The Art of Trade War

Donald Trump has declared a trade war between the United States and China, sort of. First, he increased tariffs on steel and aluminum imports (initially for all countries, but most other countries got waivers). Then, he declared a second round of measures that targetted China’s high-tech sector. China, for its part, unveiled counter-tariffs on an equivalent set of imports from the US, including on its exports of soy beans.

However, so much trade war kletter are only threats, so far. There is no trade war yet. After a second round of talks, both countries agreed on a ‘ceasefire’, meaning that no tariffs will be imposed while talks continue.

The US is at a disadvantage. China is a communist-run state. It is able to better control (and alleviate) any pain that a trade war can bring. Also, it is not so transparent; its leadership has better control over its trade war instruments, and can do so with stealth. And, perhaps best of all, Chinese leaders are students of the two millenia-old work by Sun Tzu, ‘The Art of War’.  Recent moves by the Chinese government show that they are heeding advice from this ancient book.

A trade war is just another form of war. ‘The Art of War’ could also serve as a general guide for conducting a trade war.

Sun Tzu said that it is best if a war is won without having to be fought. Political maneuvers should be able to achieve the aims of war, without the need to wage one. This seems to be what the Chinese government is trying to do.

Some quotations from ‘The Art of War’:

“Those whose words are strong, and who advance aggressively are going to retreat.”
This seems to be a general prediction of how the war will go.

“Use humility to make them haughty”
The Chinese have been projecting a conciliatory stance towards the US, enough to make the US haughty. US Trade officials have gone so far as saying that they are confident that China will agree to import an additional US$200 Billion worth of agricultural and energy products. To which the Chinese calmly replied that was not what they had agreed to.

“Those who know when to fight, and when not to fight are victorious”
Timing is important. The Chinese know that the US will have a less favorable negotiating position as its mid-term elections approaches. So, they are stretching talks to get maximum advantage.

“Those who know when to use many or few troops are victorious.”
The key to victory is to have a wide range of weapons and capabilities, and to know how and when to use them.  In the second round of US measures, it hit the Chinese telecommunications giant ZTE with sanctions. In response, Chinese regulators blocked the merger of US company Qualcomm with the Dutch company NXP (worth US$ 44 billion).  After a telephone call between Xi JinPing and Trump, sanctions against ZTE have been softened, and the Chinese regulators are no longer opposing the merger.

“The next best is to attack alliances.”
China does not even have to do that, the US has already alienated its staunches allies in a possible trade war. They will not come to the side of the US in a trade conflict with China.

“Those who skillfully move opponents make formations that they are sure to follow, give what opponents are sure to take. They move opponents with the prospect of gain, waiting for them in ambush.”
The Chinese have changed the negotiating ‘terrain’ with little US opposition by dangling ‘gains’ on agricultural imports to entice the US to take the path of demanding an increase in Chinese imports of US products, instead of decreasing Chinese exports. Then, the Chinese suddenly announces reductions in the tariff on all imported automobiles (a step which they were going to do anyway).
Now, the Chinese are ready to ambush the US negotiators.

Trump said that “winning a trade war is easy.” Foolish words from a man who has not experienced war of any kind. The Chinese would not say that winning the trade war would be easy; but they would work very hard to win it. And win it, they will.

 

 

 

Looking Forward to 2018

A number of times now (for 2008, 2010 and 2015), I made a list of predictions of things that will happen in the year to come.  Most of these have happened, but there have been big ‘upsets’, such as Hillary Clinton not becoming president in 2008. I feel the need to do this again for the coming year, so here goes:

Philippines
I believe that Chief Justice Sereno will NOT be impeached. The House will probably pass the impeachment call to the Senate, but that is where she will be acquitted.
Peace between the government and the MILF will be sealed by the passing of the Bangsamoro Basic Law. This will have a concrete positive effect of boosting economic development in Moro areas; though there will still be pockets of armed conflict.

In December, there will be a strong typhoon that will hit Mindanao.

US
Democrats will win the midterm elections, gaining both the House and the Senate. After this, they will start impeachment proceedings against Trump.  The US will finally take a very limited military action against NKorea. NKorea will protest vehemently, but do essentially nothing.
Mueller will find Trump guilty of attempting to interefere with the investigation against him. The investigation on collusion with Russia will still go beyond the year.

The Dow Jones index will suffer a significant fall (i.e. more than 15% from its highest point), probably in the third quarter.

