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China Used This Exact Phrase Ahead Of Their War With India And Vietnam

Courtesy of ZeroHedge. View original post here.

Submitted by Eric Peters, CIO of One River Asset Management

“Don’t say we didn’t warn you!” declared the China People’s Daily. And historians rushed to remind us that Beijing used the phrase in advance of their 1962 border war with India and 1979 war with Vietnam.

China assembled an “unreliable entities list” for retaliation against foreign companies, individuals and organizations that “do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for noncommercial reasons, and seriously damage the legitimate rights and interests of Chinese companies.”

Pence responded by warning Beijing we could double tariffs. “Engaging in activities that run afoul of US sanctions can result in severe consequences, including a loss of access to the US financial system,” warned the US Treasury’s undersecretary for terrorism – you see, the Europeans are building systems to circumvent American sanctions. Today, those sanctions are directed at Iran, Russia, North Korea, Venezuela, but tomorrow they may be directed at China.

Naturally, the Europeans threatened only themselves – 1,500-year habits are hard to break. Germany and France fought bitterly over who would become European Commission President. Brussels warned Rome to honor its obligation to contain its growing debt. Italy’s Salvini threatened to launch a parallel currency – step #1 in the process to abandon the euro and default.

And out of nowhere, Trump warned Mexico to stop the immigrant flow in 10-days or face tariffs. Global CEOs who were rushing to rearchitect their China supply chains, digested the risk that these investments could be instantly devastated by some future tariff – imposed to achieve Americas geopolitical objectives – and they prepared to warn shareholders they’re putting new investment on hold. As the US treasury yield curve inverted, with 3mth bills at 2.34% and 10yrs at 2.12%. Which of course, is one of the most reliable warnings of looming recession.

Framework

“Economists generally use tax frameworks to evaluate the trade war,” said my favorite strategist. “They calculate a -0.4% hit to GDP, which is not such a big deal. But they’re using the wrong tool.” Tax frameworks treat tariffs as a tax. They then model how a nation’s currency adjusts to the tax, how corporate profit margins shrink to absorb the tax, and how consumers shoulder the remaining burden. “Tariffs are being used as a proactive, combative tool. The GDP hit will be at least double. Modelling these tariffs require more complex frameworks.”

“If all of the affected nations simply agreed to adopt new tax regimes, then the tax framework would work fine,” continued my favorite strategist. “But the world has built specialized supply chains. So if Nation A tries to hurt Nation B, and Nation B is part of critical supply chains that impact Nation A, then there are many things B can do to harm A in non-linear ways.” Banning rare earth metal exports is a small example. “Once Apple locks down their product production for Nov 2019 release, China knows exactly how to push that past Feb 2020.”

“Global trade was already in the process of fracturing,” added the strategist. “Now Huawei can’t use Google’s operating system.” Their phones are as good as paperweights. “But do you really want to bet that Huawei can’t spend the next 6mths building a competing operating system?” We’re entering a world of competing superpowers. “The overall impact will be to operate economies with redundant technologies, fewer efficiencies, lower ROEs, lower ROAs. And ironically, or perhaps by design, it’ll be bad for profits, but okay for labor.”


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