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Authored by John Brennan via Off-Guardian.org,

In Afghanistan, “the world’s first narco-state” operates under US Marines very nose…

All the latest news on Afghanistan is about Donald Trump’s peace agreement with Taliban and the possible end of America’s longest war. However, it is happening against a background of another acute problem and this one seems even more serious than a path home for 14,000 American troops before the 2020 United States presidential election.

The problem is Afghan heroin.

The Guardian has named Afghanistan “the world’s first true narco-state”. If one accepts this thesis, then the capital of the country is not Kabul, the city being suffered from bloody terrorists’ attacks, but the southern Province Helmand, where the river of the same name runs.

Helmand, one of the few regions in Afghanistan appropriate for agriculture, has become the world’s biggest center for opium production. According to the data of the United Nations for 2018, 69% Afghan opium crop is cultivated in this province.

The USA was always seeking for control over Helmand. Until 2010, this province was the area of responsibility of the British Contingent. The British Army set up a military Camp Bastion, located northwest of the administrative center of Helmand Province. It was the largest British overseas military base built since the Second World War. The airfield at Camp Bastion was equipped to handle all types of aircrafts. After 2010, US aircrafts alongside with land troops were stationed there under the pretext of war with the Taliban.

In 2014 the base was handed over to Afghan National Army and renamed Camp Shorab. Nevertheless, American troops got there 3 years later. Since April 2017 300 US Marines have been stationed on this base. The official mission of this contingent is the training of Afghan security forces. US Marines train local military and police to fight with the Taliban and drugs.

But the facts show otherwise. The United States isn’t interested in combating Afghan opium industry, but rather takes control over heroin trade routes out of Afghanistan. In this scheme Camp Shorab is some sort of the hub between Afghan drug mafia and dealers in Europe and the Middle East.

In 2016 Obaidullah Barakzai, a member of the National Assembly of Afghanistan, alleged that military units of Afghan National Army conducted bloody battles with the Taliban in Helmand only in order to allow western powers to take control over deposits of uranium and drugs trafficking.

Commenting on foreign military involvement in drug trafficking, he said:

It’s impossible for a few local drug smugglers to transfer opium in thousands of kilos. This is the work of the Americans and British. They transport it by air from Camp Shorab.”

Barakzai had been the target of numerous attacks from the Taliban. On 23 March 2019 he was shot in Kandahar province. He also had experienced the death of his son at the hand of the Taliban.

Local citizens confirm the words of the late politician. They say that poppy fields are at arm’s length from the military base, where US Marines are located. Afghans, speaking only on condition of anonymity, confirm that there is a close connection between owners of heroin laboratories and American troops who buy drugs in large quantities.

In this context, the bombing campaign code-named “Iron Tempest”, conducted by the US Air Force from November 2017 to February 2019, has raised a number of questions. The aim was to take out drug laboratories in Afghanistan by airstrikes. But, according to the research of Dr. David Mansfield (London School of Economics), the attacked laboratories had not been active at the time of the airstrike and the heroin produced there was transferred to an unknown location.

Close relations between Afghan drug mafia and US military give Washington an opportunity to make billions, which remain unaccounted. This money could be spent on specific tasks: back up terrorist organizations or overthrow unwanted regimes in the Middle East.

This is not merely a claim. The United States has already used such a scenario in the latter half of 1980s. It caused a political scandal known as “The Iran-Contra affair”.

Certain administration officials of the Reagan Administration secretly facilitated the sale of arms to Iran, which was the subject of an arms embargo. Funds from the arms deal were used to support armed conflict in Nicaragua.

It’s clear that Washington is interested in maintaining Afghanistan as narco-state despite the rising number of drug-addicted servicemen stationed in this country with training mission. It means that there is no chance to solve Afghanistan’s opium problem as long as US military keep staying there.

via ZeroHedge News https://ift.tt/2NOuPbF Tyler Durden

Australian special police forces seized a total of 475 guns across the country in a week-long crackdown on illegal firearms, according to AAP (via Yahoo).