The Rest of the World
The conflict between Qatar and Saudi Arabia et al will be resolved – sort of. Most of the blockade will be lifted, but they would not really be that friendly with each other. US pressure would have been instrumental in this reconciliation.
The Syrian government and the Kurds will fight each other. Both Russia and the US will try their best to support their allies without fighting each other. Ukrainian government forces will recover some land in the Donbass (specifically in Donetsk), but too little to really hurt the rebels.
Brexit talks will be nearing their end. They will agree on what is essentially the Norway model (participation in the Single Market, for a fee) for a transitional period.

The Bitcoin bubble will burst; its value will eventually stabilize at around $5000.

 

 

 

 

On the ‘War on Drugs’

The logic behind President Duterte’s ‘War on Drugs’ is attractively simple: The drug problem can be solved by a radical approach of arresting or killing (or threatening to kill) addicts, pushers and traffickers. This will result in people stopping with their drug activity and/or surrendering to the authorities. This way, the drug problem will be solved (just like Duterte did for Davao, some will say). Simple.

A year on the ‘War’ has resulted in 1.3 million surrenderees and some 7000 deaths (3000 plus claimed to have been done by police).  The total amount of seized drugs is worth Php 14. 5 billion, which is a small proportion of the estimated Php 120 billion value of the total drug market.
So far, only 10,000 people have completed a drug rehabilitation program.

Not so Simple 
When people are faced with a complex problem that seems intractable, there is a tendency to embrace simple solutions that are offered. Invariably, the simple solution ends up ‘too good to be true’ – it does not really solve the problem.
The drug problem is not simple. There are just too many drug addicts – much too many than can be accomodated in prisons or rehabilitation centers. Drug trafficking is done in myriad ways, and it has ‘enablers’ from within the government apparatus – local officials, police, even officials tasked with fighting drugs. And the government knows so little of what is going on – quite often it acts blindly.
To make things even more complicated, there are cases where policemen are the drug traffickers, and they kill their clients so that they could not testify against them. In such cases, drug killings end up protecting the drug traffickers.

Problematic
The rush to solve the drug problem is problematic in more ways:
Selective Due Process. People are wondering why it is that suspected big-time traffickers are handled with velvet gloves , while (suspected) poor addicts are summarily killed.  The resulting impression is that the ‘War on Drugs’ is effectively a war on the poor, because those who end up dying are almost invariably poor people. It seems that ‘due process’ is being selectively applied.

Impunity. The police, which has been granted the authority to kill drug suspects (supposedly, those who resist arrest) have so far been immune from prosecution. They can kill practically anybody they wish, as long as they claim that they were drug couriers or addicts. People whom the police have personal grudges against, or who may be suspected of another crime, or another reason, can be killed. Of course, not all police are killing people left and right (or there would be a lot more deaths); but there are a lot of people dying who are not connected at all to drugs.

Then, there are the large number of deaths due to vigilante groups, which are not answerable to anybody. Police have not been going after these groups (which include some off-duty policemen); thus these vigilantes also enjoy impunity. Vigilante killings are an extension of the government policy; since, if they were not, the police should have arrested these people.

Death Penalty Restored.  In 2006, the Philippines abolished the death penalty. The death penalty was abolished then because studies showed that it does not deter crime (certainty of arrest is what deters crime), and for human rights (specifically, the right to life) reasons.
The present policy against drugs has restored the death penalty by the back door. Killing the suspect is a tempting shortcut for the police. Since there is the chance that an arrested suspect will evade conviction, they feel that it is ‘better’ to just kill him.
This unofficial restoration of the death sentence for even the possession of small quantities of drugs is harsh, to say the least. In other Asian countries, one could indeed get a death penalty for trafficking in drugs – but only if one is caught with kilos of drugs, and only after one has been found guilty in a trial.

‘War’. The idea of waging a war brings with it some alarming consequences. One of these is the idea of acceptable collateral damage. Thus, if there is a drug suspect riding a tricycle, it is alright to shoot him; if the driver or innocent co-passengers are hit, they are mere ‘unfortunate’ collateral damage in the drug war.
A ‘war’ implies a single-minded determination to achieve a goal at all costs, without regard to human rights or social harmony.

Breeding Criminals. The hundreds of thousands of people in crowded prisons who have surrendered to the police to avoid being killed are in a very dangerous situation. Most of them are not criminals at all, or mere petty criminals; but in prison, they are being mixed with hardened criminals. If they are kept too long in jail,  many of the surrenderees will leave prisons as potential criminals.

Roots rather than Leaves. The campaign seems to be disproportionately hitting drug addicts, and it seems very few (if any) big-time traffickers have been killed or caught. This is  approach is wrong. If one wants to kill a tree, one should attack its roots instead of just the leaves and twigs.
Going after big-time drug traffickers is difficult, since they are protected by armed guards, government connections and highly-paid lawyers. Instead, the police resorts to hitting the ‘retail’ end (i.e. small time users and pushers).

