Geopolitics and Naïveté

Sorry it's been so quiet lately: reality continues to intrude...

This prompted me to write: yes, I do read the New York Times occasionally.

The naïveté of newspaper people - driven by their absolute dependence, it seems, on being told what to write by their masters - is once again painfully obvious.

China is and remains a country dominated by a communist party that is concerned about one thing and one thing only: power. Economic power is of greater interest than military power, to them, because the Chinese communists know how incredibly vulnerable they are in terms of population concentration and weak infrastructure. One good strike on several dam complexes and you flood out more than half of China's industrial potential, crippling the country economically. The Chinese know this - it's unavoidable, given the geography of the country - and also know that this makes them vulnerable, militarily.

Hence the push for economic power.

What the pundits have forgotten - or perhaps never considered - is that the Chinese government, while well out of the limelight and keeping a very, very low profile, remains unchanged from the government that has killed, literally, millions of its people without regret (and indeed has done so deliberately in order to meet political targets). Politics is a one-player game in China, despite the fervent and misplaced hopes for political liberalization in the wake of economic development. The Chinese government is, if anything, equal to the French in terms of playing their own game, more than happy to let their political opponents believe what they will (usually wrongly) whilst aiming at purely national advantages, all while disclaiming and touting their international interests.

China is at a cusp: while the Chinese population will continue to rise over the next several decades, the inner shift has started, with fewer people entering the work force than leaving it. Population here will start to decline in 2050, expected to stabilize at some 600mn Chinese in 2150. This means that one of the key tenets of Chinese economic development - increasing numbers of entry-level workers to expand their industrial base - will be coming to an end.

So what is to do? The Chinese government, which still effectively runs the economic development of the country, has started to behave like a classic mercantilist: it buys up raw materials to prevent competitors from even entering the market; it buys competitors to eliminate price competition; it is playing a zero-sum game.

Hence: the decision of China to cease supplying rare earths to anyone outside of China should be utterly unsurprising. Utterly. It should be expected and will continue. The government of China, while murmuring a commitment to free enterprise and capitalism, is in reality the last mercantilist out there. Mercantilism is economic nationalism, the notion that the prosperity of a nation is dependent on its supply of capital.

Why else would China be more than happy to amass such huge monetary reserves? There is no other real explanation: under normal circumstances, the Chinese currency would revalue in the wake of such high reserves and such a long-term positive balance of trade figures. Instead, the government here keeps the Chinese currency artificially low in order to perpetuate its accumulation of capital.

Without this in mind, Chinese economic policy makes little sense. Just like any other political intervention in markets, it is also doomed to failure: at some point, the markets will reset themselves and the Chinese currency will appreciate rapidly in order to bring trade into equilibrium. It is just a question of when and how badly markets will be bent before they restore themselves.

Of course, mercantilists don't care much about markets.

These are the corer tenets of mercantilism (from here):

The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively:

• That every inch of a country's soil be utilized for agriculture, mining or manufacturing.
• That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.
• That a large, working population be encouraged.
• That all export of gold and silver be prohibited and all domestic money be kept in circulation.
• That all imports of foreign goods be discouraged as much as possible.
• That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
• That as much as possible, imports be confined to raw materials that can be finished [in the home country].
• That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.
• That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Sound familiar? Replace gold and silver with fiat money, and you've got China. Add to it a ... unique interpretation of intellectual property rights (i.e. if it isn't nailed down, steal it), and you can see China's approach to the rest of the world.

The naïveté of the West in dealing with China is legendary. It is also inexcusable.