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I have recently listened to a podcast by Peter Schiff concerning the China - US trade war. Schiff to me is an interesting chap; he always puts an interesting spin on things. However, from time to time his rhetoric is very predictable. I knew going into the podcast that he would be pessimistic about the US situation, however I think he may have gone too far with this analogy. I'm paraphrasing here, but it's almost word for word, I'm just condensing:

To understand who would "win" the trade war between the US and China, let's imagine a simpler model. Suppose there is an imaginary island that has 4 people on it: 1 American and 3 Chinese people. Let's say they have to survive on this island somehow. One Chinese person is tasked with going out and fishing. Another Chinese person is tasked with foraging for fruits and other edible plants. The third Chinese person is tasked with preparing and cooking the food. So what does the American do? Well, he simply eats! Now he doesn't eat everything, he leaves enough for the three Chinese people to sustain themselves, but the American does get the lion's share. This illustrates the precariousness of the US economy; should the Chinese ever decide to kick the US off the island, they have the skills they need to survive. And by analogy, the Chinese can win the trade war since they are making a lot of useful things whereas America's economy is primarily consumption.

It sounds kind of absurd when simplified this way, but I think Schiff has made some excellent points (in a rather humurours way to boot). Let us concede that trying to predict who will "win" the trade war (might be more a lose/lose) is a very speculative matter, so let's cut Schiff some slack. It's not easy to take a risk and stake one's reputation. With that said...

Question: Are there any glaring errors in this analogy? Is there a way to make the analogy more realistic?

My personal critique:

  • The notion that the Chinese do all the work so the American can gorge himself and get hardly anything in return for themselves seems over the top. When America consumes Chinese products, China is getting USD in return, which is the world reserve currency and they can use that to buy or invest in anything in the world. Surely that's worth something. Of course, it's true that the RMB has been climbing the currency rankings in the past few years, but still, there are limitations on RMB denominated options.
  • There are certain sectors that America is adept at. America has a powerful agriculture sector that produces much of the worlds wheat and a handful of other crops.

That's what I have so far. I would like to find other errors in Schiff's analogy. If possible, I would like to improve on his analogy and make it more realistic.

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A very interesting question

The analogy is wrong in a few aspects

1st of all, the technology. The us produces patents and knowledge in general which china doesn't posess Furthermore the us government supports innovation and the development of new technologies Since it intangible, its hard to dismiss, but when you think about it, the US most valuable companies main assets are tech patents

The ingredient of creating technology is highly skilled workers, which in turn, make the us low tech industry unsustainable, which, in its turn, gives china its advantage

China doesn't have a functioning innovation model, on the contrary, stealing patents are almost a Chinese specialty...

Another thing to consider is the game that china is playing: The stronger the demand for its goods, the stronger the demand for labor, which increases local salaries, then the product cost itself And along with the rise of its foreign currency balance that pressures the Yuan's rate to rise, there is a huge pressure on the Chinese products' price in dollars

China holds it currency artificially low, essentially subsidizing its products at a large cost, and in way, hurting the us economy

So the analogy is not really holding... The us is not the free rider in this story

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  • $\begingroup$ Excellent portrayal of the other side of the story! I hadn't considered those actually. Now that you mention it, they do seem very compelling! $\endgroup$ – Arash Howaida Sep 13 '18 at 14:48
  • $\begingroup$ (willit be rude to ask to mark the question as answered?) $\endgroup$ – Guy Louzon Sep 13 '18 at 14:50
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    $\begingroup$ I certainly hope to do so, I usually leave the question open for 24-48 hours. That seems to be the convention suggested for SE. meta.stackexchange.com/questions/5234/… $\endgroup$ – Arash Howaida Sep 13 '18 at 14:53
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Arash, you definitely have a more sensible understanding of how the global economy works than Peter Schiff does. From my days of listening to Peter Schiff, I walked away with the understanding that Peter does not know exactly how Triffins' Paradox works, nor what it means to have a global reserve currency.

To truly understand why trade wars ignite and spread, we need to go back to the monetary stimulus program launched after the 2009 financial meltdown which includes Zero Interest Rate Policy (ZIRP), Quantitative Easing (QE) and central bank purchases of government and corporate bonds and stocks to backstop lenders and increase liquidity.

So with credit being almost free, new production facilities come online in the hopes of earning a profit.

Soon there is more productive capacity than there is demand for the good being produced and this leads to over-capacity, and it leads to over-production, which as a result of supply and demand. This leads to a loss of pricing power: producers can't raise prices due to global gluts, so they end up dumping their over-production wherever they can.

Over-capacity leads to some nations over-producing, and cheap, easy credit leads to over-consumption in other nations. Both imbalances are the result of vast distortions in the incentive structure of the global economy, distortions created by the policies of (ZIRP), and other financial engineering, as well as government subsidies for over-production and so on.

As these distortions and imbalances start destabilizing domestic economies, political leaders turn to trade wars to stem the erosion of the domestic economy. Trade wars are the inevitable consequence of monetary stimulus that creates perverse incentives to borrow more than is prudent, over-produce, over-consume and use accounting trickery and financial engineering to maintain the appearance of fiscal health.

Its a complex topic, but Schiff always succeeds in turning into a pissing contest among an American and Chinaman type of imagery. It is nothing personal between China and U.S., its just financial trickery among its leaders to try to keep their economies afloat after screwing it up in the first place.

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