‘All Addicts are Dangerous’
Pro-government online and offline media keep hammering the point that addicts are a danger to everybody’s life and limb. Stories abound of addicts murdering people – these stories are used to convince people that all addicts deserve to be killed. This reasoning is faulty and dangerous. People who commit crimes should indeed be caught and punished; but not everybody else with similar characteristics.
Similarly, a lot of crimes are done by drunk people; but this doesn’t mean that it is alright to kill every drunkard.  Or, there are Muslims who commit terrorist acts, but this does not mean that all Muslims should be killed. Demonizing whole categories of people, and condemning them to death, is not right.

Declaring that all addicts are dangerous creates an atmosphere of mistrust among the people, since there could be ‘enemies of the people’ among their midst. Police reliance on informers and anonymous tips adds to the problem.

The policy of demonizing a whole category of people (addicts, in this case) is one that is on a slippery slope towards fascism.  The imprisonment of Senator Leila de Lima ( a leading critic of extra-judicial drug killings) on trumped-up charges is a sign that the government has expanded the targets of the ‘War on Drugs’ to include those who are opposed to it.  Similarly, the Commission on Human Rights and the Ombudsman have been attacked in President Duterte’s speeches and by his online supporters for some months. Now, there is an attempt to impeach Supreme Court Chief Justice Sereno on petty charges; but the reason is that she could oppose the ‘War on Drugs’ in the future.
These are dangerous signs.

Stopping the War
There is still hope for those who call for an end to the ‘War on Drugs’. The public outcry at the killing of Kian delos Santos has pushed the issue of police killings of drug suspects to the center of public discourse.  So much so that President Duterte has promised that the government will not interfere with the trial of the 3 police officers accused of killing Kian. Police impunity will hopefully be reduced if they are found guilty.

But this is not enough. The whole campaign against drugs needs to be restructured. The biggest change needed would be the recognition that drug addicts are sick people, not criminals. The criminals are the drug traffickers. A first step in this would be to release all ‘surrenderees’ who are merely addicts, and schedule them all for drug rehabilitation.
The government should also release Senator de Lima and others who have been imprisoned because of their criticism of the ‘War on Drugs’.

Then, all sectors of Philippine society should be mobilized in order to eradicate the drug scourge. The church, NGOs and local governments could then be called on to fully participate in a more deliberate, thorough and humane ‘Campaign against Drugs’.

 

 

 

 

All-Electric by 2040?

The UK government declared on 25 July 2017 that all new cars that will be sold in the country by 2040 will be electric. Similar goals have been declared by some other European countries: Norway had declared that only hybrid and electric cars will be sold there after 2025; France by 2030, and Germany by 2040. Volvo of Sweden has led car manufacturers by declaring that it will only manufacture hybrid and electric cars by 2019. Before long, it is quite possible that most European countries will subscribe to the aim of ‘All-Electric by 2040’.

The 2040 target has been criticized as being unrealistic by some, and being too modest by environmental activists. I think it may be just right. Some studies have shown that 80% of all new cars that will be sold in Europe by 2040 will be electric, even without changes in government policy. So, it should be quite possible to achieve 100% electric by 2040 with the help of government policy.

Government Policy
Governments need to give electric cars an extra push, especially in the early years, before the mechanisms of the market kick in.  One example of this would be the setting up charging stations for electric cars. In the beginning, companies would be reluctant to set them up because there are still relatively few electric cars to use them. But, if there are too few recharging stations, people would be less likely to buy electric cars. To stimulate electric car use, governments could require parking areas to have a certain number of charging stations, and it could also put  up charging stations itself in order to ensure their good geographic dispersal.
When fast-charging technology gets more developed, government could require all fuel stations to have them.

Tax and other incentives could also be used to spur electric car sales. In the Netherlands, lease car users are exempted from paying income tax on their leased car if their car is electric; as a result, 16% of new cars sold in the country in 2016 are now electric. In China, buyers of new cars wait 2-years to have them registered, but buyers of electric cars have no waiting period. This has resulted in a boom of electric car sales there.
Government could also exempt electric cars from toll fees for highways, or entry fees for certain city zones.  Taxes on carbon-based fuels could be steadily increased to further stimulate the shift to electric cars.

Governments own a lot of cars, and they could have a large part of their vehicle pool made up of electric cars. In addition, they could require or encourage their contractors to have electric cars.

