t stop with Shanghai. Entire cities with millions of people are erupting across the country. Google lists the population of Shanghai as 24 million. The city of Beijing adds another 21 million, and a city most Westerners have never heard of, Chongqing, has a whopping 30 million.

The point is, China is no longer the backward communist country that most Americans learned about in school. The rate at which China transformed from a low-cost exporter to a world power is astonishing. According to the IMF, China’s economy is roughly the size of Japan, Germany, Britain, and France combined. While the US is still the largest, China is now number two and rapidly closing the gap. Together, China and the US make up 40% of the world economy. Free and open trade between these two countries would provide a tremendous opportunity for both nations.

Wanderer Financial Stock Trading Newsletter - Prosperous Shanghai China

Mr. Trump has his own style of negotiating, and I applaud his efforts to open China’s economy to the US. China’s current trade policy can undoubtedly seem unfair to its trading partners. China has transformed into a big deal, and they know it. They no longer see themselves as a third-world country, and they aren’t likely to accept being treated as one any longer. My brief time in China left me with the distinct feeling that they no longer need the US, and that they know it. That is why President Trump’s threats do not have the impact he intended. Free and fair trade between the two largest economies on earth would be a boon to the world. We wish Mr. Trump the best of luck in his negotiating efforts with China, and at the same time encourage him not to underestimate them.