Dubbed Operation Athena, the crackdown targeting firearms trafficking involved all police jurisdictions – including the Australian Federal Police, the Australian Border Force and the Department of Home Affairs. 

According to Detective Superintendent Peter Brigham from the Victoria Police State Anti-Gangs Division, trafficking of illegal firearms remains a key law enforcement issue across the country. 

“The community should be reassured we are getting results. We’re arresting people and charging them with serious offences, and we are continuing to seize illicit firearms from criminals every week,” he said. 

In Victoria, 91 guns were seized and 12 people arrested – who face a total of 44 charges. 

Police also served 10 new firearms prohibition orders and conducted a number of searches in relation to existing orders in the state.

“The results from the week of action not just in Victoria but right across the country are testament to the work that’s being done by a number of agencies to target those involved with the trafficking and use of illicit firearms, and try and prevent further harm to our communities,” Det. Sup Brigham said.

In New South Wales, 81 fire arms were confiscated, while in South Australia, the Northern Territory and Western Australia, 14 warrants were executed by the ABF, in relation to the recent detection of suppressors at the border. –Yahoo

Also confiscated were a number of suppressors and unsecured ammunition. 

“Our clear message is do not attempt to import firearms, parts or accessories without a proper permit. If you do, we will seize these items and pursue appropriate criminal charges. Under the Customs Act, possible charges include ten years imprisonment, a fine of up to $525,000, or both,” said ABF Commander Graeme Grosse.

Gun ownership is heavily regulated in Australia due to restrictions put in place following the April 1996 Port Arthur Massacre, in which 35 people were killed and 23 wounded when gunman Martin Bryant opened fire at the Port Arthur Bay’s Broad Arrow Café with an AR-15.

via ZeroHedge News https://ift.tt/2ZL8gH1 Tyler Durden

Authored by Paul Jospeh Watson via Summit News,

The Pentagon has declared war on memes as DARPA launches a new program to fight “polarizing viral content” before it spreads.

The Defense Advanced Research Projects Agency is seeking to create software with the capability to “automatically detect, attribute, and characterize falsified multi-modal media to defend against large-scale, automated disinformation attacks.”

The software will scan news stories, photos and videos to identify “polarizing viral content” and stop its spread to eliminate “malicious intent” entirely.

Titled Semantic Forensics, the program will run content through a myriad of algorithms to identify inconsistencies and identify a story or a meme as inauthentic or fake. The system will also pinpoint the origin of the meme, the intent behind it and predict the impact of its spread.

Given that the program doesn’t take into account the fact that so-called “trusted sources” in the mainstream media have been responsible for some of the biggest fake news stories in modern history, such as Trump-Russia election collusion, the software will only succeed in eliminating dissident narratives.

As Helen Buyniski warns, the true intent of the program “seems to be to stamp out dissent.”

“To hear them tell it, the Pentagon just wants to even the playing field between the ‘good guys’ – the fake-hunters pursuing the cause of truth in media – and the ‘bad guys’ sowing discord one slowed-down Nancy Pelosi speech at a time,” she writes.

“But the Pentagon’s targets aren’t limited to deepfakes, the bogeyman-of-the-month being used to justify this unprecedented military intrusion into the social media and news realm, or fake news at all. If the program is successful after four years of trials, it will be expanded to target all “malicious intent” – a possibility that should send chills down the spine of any journalist who’s ever disagreed with the establishment narrative.”

A study undertaken by researchers at University College London found that the most effective memes in the run up to the 2016 presidential election largely originated in two places – the subreddit r/the_donald – a forum devoted to boosting President Donald Trump, and 4chan’s politically incorrect /pol forum.

A VICE write-up of the study acknowledges that the most “effectively spread” memes originated on r/the_donald and /pol.

Last year, Facebook also announced it is developing a new AI algorithm that can detect and ban “offensive” memes.