Parallel Developments
The drive towards ‘All-electric by 2040’ will be aided by developments directly or indirectly related to the goal.
Batteries, lithium-based or other kinds, will rapidly become more powerful, plentiful and cheaper in the coming decades. In addition to their use in electric cars, they are critical for the development of alternative energy e.g. solar panels and wind turbines, which need a means to store energy because of their intermittent nature. Solar panels produce electricity during the day, but this energy also needs to be stored for use during the evening. Big wind turbine farms need batteries to store energy for when there is no wind; batteries would result in a steady outflow of energy to the electricity grid.
Conversely, the rapid adoption of electric cars will stimulate the development of the market for batteries.

Clean Air. Cities are increasingly clamping down on ‘dirty’ vehicles in an effort to lessen pollution. Diesel vehicles are now restricted or prohibited in areas within many cities.  It is only a matter of time before autos running on gasoline will also be restricted. Governments in countries where pollution is a big problem are now giving incentives for people to buy electric cars.

Smart Grid. Recharging cars at home during the night is good for consumers, since electricity prices are lower then. If a big portion of the charging is done at night, electric cars will only add a little to the daytime load of power plants. Decentralized power generation, mainly by solar panels, would also lighten the daytime load on power plants.

Scarcer support infrastructure for motor cars.  When electric cars become much more common, the infrastructure supporting gasoline/diesel cars will also be less. There will be lesser fuel stations, lesser service points for motor cars. It will become increasingly inconvenient to have motor cars. At the same time, support infrastructure for electric cars will be more available, making them more convenient to use.

Objections
There are people who object to the ‘All-electric by 2040’ target, claiming that it is impractical, expensive and ineffective.
No Net Effect on Environment. The argument is that if electric cars plug into an electric grid where power was generated by coal or other ‘dirty’ sources, electric cars will simply be transferring pollution from the individual cars to the power generating station. Thus, the total pollution will be the same.
It sounds logical, but it is not true. Internal combustion motors in individual cars are quite inefficient, compared to electric cars using grid electricity.  Transferring energy generation from individual automobiles to a power plant will save at least half of the fuel. This is similar to having electric generators in every house; replacing all these by a central power plant will save a lot of fuel. In addition, heat generated in centralized power plants could be used to heat  thousands of homes. So, even if the power source is ‘dirty’, electric cars will radically reduce carbon dioxide production as well as pollution.

Motor Cars Can Always be Imported.  If a given EU country prohibits the sale of new motor cars after 2040, under existing EU rules, people would still be allowed to buy motor cars in another EU country and bring them in (because of their right to have parallel imports).  This can be minimized through the use of taxation and other regulations. For example, inspections for road-worthiness (which are now required for older cars in the Netherlands and other countries) could be required for all motor cars, regardless of their age. Then, specific taxes on gasoline and diesel could be raised significantly (perhaps to double the previous rate), so as to keep fuel prices at a significantly higher level.
If enough EU countries agree, restrictions could be placed on the parallel importation of new motor cars into countries which are already ‘all-electric’.

Expensive. Not really. There will be initial costs in things like setting up charging stations, and lost revenues due to tax exemptions for electric cars. But, as electric cars catch on, taxes on electric cars will gradually be increased, while taxes on motor cars increased even faster. The income from higher taxes will exceed the initial expenses for stimulating electric cars.
A lot of things that government needs to do cost little or nothing.  Some costs will be borne by private entities, but this will be relatively small.

Power Grid will be Overloaded.  The recharging of a lot of electric cars will overstretch the capacity of the power grid.
Not really. A lot of the electric cars will be recharged at night, when electricity demand is low.  The load on the electricity grid will expand gradually; and capacity from traditional or renewable sources will be able to take on any increase in demand.

Unemployment. The shift to electric cars will cause a lot of jobs in businesses that depend on motor cars (e.g. fuel stations, auto repair shops etc.).
The transition will take more than 20 years, and there will be a lot of time to adjust. Electric cars will need new services, and these in turn will be served by new (or even old) businesses. For example, fast recharging could be done at fuel stations.

Crossing Borders. People who use their cars to cross over to countries which do not have an ‘All-electric by 2040’ target may  have problems because electric cars may not be as well supported in these other countries as in their home country. For these people, it may be better for them to have plug-in hybrid cars – so they can be electric in their home country, and use gasoline or diesel in the foreign country.
This will not be a problem within the EU, which will probably have agreements to support electric cars even for countries which have not converted fully to electric. However, for people who travel by car to countries outside the EU e.g. Morocco, the Balkans and Turkey, this may be the case.

Step by Step
The target of ‘all-electric by 2040’ is better achieved by setting sub-targets on the way. This could be:
2025 – 50% of new cars sold should either be hybrid or electric
2030 – 80% of new cars sold should be hybrid or electric
2035 – 100% of new cars sold should be hybrid or electric
2040 – 100% of new cars sold should be electric
2050 – all cars on the road are electric

This will give the public, auto makers and lawmakers a guide as to when certain shifts could be made.

