China US Containers WarFrom an American perspective, China has a strange confidence the belies and critical weakness that is just below the surface.

US President Donald Trump is fond of pointing out that China sells much more to the US than the US sells to China.  He believes that this trade imbalance gives him unlimited power to dictate Chinese policy and that belief has lead to the US initiating a trade war.

Chinese President Xi Jinping knows that his country has an enormous domestic market that is massively undeserved.  China can and will replace exports to the US with domestic consumption.

Westerners have a perception that China will collapse without US exports, when in fact China:

  1. only exported 18% of its exports to the United States in 2018.  That is not 18% of the Chinese economy… just 18% of exports.
  2. China only exports 19% of it’s gross domestic product (GDP)

This means that the US only consumes 3.5% of what China produces.  To loose that would be a major problem for China but it would be far from devastating if it is stretched out over a 10+ year period.

Keep in mind that China only has 31% of its citizens in the middle class. That leaves about 60% of it’s people to develop and with a population of 1.4 billion people (compared to the US’ 3.3 million), they have lots of room to grow.

President Xi knows that US exports will not drop to zero even in the worst case scenario.  His country feels like post WWII America.  They have technological advances that surpass what the rest of the world is capable of and enormous domestic market to supplant foreign markets like the United States.

It appears that Xi is playing a long game while Trump can’t see past this afternoon.

Watch this interesting 90 second video clip with Rana Foroohar:


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