Breaking free of Chinese suppliers could take “months”

Nobody said a breakup would be painless, but it may be a lot easier for the US to cut its dependency on Chinese suppliers than is generally assumed. From the blog of trade expert Alan Tonelson (emphasis mine):

Throwaway lines are among my favorite aspects of opinion writing, largely because in a simple, usually brief, and almost by definition understated sentence or two they can thoroughly debunk or at least gravely weaken shibboleths that have reigned virtually unchallenged for decades. And Financial Times columnist Rana Foroohar had a doozy yesterday.

As is well known by anyone who’s been closely following the development of President Trump’s trade policies and the uproar they’ve triggered, some of the biggest fears surrounding the prospect of the “trade wars” they’re deemed all too likely to ignite concern the impact on global supply chains. As explained this morning by Nobel Prize-winning economist and New York Times columnist Paul Krugman;

“[C]orporations have invested trillions based on the assumption that an open world trading system, permitting value-added chains that sprawl across national borders, was going to be a permanent fixture of the environment. A trade war would disrupt all these investments, stranding a lot of capital.” […]

Just how fast they took place, and can still take place, is where Foroohar’s column comes in. In yesterday’s column, she echoed my point about supply chain movements that are either already underway or being contemplated:

“Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future.” She continued – consistent with the conventional wisdom, “But in the short term, the interdependencies will be difficult to untangle.”

Then, however, came the kicker – which received no special emphasis from the author at all:

“Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.”

To repeat: Months – and at the outside years – for many companies to marginalize China’s role in particular in global supply chains. And then remember the reward: Greatly diminishing China’s still-burgeoning influence over the American economy and over the broader global economy, and in the process blunting the growing threat it poses to U.S. security interests both in the Asia-Pacific region and around the world.

Axios cites me

piece in Axios discussing a report on the precipitous decline of Chinese investment in the US in 2017, and what it means:

When Chinese investment in U.S. companies plunged by 83% last year, it was the result of Beijing’s crackdown on capital. But it also reflected a reckoning for four Chinese titans who Beijing cut down to size, according to new research. […]

  • But, but, but: When Ma looked at the individual investments, she saw that just four companies — what MacroPolo calls the Group of 4 — accounted for 61%, or $34 billion, of China’s entire 2016 investment.
  • The four: Anbang Insurance, HNA Group, Oceanwide Holdings and Wanda Group.
  • Absent those six deals, 2016 would have been just a tad higher than the three prior years, Ma writes.

Beijing noticed too: For years, Beijing has encouraged China’s companies to “go out” and invest around the world. But that’s not how the government viewed the Group of 4, which it proceeded to treat as something akin to traitors. […]

Oceanwide appears to be the exception. Just two weeks ago, it got final approval for yet another U.S. deal — a $3.8 billion takeover of Genworth Financial, an insurance company, reports Mingtiandi’s Greg Isaccson.

The article cited is “China Oceanwide Gets US Green Light for $3.8B Genworth Deal.”

Lu Zhiqiang Oceanwide

Oceanwide chairman Lu Zhiqiang is the only member of China’s outbound investment Gang of Four to escape Beijing’s regulatory wrath

Nightlight data and fuzzy math

This is almost a little too pat to be entirely convincing… but it makes sense that authoritarian regimes would have more ability, if not more incentive, to manipulate, exaggerate and outright make up statistics than democracies:

China, Russia and other authoritarian countries inflate their official GDP figures by anywhere from 15 to 30 percent in a given year, according to a new analysis of a quarter-century of satellite data. […]

“The key question that the paper tries to tackle is whether the checks and balances provided by democracy are able to constrain governments’ desire to manipulate information or, more specifically, their desire to exaggerate how well the economy is doing,” Martinez said via email. “The way I try to answer the question above is by comparing GDP (a self-reported indicator, prone to manipulation) and nighttime lights (recorded by satellites from outer space and much harder to manipulate) as measures of economic activity.” […]

For the world’s freest democracies — places such as the United States, Canada and Western Europe — a 10 percent increase in the average intensity of nighttime lighting in a given year correlated with, on average, a 2.4 percent increase in year-over-year GDP. Less free and open countries, however, reported larger GDP gains for the same percent change in nighttime lighting. And the least-free countries of all showed huge increases in annual GDP relative to the freest countries, working out to between a half and a full percentage point of extra GDP for the same light increase.