The target of ‘all-electric by 2040’ will develop its own inertia. If the goal is clearly and forcefully set out by the government, and steps taken towards it, other parties will act accordingly. Thus, companies will phase-out their production of motor cars, politicians will pass laws favoring the transition, and consumers will choose to buy electric cars long before the target date.

 

 

An Attack on Guam?

On 9 August 2017, General Kim Rok Gyon, head of North Korean Strategic Forces, announced that they were planning to fire 4 medium-range missiles at Guam. These missiles will be set to hit the waters around Guam – about 30 kilometers away from it. He said that the plan will be presented to Kim Jung Un by the middle of August. In response, the US declared that it will defend its territory (Guam is a part of the US), and that North Korea will be sorry if it attacked Guam.

Does this mean that nuclear war is about to break out? Or, will there be war on the Korean peninsula? Perhaps; but I don’t think so. Not even if North Korea does indeed fire missiles towards Guam.

Kim Jung Un may calculate that the US could not afford to retaliate against ‘enveloping’ Guam with missile strikes on water – after all, this would merely be another test. But he would then be ignoring two big changes in the strategic situation. First, that the US believes NKorea has the capability to load nuclear warheads on its missiles. And second, that China has changed its stance towards the NKorea – US conflict: by announcing that if NKorea initiates a conflict, it will remain neutral; but if the US seeks to attack and occupy NKorea, it will move to stop it.  These make up for a changed situation vis-a-vis a possible NKorean missile launch against Guam.

What could happen?
US-SKorea joint military exercises will start in a few days. This could be the time (judging from past experience) that Kim Jung-Un would order the launching of missiles towards Guam.
Right after missiles are launched towards Guam (and after the US radar has confirmed this to be so), the US could declare that NKorea has attacked America. This would then mean that, since the US would only be responding, China will remain neutral in any eventual confrontation. The US will almost surely shoot down the NKorean missiles way before it nears Guam.
Immediately after the missiles are launched, warplanes will take off from US aircraft carriers, airfields in SKorea, Japan and Guam, and military moved out of bases in the region (dispersal in case of nuclear war). The US would have to assume that the missiles have nuclear warheads, and respond accordingly.
A ‘minimum’ response would be for the US to attack one or more NKorean missile and/or nuclear sites with cruise missiles. The damage such a strike would cause will probably be minimal, but the political effect will be substantial.  Given China’s neutrality, Kim Jung Un could not order a retaliatory strike against South Korea; because it will mean that NKorea will be hit by overwhelming US firepower. Besides, why end his regime (as a result of a nuclear war) because of US strikes that did minimal damage? So, he will declare that the US attack had not really hurt his country, and that he had won. Other countries will celebrate the fact that war had been averted.
But Kim would not have won, because the US would have established a precedent – it had attacked NKorea without a substantial response. It could follow-up by declaring that it would shoot down any NKorean missiles it chooses to shoot down. And it could get away with shooting down NKorea’s missiles, because of the precedent of the cruise missile strikes.  After doing this, the US will effectively prevent NKorea from continuing with its testing of missles – meaning that it would not be able to develop an ICBM that could strike the US.

If NKorea is no longer able to test launch its missiles, after a suitable period, the US could initiate a dialogue with its leaders. They could demand a freeze on the development of its nuclear and missile technology, and since that would be what actually would already be in place,  NKorea may then agree.  A package of economic benefits could be thrown in to make the agreement palatable to the NKoreans.

What if something else  happens?
The above scenario is why I think that Kim Jung Un will do something else.  He is probably intellligent enough not to risk loss of face if he loses a confrontation with the US. So, he could do two things:
First, he does nothing for a long while. This would be good, since tensions would cool as months go by. It also means that China will be under pressure to really implement the sanctions against it. With time, the NKorean economy will suffer, and perhaps Kim’s political grip will weaken.
Second, he will do something else.  Kim could simply order new missile tests that do not head toward Guam. Or he could have a nuclear test (I suspect that Chinese pressure had kept him from doing so recently).  The US could (should?) try to shoot down these missiles, even if they were set to splash in international waters. The NKoreans will be trying to perfect re-entry and targetting capacities of its missiles – and if they are shot in mid-flight, NKorean scientists will not learn anything from such tests.

Whichever scenario unfolds, NKorea will continue with their inflammatory rhetoric. But,  if this is not accompanied by steady progress in its missile technology, they will be just whiffs of hot air.

And Guam will be safe from future attacks from NKorea.