Yuanfen and the Trade Gap with China

Capitalism is anti-fragile. It becomes stronger under challenge. Innovation thrives in a crisis.

However, this resilience depends upon unleashing entrepreneurs to address the new situation. China’s authoritarian government has used the crisis to exploit its facial recognition, artificial intelligence, drones, geolocation, sensors, and other technologies. The US government has been entertaining Luddite ideas of technology as the enemy of privacy and a vessel of monopoly. The EEOC treats job markets in Silicon Valley as channels for sex discrimination.

In a bizarre turnaround, we have closed down much of our economy in the name of freedom and privacy, while they have opened up their economy in the name of communism.

I am not making this up. While the world obsesses about the coronavirus, the US remains in the grip of insidious fears of trade and technology that may well force investors to look beyond our shores.

As the crisis ends, investment is likely to flow toward those countries that use strategy and technology to keep their economies in gear. Investment will tend to shun those countries that stop their private sectors from innovating.

In a mercantilism siege, the administration deplores our trade gap with China, as if it somehow signified losses for the US.

But the trade gap with China is the essence of yuanfen, the fate that brings peoples together. It means the Chinese want to invest in the United States and in the dollar. It means the Chinese have been adopting our operating systems, chip designs, architectures and industry standards.

The trade gap represents streams of valuable manufacturing services, assembly plants, and needed skills for the supremely profitable information industries of America. These technologies, often built in China, have given us the world’s four most valuable companies, worth trillions of dollars of market cap, and so powerful they terrify and stultify America’s politicians.

In addition, the trade deficit represents a complementary capital surplus for the US, which we sorely need because of our meager savings rate.

Understanding Global Capitalism

A foreigner who earns a dollar has essentially two choices. He can spend it on US commodities or he can invest it in US assets (or trade it with someone else who has the same choices).

The Trump Administration trade warrior Peter Navarro imagines that a trade gap signifies loss.

Somehow when the Chinese buy Apple or Alphabet shares, or government securities, or real estate, or a technology license, or a chip design it depletes us. Navarro’s view implies that somehow we are going to have to buy these things back. An ultimate buyback requirement is the implicit assumption of all those who believe that our trade gap puts us in debt to foreigners.

But there is no reason we will ever have to buy the investments back. Partial Chinese ownership of the US economy is a fact of global capitalism.

The rule of trade and capital markets is what they buy in the United States we keep; what they buy from the United States, they take.

According to the mercantilists, if they buy soybeans or apples or beef or some other commodity, it enriches us. This is the opposite of the case. They buy the apple and they eat it and we don’t have it any more. They buy the Apple shares or the hotel and we keep them and improve them.

It is better to have the Chinese investing in America than merely buying our commodities, reducing us to a mere supplier to the Chinese manufacturing empire.

At the same time, the US is propagating myths regarding China’s world leading economic growth and technology ascent. China has been exaggerating its growth rate. Its growth is the effect of government mandates and payments.

The Communist party, so it is said, has engineered the Chinese success by manipulating its currency and subsidizing and controlling business investment. Moreover, its technology has been stolen from the West. Stolen technologies have allegedly enriched China and impoverished the US at a rate of some $300 billion a year.

In fact, as I have been showing in my time-price analysis of Chinese growth (see Marian Tupy and Gale Pooley’s compendious data), the Chinese communist party doesn’t understand economic growth and much underestimates the achievement of Chinese private enterprise.

Today’s Prophecy

In my book, Scandal of Money, I show that China has actually refused to manipulate its currency and has mostly followed the Hong Kong model, pegging the RMB to the dollar.

Moreover, when the Chinese “steal” US technologies based on US standards and architectures, they lend momentum and power to the American technological empire. When the Chinese are forced to create new standards and architectures of their own, they begin to launch a competitive empire of technological standards and architectures.

Over the last several years we have been forcing Huawei, the world’s leading telecom equipment company and second ranking smartphone producer, with business in 80 countries, to abandon US technology. We are requiring Huawei to replace Google’s Android standard, give up on Intel chip architectures, and compile a huge panoply of wireless technology patents.

No anti-American schemer could have contrived such a devastating attack on US microchip leadership and technology standards, unless perhaps they combined it with a wide-ranging US governmental and judicial attack on our leading technology companies. In recent years, the US government has followed European governments in suing and fining, investigating and indicting Google, Facebook, Apple, and Amazon for spurious offenses in anti-trust and privacy and even sex discrimination.

Meanwhile, on all our campuses, the professoriat is mounting a Luddite attack on technology in the name of a doomsday adventist cult of climate change.

This is an inflection point for US investors. We have to figure out how to save our assets and savings in the face of a massive attack. And it does not come from China.

Even for investors who hesitate to enter the maelstrom of Chinese markets, I believe that there will be many opportunities opening up in the coming year — in Israel, South Korea, and even South Africa, and on the frontiers of new technology in the United States.

I will be chasing them down here in my prophecies and newsletters. It should be an exciting ride.


George Gilder
Editor, Gilder’s Daily Prophecy

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George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

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