One question that comes to mind: Is it possible that countries where personal consumption accounts for a relatively small share of GDP (e.g. China) are able to grow more “darkly” than countries where personal consumption plays a larger role (e.g. the US)? The idea being that factories might give off less light per capita at night than, say, driving to a restaurant or staying up late watching Netflix in a brightly lit house. (I have absolutely no idea whether this is the case.) Likewise for economies where the services sector plays a greater role (think of all those computer screens and florescent-lit offices). Looking at the paper, it appears the author has already accounted for just those possibilities, and that the autocracy bias is still strong even when controlling for differences in economic structure.

Of course, it’s not exactly surprising that China manipulates economic data rather liberally; this is a country where the official population figure could be off by 90 million.

Pointless jobs

A savage deconstruction of the treadmill of pointlessness that constitutes “work” for a large percentage of people:

Everyone is familiar with the sort of jobs that don’t seem, to the outsider, really to do much of anything: HR consultants, communications coordinators, PR researchers, financial strategists, corporate lawyers or the sort of people who spend their time staffing committees that discuss the problem of unnecessary committees.

Some would argue that lots of media, entertainment, academic and government jobs could be added to that list. Uncharitably, one might even throw in the entire advertising, marketing and PR industries.

What if these jobs really are useless, and those who hold them are actually aware of it? Could there be anything more demoralising than having to wake up in the morning five out of seven days of one’s adult life to perform a task that one believes does not need to be performed, is simply a waste of time or resources, or even makes the world worse? […]

What is a bullshit job?

The defining feature is this: one so completely pointless that even the person who has to perform it every day cannot convince themselves there’s a good reason for them to be doing it. They may not be able to admit this to their co-workers – often, there are very good reasons not to do so – but they are convinced the job is pointless nonetheless.

Bullshit jobs are not just jobs that are useless; typically, there has to be some degree of pretence and fraud involved as well. The employee must feel obliged to pretend that there is, in fact, a good reason their job exists, even if, privately, they find such claims ridiculous.

The element of pretense and fraud is a key point. The habitual dishonesty required to maintain the illusion that a pointless job actually serves a purpose may be the most psychologically destructive aspect of the Treadmill of Pointlessness.

An earlier piece by the same author is even more incisive:

In the year 1930, John Maynard Keynes predicted that technology would have advanced sufficiently by century’s end that countries like Great Britain or the United States would achieve a 15-hour work week. There’s every reason to believe he was right. In technological terms, we are quite capable of this. And yet it didn’t happen. Instead, technology has been marshaled, if anything, to figure out ways to make us all work more. In order to achieve this, jobs have had to be created that are, effectively, pointless. Huge swathes of people, in Europe and North America in particular, spend their entire working lives performing tasks they secretly believe do not really need to be performed. The moral and spiritual damage that comes from this situation is profound. It is a scar across our collective soul. Yet virtually no one talks about it. […]

But rather than allowing a massive reduction of working hours to free the world’s population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning not even so much of the “service” sector as of the administrative sector, up to and including the creation of whole new industries like financial services or telemarketing, or the unprecedented expansion of sectors like corporate law, academic and health administration, human resources, and public relations. And these numbers do not even reflect on all those people whose job is to provide administrative, technical, or security support for these industries, or for that matter the whole host of ancillary industries (dog-washers, all-night pizza deliverymen) that only exist because everyone else is spending so much of their time working in all the other ones.

These are what I propose to call “bullshit jobs.”

Exactly. But how do we rein in the “administrative sector” without destroying the modern economy and throwing many tens of millions of people out of work?

Buckle up

US Trade Representative Robert Lighthizer

The tariffs cometh:

U.S. Trade Representative Robert Lighthizer said Wednesday the administration would likely be unveiling tariffs against China soon, but cautioned that the precise details are still subject to change.