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via ZeroHedge News https://ift.tt/2Zs2bnw Tyler Durden

Ariana Grande is suing retailer Forever 21 for deliberately using a look-alike in a commercial it filmed advertising the deal. Before the spot aired, Grande was given a heads up. Ultimately, a potential collaboration between Grande and Forever 21 fell through some time between late 2018 and early 2019.

According to documents filed Monday in California, Grande alleged that Forever 21 wanted her to endorse its “clothing and accessory products” while offering nothing in return.

According to Buzzfeed,  Forever 21 was angling for an endorsement of its “clothing and accessory products” (Of course, whatever the company’s plans had been, it’s very likely that it could buy a flurry of posts from an army of influencers during the latter half of the week).

However, the company was unwilling “to pay the fair market value for a celebrity of Ms. Grande’s stature,” and thus the partnership didn’t workout, Grande’s lawyers alleged in the lawsuit.

Instead, the fast-fashion giant, in what appeared to be an “unauthorized marketing campaign”, improvised a workaround and said and “falsely suggested” her participation by hiring a model who bore a striking resemblance to the “Thank U, Next” vocalist.

In the suit, Grande’s team referenced images from the singer’s “7 Rings” music video posted to Forever 21’s Instagram account (shown below).

Another image (again, below) features a Grande lookalike with a similar hairstyle and headpiece to the one the singer wore in the original video.

Instead of paying Grande what she would be owed for using her likeness, Grande’s lawyers said Forever 21 “simply stole it by launching a misleading campaign across its website and social media platforms primarily in January and February 2019,” capitalizing on the success of Grande’s newly released album.

In addition, the company also rode Grande’s coattails by timing the campaign’s launch to coincide with the release of Grande’s then-newly released album. 

As referenced above, the “market value” for a single Instagram post from Grande “is well into six figures.” Sometimes, she can even “command in the mid-seven figures to over eight figures” for longer term endorsement deals.

All told, Grande is suing the company for $10 million.

Grande’s fans may not understand the deep irony at play here. Since Forever 21 is filing for bankruptcy, actually securing that payout is like getting blood from a stone.

So Grande can get in line with everybody else who claims Forever 21 owes them money.

via ZeroHedge News https://ift.tt/34o3wKQ Tyler Durden

With the drumbeat of a looming recession growing louder by the day – whether due to ongoing trade war or the late-cycle slowdown which finally pushed the all-important US mfg ISM into contraction today – and prompting banks such as UBS to drastically slash their GDP forecast to a whisker above recession in H1 2020, it’s just a matter of time before the chorus turns universally pessimistic.

Taking a bold step in that general direction, was SocGen which today reported that after another sharp drop-off in August, the bank’s proprietary newsflow indicator (a “big data” approach to a variety of key market themes such as economic momentum, monetary and fiscal policy, inflation and risk, and which regularly leads the financial market by a few months) has collapsed signaling “severe damage to global growth momentum.”

As the bank explains, looking at this ominous indicator, for most developed and emerging markets that it follows (42 in total), levels are well below equilibrium (at 50), suggesting strong contraction in activity. Europe is the region most impacted, with France and Germany touching the lowest levels since 2001. But the US, Japan and China are also concerned, just 3.9%, 4.4% and 8.5% above their historical lows respectively. On paper, this justifies a cautious stance on so-called leading indicators, such as the ISM manufacturing index and the IFO business climate, which still look overly optimistic in comparison with the French bank’s data. In fact, if anything the SocGen global eco newsflow indicator (ECNI) is at levels last observed during the bursting of the dot com bubble in 2001 and the housing and credit bubble of 2008.

And while US sentiment data have only just now cracked below the critical 50-support level that indicates expansion, the chart below shows that the US ECNI is not far from its all time low (the last time the red line was here, the stock market was about to crash).

There is a silver lining to this data: as SocGen strategist Arthur van Slooten writes, such a sharp deterioration typically increases the probability of policy easing. Why? Because while the current economic cycle – the longest on record – may have lacked vigour, its growth horizon is suddenly darkening rapidly, and in view of presidential elections in the US next year, Trump may be increasingly tempted to prop up growth once again according to SocGen.

