China versus the US.
This is the heavyweight bout that the world has been waiting for. A clash of superpowers that will pit the east against the west.
As I alluded to yesterday, the current trade war is just the latest round in this bout. An escalation of an ever-rising tension between the two nations. Especially as the perceived gap between the two begins to narrow.
However, despite Trump’s insistence to the contrary, no one truly ‘wins’ in a trade war. At least not for the parties directly involved.
Wielding trade as a weapon is a double-edged sword. One that will only work for so long before it starts doing more harm than good.
Whether the current crop of politicians will come to that conclusion is up for debate. Though perhaps even that won’t matter in the long run.
The US, in their current state, cannot win.
Not the trade war, nor the greater war for power. They are in decline while China continues to rise.
And the real irony here is that they’re using the US’ own playbook to make it happen. Granted, they are using some very different means. Which is why we’ve ended up with this mess in the first place.
Political quagmires aside, the fact is the US needs a new strategy. That is if they want to win anyway.
Obama tried to gently prod China in the right direction, Trump is now trying to force them. Clearly an offensive strategy isn’t working.
So, perhaps it’s time to change the game altogether…
Pursue the end, not the means
At the end of the day, this trade war is (for the most part) about growth. Or rather, the US’ bid to try and limit China’s growth.
Trump is trying to curtail the Middle Kingdom’s ascent, while boosting his own. And while he has had some success, this strategy is misguided. As MIT economists Jonathan Gruber & Simon Johnson recently noted:
‘China’s economic strategy is no secret. In the short term, Beijing will grow the country’s economy by manufacturing and exporting cheap, globally competitive goods. Over the longer term, it will build the capital, infrastructure, and expertise necessary to make the country an innovation powerhouse.’
That’s why Trump went after trade. He was trying to hit them where it hurt as the world’s manufacturer. As Gruber & Johnson add though, this tactic was far too late:
‘But Trump’s sights are set on outdated threats. China’s economic strategy has already mostly succeeded.
‘The biggest threat from China is both much more serious and considerably easier to address than any the Trump administration has identified. Through government-led investment in research and development, China is poised to become the global leader in scientific and technological innovation in the near future, displacing the United States from a position it has held for 70 years.
‘Instead of sparring with China over trade, the United States should dramatically increase its own investment in research and development.
‘Only by spurring domestic innovation can the United States counter China.’
In essence, Gruber and Johnson are saying the US needs to get back to what it does best: innovation. Really harnessing the true spirit of the creative destruction that Schumpeter pined about.
We know it’s possible too, because they’ve done it before.
During the height of the Second World War and the Cold War, the US didn’t rely on trade to win. They won through sheer technological supremacy. The Manhattan and Apollo programs can attest to that.
If the US really wants to win, it’s time to do it again.
Greasing the wheels
The thing we do have to keep in mind is that innovation isn’t ephemeral. It isn’t chance that leads to new inventions, it’s commitment.
Statistically speaking, given enough time and money, breakthroughs can always be made. It simply depends on how much, both in input and output.
More than this though, innovation often requires resources; beyond just time and money.
It’s not easy to create something from nothing.
That’s where the trade war could really bite. The US needs raw materials to innovate. And they need the help of other nations to secure these materials.
Pissing off China, a major supplier of many key resources, isn’t the best way to go about that. It could wind up costing them dearly.
We’ve already seen plenty of murmurs about one such resource in the form of rare earths. If China decided to stop supplying the US with these minerals it would eventually leave them in a pinch.
Because of this, finding an alternate supply has been one of Trump’s top priorities. A matter that has seen him turn to Australia to potentially fulfill his nation’s needs.
In fact, we could be about to see a rare earths boom Down Under. As it stands, the US could be the catalyst that sends a select group of junior miners’ share prices soaring.
Long term though, these minor details will be negligible. That is if, and only if, they commit to innovation.
It won’t be easy, but it will be easier than their current plan. Finding leaders willing to commit to it though, could be the hurdle. Within both the private and public circles.
Nevertheless, it’s worth a shot. I can’t see them winning any other way.
It’s time to Make America Innovate Again.
Editor, Money Morning
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