Rabobank: It's A Market Where The Majority Have Hotdogs For Brains


Rabobank: It's A Market Where The Majority Have Hotdogs For Brains

By Michael Every of Rabobank

Ambiguity? Yes. Strategic? Mmm...

The market focus yesterday - in what Bloomberg is this morning in Asia calling a ‘Ray of Light’, risk-on day - was deliberately, myopically on all the wrong interpretations of all the wrong things. In fact, Monday’s ‘Risk-on Regardless’ was so egregious that it had me thinking back to ‘Everything Everywhere All At Once’ and wondering if the majority of those involved are not perhaps from an alternate universe where mankind evolved hotdogs for brains.

The trigger for ‘optimism’ was that US President Biden, speaking in Japan, flagged that when he returns home, he will discuss current US tariffs on Chinese goods with Treasury Secretary Yellen, adding to whispers going round that he may remove some of them.

“Well,” said the hotdog-brains, “This means a reduction in US-China tensions and cheaper stuff and lower inflation and ketchup and mustard and fried onions!” In this reality, Biden was answering questions at the launch of his Indo-Pacific Economic Framework (IPEF) aimed at building a geostrategic economic block deliberately excluding China. Yes, this White House is capable of hotdog-brain double-think. However, did the US president really fly all that way to undermine his own policy in front of his Japanese hosts?

Also note US Trade Representative Tai is in favor of existing tariffs, though she admits they will not change Chinese behavior, and is opposed to removing them without a quid pro quo from China, which is short of more than a few quid in that regard. There is bipartisan support in Congress for the tariffs. Removing them is not a November vote winner. And despite a Peterson Institute study on the topic, existing US tariffs on China have NOT driven inflation and would have a negligible downwards effect on CPI now given the issue is physical supply, not price.

The details of the IPEF for those easily distracted by the smell of fried onions, are that it involves the US, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam, representing 40% of world GDP. (And the EU, Canada, UK, and Mexico will easily slot in on top, which makes it the lion’s share of world GDP.) 

Yes, the IPEF will lower tariffs. Frankly, who cares? These are already very low. Instead, it offers four pillars:

  • Connected Economy: ‘High-standard rules of the road’ in the digital economy; helping SMEs; addressing online privacy and “discriminatory and unethical use of Artificial Intelligence”; and strong labour and environment standards, and corporate accountability provisions. All of which presumably China will fail, and the others pass.
  • Resilient Economy: First-of-their-kind supply chain commitments that better anticipate and prevent disruptions in supply chains to create a more resilient economy and guard against price spikes, by establishing an early warning system, mapping critical mineral supply chains, improving traceability in key sectors, and coordinating on diversification efforts. Which will surely mean a map to help decouple from China, or at least to build up alternatives.
  • Clean Economy: First-of-their-kind commitments on clean energy, decarbonization, and infrastructure that promote good-paying jobs. Which won’t work for China if it keeps embracing coal, though how any of this will be funded is entirely unclear.
  • Fair Economy: To enact and enforce effective tax, anti-money laundering, and anti-bribery regimes, including provisions on the exchange of tax information, criminalization of bribery in accordance with UN standards, and beneficial ownership recommendations. In other words, trying to introduce Western standards – which will exclude China (and rankle others if applied strictly).

In short, the IPEF is highly ambiguous in terms of what can actually be achieved, but clearly very strategic in what is *trying* to achieve: a US pushback against China in the Indo-Pacific without lowering its own tariffs, but rather by raising common non-tariff barriers.

How do you like them onions?

Meanwhile, tariff talk eclipsed the real issue yesterday: President Biden, when asked if the US would come to the defense of Taiwan if it were attacked by China, answered unambiguously – “Yes”.

This is not the first time he has done this, but the third, and was again walked back by an underling. Moreover, he is not the first US president to say it (George W Bush was). Nonetheless, we either have a US leader who does not understand international treaties, because the US is not legally beholden to defend Taiwan, or one willing to drop all pretense of “strategic ambiguity” over the issue.

“Mmm, fried onions!”, say some. But in the real world, really serious people are now worried.

  1. First, Biden’s words were not a surprise to China, and won’t see a halt to the massive, rapid military build-up underway there that will make a move on Taiwan physically possible ahead. However, the likes of Henry Kissinger --who is *still* going at it at Davos this year-- fear the US statement may prompt China to move even faster, and especially if it sees an IPEF shield being raised against it, I might add.
  2. Second, this places the onus on the US --and AUKUS-- to prepare to defend Taiwan. And they are far from prepared; more so if there is also a war going on in Ukraine. Some military observers believe the US could not stop a Russian-style Chinese seizure of Taiwan, nor orchestrate the same kind of pushback it currently is in Ukraine, and that the trend is getting worse, not better.

In short, the worst possible combination for the US, the region, and the world is to rattle a sabre with a blunted blade: yet today the US risks just that with over-stretched logistics, an under-funded navy, no spare capacity to ramp up production, partially offshored defense industries, and an about-to-be-closed Redhill fuel depot in Hawaii. All of that can change, and may well do ahead: but lowering US tariffs on China is arguably more rust on its blade, not less.

Of course, some also argue that if China moves on Taiwan, the US will simply blockade the world’s seas, ensuring nothing gets in or out of Chinese ports to the wider world – including food and energy. That would instantly militarize global merchant shipping, which is something China (with 5,500 vessels) is preparing for and the US (with 79) isn’t. If you think we have supply-chain shocks now, try that scenario on for size.

Relatedly, the World Food Programme head, at Davos, just tweeted: ‘With a devastating global hunger crisis at our doorstep, it is all hands on deck to pull millions back from the brink of famine. We need EVERYONE's help to save lives today: from world leaders to the private sector and billionaires!!’ Which is basically what I pleaded on Friday.

One idea being floated is naval intervention. The UK is seriously considering backing a Lithuanian proposal to send a naval coalition ‘of the willing’ --but *not* NATO-- to de-mine the Black Sea, and then escort merchant shipping there, so it can take out Ukraine’s grain. As the Lithuanian foreign minister put it yesterday, “Time is very, very short. We are closing in on a new harvest and there is no other practical way of exporting the grain except through the Black Sea port of Odessa. There is no way of storing this grain and no other adequate alternative route. It is imperative that we show vulnerable countries we are prepared to take the steps that are needed to feed the world.”

If Russia allows this to happen, it would help alleviate the risk of mass global starvation and, with a flow-through, mean a partial easing of inflation pressures globally. If Russia does not, then it is sticking to a policy of weaponizing food and driving global starvation and high inflation.

The only other logical recourse on the naval front would then be for a broader coalition, presumably including NATO, going in anyway and daring Russia not to attack them as they get Ukrainian grain out; and if Russia were to sink them, it could then mean World War 3 according to Article 5.

Is Russia agreeing to remove its geostrategic chokehold over key commodities likely? If not, project what the world will soon look like. It isn’t pretty at all.

Is NATO risking World War 3 likely? Probably not – in which case see above. Yet if it isn’t, ask yourself if the US is really going to defend Taiwan or not. And if it isn’t, ask yourself what the Indo-Pacific, and the world, will look like ahead.

The massive ambiguity of the current global situation should be clear. The strategic thinking is sadly not.

And hotdog-brains should arguably be in charge of ‘Nothing, Anywhere, Continuously’. But they are already bored with US tariffs anyway, and are off to focus on gloom regarding US tech/social media.

“Mmm, fried onions!”

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