Indeed, as SocGen cautions, its US monetary policy newsflow indicator (MONI) has moved toward full easing, however, the bank’s US fiscal newsflow indicator (FINI) has been slower to react…

… suggesting that the debate about fiscal policy has only just started, and certainly points to aggressive easing.

The bottom line, according to the French bank, is that Trump must now decide: “If Trump is serious about his chances of re-election next year, it seems increasingly likely that, at some not-too-distant point in the future, he will have to choose between winning the trade war or lending maximum support to ailing economic growth.” And since he has no other choices, SocGen is increasingly preparing for an “nice” if unexpected Christmas present, courtesy of the White House…

via ZeroHedge News https://ift.tt/2Lw08oW Tyler Durden

Tesla is quickly reshuffling it’s California to Europe shipping route for Model 3s to ensure faster delivery times.

Tesla moved Model 3s from its headquarters in Palo Alto, California, to the Port of San Francisco, or other ports along California’s coast, to be loaded onto roll-on/roll-off vessels that would then embark on a lengthy 10,684 nautical mile trip to Europe, would take at least 24 days to one month for delivery.

According to several reports, mainly from X Auto and several citizen journalists, Model 3s are now being shipped by truck and rail across the US to be loaded onto roll-on/roll-off vessels at the Port of Philadelphia (PhilaPort).

PhilaPort confirmed X Auto’s report by tweeting the story on Sunday. This would mean that the new shipping route is from PhilaPort to the Port of Zeebrugge, Belgium, is expected to significantly save the struggling electric car company time and money.

A large number of @Tesla #Model3 vehicles is reportedly being moved from the #TeslaHQ in Palo Alto, CA to #PhilaPort to ensure faster delivery times for Europe & the UK…” → https://t.co/Xpd8yVidvP

via @XAutoWorld100 pic.twitter.com/d4oTpELWlZ

— Port of Philadelphia (@PhilaPort) September 2, 2019

PhilaPort to the Port of Zeebrugge is only 3,996 nautical miles and if a vessel was traveling around 18 knots, would only take 9.3 days, versus the 24-31 days from the Port of San Francisco.

With about 10 days at sea, but also adding 2-4 days to transfer the electric cars via truck or by rail across the US, the new travel time is about 15 days, a 50% improvement from the prior shipping route (Port of San Francisco to Europe). As to why Tesla didn’t think about this before is beyond our comprehension.

X Auto showed several photos last month of the Port of San Francisco Pier 80 handling hundreds of Model 3s waiting to be loaded onto roll-on/roll-off vessels bound to Europe and the UK.

With the reworking of the shipping route, more and more Model 3s are being spotted with Euro plates on major US highways and at PhilaPort.

Here’s how the social media responded to PhilaPort’s Twitter that tweeted: ” A large number of @Tesla #Model3 vehicles is reportedly being moved from the #TeslaHQ in Palo Alto, CA to #PhilaPort to ensure faster delivery times for Europe & the UK…”

This major overhaul comes at a time when Tesla reported a major miss on the top and bottom line, a CAPEX miss and cut during 2Q19. It seems the new shipping route is all in an attempt to boost 3Q numbers to raise the stock above its monthly 50sma before a deeper correction is seen.

Looks like the #TSLAQ crowd has a new port on the East Coast to observe. 

via ZeroHedge News https://ift.tt/2ZOwEYi Tyler Durden

If the nightly images of water cannons and molotov cocktails were not enough to spark fears about the state of Hong Kong’s economy, tonight’s almost unprecedented collapse in IHS Markit Hong Kong Purchasing Manager’s Index should slap reality back to the top of mind.

The whole economy PMI crashed to 40.8, the lowest reading since Feb 2009.

Business activity fell at the steepest rate since the end of 2008, reflecting a sharper decline in new order intakes. Pessimism spread to more firms, with business confidence slumping to its lowest on record.