“The president is going to make a decision in the very near future,” Lighthizer told the House Ways and Means Committee. “Our view is that we have a very serious problem of losing our intellectual property, which is really the single biggest advantage of the American economy. … We are losing that to China in ways that is not reflective of the underlying economics.” […]

He said that the existing world trade system, including the World Trade Organization, was “wholly inadequate” to deal with China because it is “state-dominated economy that rejects market principles.”

Better dig a bomb shelter and stock up on canned beans and shotguns shells, as we are reliably informed that tariffs will lead to a “trade war.”

Protectionist China

Reuters provides a handy rundown of China’s restrictions on US imports. They are… significant:

TECHNOLOGY

China keeps close control over the use of tech within its borders, including full or partial blocks against many popular U.S. firms including Google, Facebook Inc, Twitter Inc and others.

The Chinese government has adopted a raft of strict new cybersecurity regulations, which foreign business groups complain either put China off limits or require them to provide sensitive intellectual property for government checks. […]

AUTOS

Global carmakers can only operate in China, the world’s largest auto market, via joint ventures (JVs) with local partners, with their stake limited to 50 percent, part of a government drive to protect home-grown auto firms.

Tesla Inc chief executive Elon Musk said on Twitter earlier this month that China trade barriers created an unfair playing field and that it was “like competing in an Olympic race wearing lead shoes.” […]

China also imposes a 25 percent duty on imported vehicles, versus a 2.5 percent import tax in the United States.

BANKING AND FINANCE

Foreign financial firms face long-standing equity caps to participate in some services in China, including a 50 percent limit on life insurance and a 49 percent cap on foreign-invested securities broker-dealers. […]

ENTERTAINMENT

China has a strict quota system for imported movies, limiting the number allowed to be shown on domestic cinema screens through the scheme to 34 each year. Hollywood producers also get around 25 percent of the box office, compared to nearer 40 percent they received in other overseas markets.

FOOD AND AGRICULTURE

China bans imports of poultry, poultry products and eggs due to avian flu. It conditionally lifted an import ban on U.S. boneless beef and beef on the bone in June last year. […]

RAILWAYS

China requires rail equipment suppliers to its domestic train networks, which are among the world’s longest, to prove that at least 70 percent of their supply chain is in China.

Embracing “free trade” when your trading partners are severely protectionist is a bit like leaving all your doors unlocked when your neighbors are thieves.

Tariff talking points

Some thoughts from trade expert Alan Tonelson on the impending metals tariffs:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons).

As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

Also don’t miss the follow-up post.

Who’s afraid of a trade war?

Can you be afraid of something that doesn’t exist?

Economist Ian Fletcher writes in the HuffPo:

Trade wars are mythical. They simply do not happen.

If you google “the trade war of,” you won’t find any historical examples. There was no Austro-Korean Trade War of 1638, Panamanian-Brazilian Trade War of 1953 or any others. History is devoid of them.

Please don’t respond with that old canard about the Smoot-Hawley tariff of 1930 starting a trade war and causing the Great Depression. It doesn’t stand up, as actual economic historians from Milton Friedman on the right to Paul Krugman on the left have documented. See here, and here, and here.

The Depression’s cause was monetary. The Fed allowed the money supply to balloon during the late 1920s, piling up in the stock market as a bubble. It then panicked, miscalculated, and let it collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. A wave of bank failures in 1930 spread the collapse around the country. Trade had nothing to do with it.

As for the charge that Smoot caused the Depression to spread worldwide: it was too small a change to have plausibly so large an effect. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of GDP. Our average tariff on dutiable goods went from 44.6 to 53.2 percent—not a large jump. Tariffs were higher in almost every year from 1821 to 1914. Our tariff went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the recessions of 1873 and 1893 managed to spread worldwide absent tariff increases.

Now, there will be much sound and fury about the decision by the US to slap tariffs on steel and aluminum imports (of 25% and 10%, respectively). China, which accounts for 2% of US steel imports, will mostly shrug:

But most analysts said the move was more of an irritant to China than anything serious at this stage.