“The rates of decline in output, new orders and export sales accelerated sharply in August, with the only other time that the PMI survey has recorded a steeper downturn, in its more than two decades of history, been during the SARS epidemic in 2003 and the global financial crisis in 2008-2009.”

Nearly half of survey respondents reported reduced Chinese demand, citing the ongoing US-China trade dispute, a sharp depreciation in the renminbi and large-scale protests as reasons.

Commenting on the latest survey results, Bernard Aw, Principal Economist at IHS Markit, said:

“The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis.

“The executive authorities of the Hong Kong SAR recently unveiled an economic stimulus plan to support flagging growth momentum, but any further economic weakness will mean policymakers are likely to consider larger stimulus measures.

Finally, Aw warns, “the survey is now broadly indicative of the economy contracting at an annual rate of around 4.0-4.5%.”

A bloodbath that we are sure China will be perfectly ok with.

via ZeroHedge News https://ift.tt/2HIxcJ7 Tyler Durden

Now that trade war with China has escalated substantially yet again following a weekend in which both the US and China hiked the tariff rate on billions of imports, Deutsche Bank is revisiting how China’s stance towards the trade war has evolved over the past 1½ years, and how it may change in the future.

As a reminder, while China first sought to prevent a trade war, and then tried to quickly reach a trade deal with the US, DB economist Yi Xiong notes that China’s strategy has changed again since early May, and he describes China’s current strategy as “endurance”: the main goal is to preserve China’s economic resilience, while taking the higher US tariffs as a given fact.

The premise for China’s new strategy is two-fold:

1. frictions between the US and China have gone far beyond trade, reducing China’s potential gains in a trade deal; and
2. damage from the higher US tariffs to China’s economy has been manageable.

Under this strategy, we think China will continue trade negotiations despite the new tariffs, but it is not willing to meet all US demands to reach a deal quickly. When the US increases tariffs, China will respond with smaller and targeted tariffs on specific products. China will also accelerate its opening up to other countries and diversify its supply chains. But it will not proactively cut off economic ties with the US.

Domestically, China will not excessively stimulate the economy to counter short-term trade shocks, and will exercise extreme caution to prevent asset bubbles, especially in housing.

As even Trump has realized by now, China’s current strategy likely has a long time horizon embedded in it – one at least as long as the next presidential election, although the time horizon may go beyond the life cycle of the current US administration. As China sees it, political dynamics in Washington DC imply that the US’s attitude toward China is unlikely to change course, no matter which party is in power. A reference point would be the US-Japan trade war, which lasted more than a decade.

The future course of the trade war will, therefore, largely depend on the US’s trade war strategy. DB’s baseline scenario is for prolonged trade tensions with some back and forth. Tensions may escalate at times, while trade talks and perhaps partial agreements may help ease tensions at other times. We think the likelihood of a comprehensive trade deal is small. The main downside risk to this baseline is if US-China tensions escalate substantially on non- economic fronts – security, geopolitical, or  China’s sovereignty issues – this could derail the trade talks leading to a full-blown trade and economic war.

Trade war: where are we now?

It feels like a long time ago, but it’s been only two months since Presidents Trump and Xi reached an agreement at the G20 summit to put a halt to the trade war. Throughout July, some limited progress was made on both lifting the Huawei ban and increasing China’s agricultural purchases. Tensions quickly re-escalated in the first week of August, when Trump  announced that he would put a 10% tariff on US$300bn of Chinese goods. China swiftly vowed that it would retaliate, and put further purchases of US agricultural goods on hold. The RMB depreciated in the next few days, breaking the 7 threshold against the USD, and the US responded by declaring China a currency manipulator. Tensions eased slightly as the negotiation teams talked over the phone, and on Aug 14 the US delayed tariffs on more than half of the USD300bn list to mid-December.

This brings us to a flurry of events that unfolded over the past weekend:

• On Aug 23, Friday evening Beijing time, China published its new tariff list. It will impose 5% to 10% addition tariffs on USD75bn of US goods, in retaliation to the US’s USD300bn tariff list. It will also resume the previously suspended 25% tariff on autos.
• President Trump quickly countered that he would respond to the new tariffs. One significant message from one of his tweets was: “who is our bigger enemy, Jay Powell or Chairman Xi?”
• After US market close, President Trump announced that he would raise tariff rates on the USD250bn list from 25% to 30%, and on the USD300bn list from 10% to 15%. This is effectively a 5% tariff raise on almost all Chinese exports to the US.

Tensions eased somewhat afterwards. On Saturday, China’s Ministry of Commerce warned the US to “bear all consequences”, but it did not explicitly say that China would announce retaliatory measures. On Monday, Chinese Vice Premier Liu He called for calm negotiations , while President Trump suggested “we’re having meaningful talks, much more meaningful than I would say at any time”.

Despite the verbal de-escalation, the tariff increases from both sides did take place, as expected, on Sept 1 at midnight (China’s tariffs hitting 1 minute after the US). If all these new tariffs become effective, by Dec 2019 the US would have an average tariff rate of 23.2% on China. This would exceed China’s average tariff rate on the US, which would be 21.3% by Dec, absent further measures.

China’s evolving trade war strategy

China’s responses to the recent few rounds of US tariffs since May are somewhat different from its previous responses, and Deutsche Bank thinks they reflect a change in China’s strategy. To understand China’s current stance, it is helpful to  review what has happened since the trade war began (see trade war timeline below) to see how it has changed over time. In simple terms, China’s strategy in the past 1½ years can be divided into three stages:

• Stage 1: Deterrence (early 2018 – Sep 2018). In the first phase of the trade war, China’s strategy was perhaps best described as trying to deter the US from imposing tariffs. Recall that in the beginning, a full-fledged trade war was viewed as a tail risk by most observers. For each round of US tariffs over this period (the 232 list, the USD50bn list, and the USD200bn list), China responded immediately with comparable tariffs on US goods. It can be described as a “game of chicken” strategy: in order to prevent the trade war, China must prove its willingness to match all US tariff threats, so as to convince the US that both sides would have a lot to lose. When the trade war became reality, the RMB depreciated rapidly from around 6.3/USD in Mar 2018 to 6.9/USD in Sep 2018.
• Stage 2: Compromise (Nov 2018 – Apr 2019). Presidents Trump and Xi’s phone call in early Nov 2018 marked the start of the second phase, which lasted until April 2019. After earlier moves failed to prevent a trade war from happening, we think China showed genuine willingness to make a deal to prevent further deterioration in the US-China relationship. Over this period, China held frequent (6 rounds) trade talks with the US, purchased US agricultural products, suspended tariffs on US autos, passed a new Foreign Investment Law, and revised regulations on technology transfers. The RMB was stable, appreciating to 6.7/USD by April.
• Stage 3: Endurance (May 2019 – now). Recent developments suggest that the trade war likely entered a new phase. It started when the trade talks broke down in May. A symbolic event is that China issued a white paper on its position in trade talks in early June. In the white paper, China laid out a series of principles for a trade deal. The white paper formalized China’s positions, which had not been spelled out clearly before. The RMB depreciated again, reaching 7.1/USD in August.

There are two main reasons why China has changed its strategy lately. The primary reason for the change is that China no longer sees resolving the trade war as the top issue in US-China relations. Over the past year, frictions between the US and China have gone far beyond trade, including on the fronts of technology barriers, security, geopolitical issues, and  even China’s sovereignty issues. If China had hoped before that resolving the trade war could help improve overall US-China relations, that hope is largely gone. The second reason is that China may have judged the damage of the trade war as manageable, based on evidence that we will discuss in the next section.