A glut of steel from China has fueled global oversupply, but Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said China had already been working to cut overcapacity in its steel industry.

Anti-dumping duties imposed by the Obama administration on China two years ago had also helped cut U.S. imports from China and protect a restructured U.S. steel industry based around mini-mills, experts said. Last year, China’s steel exports fell 30 percent […]

The uproar over trade in nineteenth century commodities is drowning out the far more important issue for the US, which is the destruction of the American edge in advanced manufacturing thanks to trade and technology transfers:

America produced every important invention in the digital age, from integrated circuits to semiconductor lasers, solar cells, flat panel displays, sensors and light-emitting diodes. Except for integrate[d] circuits, Asia now produces virtually all the world’s output of these building-blocks of the electronics industry, and China has a crash program underway to become the world’s major producer of semiconductors.

The steel tariff could be just an opening salvo, as the US prepares to take action on high-tech manufacturing. That’s when the sparks would really fly. On the other hand, there are no clear signs that this will actually happen, so we’ll just have to wait and see.

“Enron on steroids”

The collapse of Alibaba, when it happens, is going to be spectacular. From the accounting blog “Deep Throat”:

So here are the metrics we’ve been discussing since the IPO, as described in the 12/31/17 materials/filings.

1.) Fake Revenue: Incredible 56% revenue growth last quarter. Most of this growth is likely just “fake” consolidation revenue masquerading as “organic” growth. (i.e. If Ebay bought Macy’s and consolidated same, Ebay’s revenue would jump 400% YOY in the consolidation quarter.) That’s probably what’s going on here (Intime, Cainiao, SunArt, Hema, Lazada, etc.). The “New Retail” model that management has been referring to (buying up brick and mortar) would have a much lower gross margin, and consequently, a much lower Price/Revenue ratio. Management has also, yet again, increased their “guidance”. It’s presumably much easier to forecast growth when you can go out and “buy” it. Unfortunately, since Revenue is, and has always been, reported as one big “Blob” we have no idea what it’s comprised of. (i.e. “Organic” e-Commerce vs. “Purchased” Brick & Mortar Revenue)

2.) “Questionable Assets”: (Investment Securities, Goodwill, Intangibles, Land Use Rights and Investments in “Investees”) are now a whopping US$56 Billion (51% of the balance sheet), up $9 Billion from $47 Billion in the prior quarter…..compared to roughly US$0.00 (0.00%) prior to the IPO just four short years ago. Alibaba Management continues to create financial vapor at an unprecedented pace.

3.) “Questionable Assets” – Valuation: I’ve long opined that IFRS accounting rules had required Alibaba Management to write down their interest in Alibaba Pictures and Alibaba Health by roughly $3.5 Billion because the publicly traded value simply didn’t support their carrying value. (See: Finding Inner Peace in Dharamsala …..and thoughts on the Alibaba 20-F…. ) Good news! ….this quarter they’ve finally written off $2.8 Billion on Alibaba Pictures!. We’re making progress!……Oh….but wait….when they consolidated the money-losing-dog-turd Cainaio “junk delivery by tuk-tuks & scooters ecosystem” business, they somehow reported a $3.45 Billion gain on the consolidation….more than fully offsetting the Alibaba Pictures write-down!

Etc, etc, etc. From a comment cited in the blog post:

I read your analysis on BABA and on so many different levels this screams “Enron 2.0”. The similarities are uncanny. But it’s actually worse than that. It’s Enron on steroids due to the fact that the Chinese government and regulatory bodies are likely aware of, and support the companies shenanigans, both implicitly and explicitly. If BABA is able to fleece American investors for billions of dollars in exchange for what will ultimately be worthless (or near worthless) equity, all the better. The average analyst/fund manager on Wall St. is likely too young to remember Enron as it happened in real time; even fewer of the older professionals who do remember could explain in depth how the company manufactured their financials and the machinations involved. Once again, history seems doomed to rhyme, if not repeat.