This latest strategy can be labeled as “endurance” because China no longer seems to seek a near-term solution to the trade war. Currently China is neither aiming to quickly reach a trade deal, nor trying to hit back at the US as hard as it can. Rather, China seems to have internalized the trade war as a given fact, and is trying to preserve China’s economic resilience under rising tariffs. In the words of the white paper, “China remains committed to its own cause no matter how the external environment changes”.

China’s current trade war strategy can be summarized as follows:

China is willing to continue trade talks… China has not yet canceled any trade talks with the US, despite all the new tariffs. Whether or not an agreement can be reached, China still judges having trade talks as better than no talks at all. Stopping the talks may send the wrong message that China does not want a trade deal at all: it does, but not at any cost.

• …but it will abide by the principles set in the white paper. Solving the tariff problem is unlikely to resolve the broader problems between the US and China. Even the Huawei ban, which is partly a trade issue, does not seem to be something the US can rescind in a trade deal. Therefore, China is not willing to offer a lot for a trade deal, given the limited benefits.
• China will still respond to US tariffs, but with smaller and targeted measures. As is shown in Figure 1, recent China retaliatory tariffs are smaller than corresponding US tariffs not only in absolute size, but also in relative terms. The goal of retaliation is not to maximize the damage to the US, but to disincentivize further US tariffs. For the same reason, China is likely reluctant to take non-trade actions against the US, such as punishing US business interests in China . In fact, it may be just the opposite: Costco just opened its first store in China, and Tesla’s Shanghai factory will be completed soon.
• China will also accelerate its opening up to other countries. This will both help the Chinese economy and increase the cost for the US in a trade war. In the longer term, China will likely reduce its supply chains’ reliance on the US. A page from Sunday’s People’s Daily (the official newspaper of the CPC) interestingly puts official statements and comments about new US tariffs on the same page as multiple articles about China’s improving cooperation with other countries (we provide the layout in Figure 2 ).

A case in point here is how China recently raised tariffs in retaliation to the US tariff on USD300bn of Chinese goods. China’s retaliation came out not only smaller in size (USD75bn compared to USD300bn) but also lower in tariff rates (5 –  10% compared to 10%). The new list substantially overlaps with China’s previous tariff lists: about 90% are items that have already been tariffed before. This is because the new list is well targeted at the product level. In fact, if we calculate China’s additional tariffs by product categories, it is clear that tariffs increased the most for agricultural products, automobiles, and energy, the products that the current US administration cares about the most. On the other end of the spectrum, tariffs increased the least for products such as ICs, machinery, and medical equipment.

An important assumption to China’s endurance strategy is that the trade war would not lead to a collapsing Chinese economy. On this front, China appears to be learning from Japan’s experience in the 1980s. Most economists and  policymakers now believe that it was not the US-Japan trade war that ended Japan’s economic growth miracle. Japanese companies remained competitive internationally, despite the trade war. Rather, it was a series of policy mistakes that led to an unprecedented housing bubble and a prolonged balance sheet recession.

Based on this diagnosis, policymakers are likely not overly worried about the direct impact of the trade war. Meanwhile, they are extremely careful not to repeat Japan’s policy mistakes in the 1980s – 1990s. It will not excessively stimulate the economy to offset short-term trade shocks, and will exercise extreme caution to prevent asset bubbles, especially housing bubbles. Evidence so far seems to support this claim that the trade war is not very damaging. China’s growth has slowed a lot since early 2018, but the slowdown has been largely driven by domestic factors, including deleveraging policies, a fall in government investment, higher household debt burdens, and automobile replacement cycle, all of which have been covered previously. External demand also played a role, but the direct contribution of the trade war does not seem to be very large:

1. China’s total exports growth stayed positive (+0.6% yoy) in the first 7 months of 2019. So far in 2019, China’s exports performance has in fact been better than most other major economies ( Figure 4 ).
2. 80% of China’s exports are to countries other than the US. The trade war does not seem to have affected China’s competitiveness elsewhere: overall, China has not lost market share in these markets ( Figure 5 ).
3. For the 20% of China’s exports that went to the US, exports did fall sharply. US imports from China fell -12% yoy in H1 2019, of which those subject to additional tariffs fell -27% yoy ( Figure 6 ). However, processing trade exports–whose domestic value added is usually small–have fallen more, while the decline in non-processing exports was mild ( Figure 7 ). This suggests the damage to China’s GDP may be much smaller than the drop in headline exports.
4. Furthermore, studies have shown that so far the US importers and consumers have borne substantially all of the tariff increase. The US seems unable to pass on the tariff increases to Chinese exporters, though the exact reason is unclear. Maybe Asia’s dominance in manufacturing has given Chinese exporters more market power; or maybe it’s just too early as pricing behavior change takes time.

These results above have not taken into account the impact of the latest rounds of tariffs. The US average tariff rate on China will increase by another 10% between end-June and end-December, if all the announced measures become effective. However, this impact will be at least partially offset by China’s exchange rate flexibility.

Here, DB notes that its baseline RMB exchange rate forecast is at 7.1/USD by end-2019. This forecast does not take into account the most recent rounds of tariffs announced. The upcoming meeting between US and China teams in September will hopefully prevent or delay these new tariffs. If tariffs indeed all become effective, the RMB will face further depreciation pressures to likely 7.3/USD by end-year. Here analysts should think in terms of China’s entire exports to the world: China would face a 2% increase in weighted average tariff between June and December, if all US measures become effective. At 7.3/USD, the RMB would also depreciate by about 2% against the trade-weighted currency basket between June and December.

It is of course possible that the US may raise tariffs even further. The most extreme scenario for tariffs is that the US raises them across the board to prohibitive levels (50% or more), such that most Chinese goods are driven out of the US market. Using the World Input-Output Database, the impact, including on both the exporting industries and their upstream suppliers, would be a 5% loss of China’s aggregate industrial output, a 2% loss of GDP, and a 1.5% increase in the unemployment rate.

This would be painful to manage, but arguably is not calamitous for China. China could respond with a policy mix of more monetary easing and fiscal spending, flexible exchange rate, and further opening up to the rest of the world.

Conclusion

China’s stance towards the trade war has changed since early May, and Deutsche Bank describes China’s current strategy as “endurance”: the main goal is to preserve China’s economic resilience, while taking the higher US tariffs as a given fact. The premise for China’s new strategy is two-fold:

1. frictions between the US and China have gone far beyond trade, reducing China’s potential gains in a trade deal; and
2. damages of the higher US tariffs on China’s economy have been manageable.

Under this strategy, think China will continue trade negotiations despite the new tariffs, but it is not willing to meet all US demands to reach a deal quickly. When the US increases tariffs, China will respond with smaller and targeted tariffs on specific products. China will also accelerate its opening up to other countries and diversify its supply chains. But it will not proactively cut off the economic ties with the US. Domestically, China will not excessively stimulate the economy to counter short-term trade shocks, and will exercise extreme caution to prevent asset bubbles, especially in housing.

China’s current strategy likely has a long time horizon embedded in it. This is unlike China’s previous strategies, which had sought to prevent a trade war at first, and then to quickly reach a trade deal. The time horizon of the strategy may go beyond the life cycle of the current US administration. As China sees it, political dynamics in Washington DC imply that the US’s attitude toward China is unlikely to change course, no matter which party is in power. A reference point would be the US-Japan trade war, which lasted more than a decade.

The future course of the trade war will, therefore, largely depend on the US’s trade war strategy. The baseline scenario is for prolonged trade tensions with some back and forth. Tension may escalate at times, while trade talks and perhaps partial agreements may help ease the tension at other times. That said, the likelihood of a comprehensive trade deal is small, and the main downside risk to this baseline is if US-China tensions escalate substantially on non-economic fronts – security, geopolitical, or China’s sovereignty issues – this could derail the trade talks leading to a full-blown trade and economic war.

Appendix:

A Time of the US-China Trade War

via ZeroHedge News https://ift.tt/2PGl7dJ Tyler Durden