By Joe Petrowski

While most Americans support free and expanded trade, they also support fair trade and countries living up to their agreements. This explains the broad bipartisan support for reformed trade terms with China. But a potentially explosive situation exists today in China that is having an off-Broadway trial run in Hong Kong. And while it may help us make a good trade deal, we do not want to see chaos in China and the inevitable bloodshed that will occur when the People’s Liberation Army are brought in to restore order.

China represents almost 20% of World GDP and as the country with the highest percent of trade in their GDP (remember, exports only are 13% of GDP in the US compared to China at 19%). And a country undergoing domestic turmoil will be a country that resists almost any trade agreement; a country that will not be helpful on North Korea; and a country that will become more expansionist and aggressive. Remember, today’s South China sea is the Silesian Coal Fields of Poland or the Rumanian Oil fields that Hitler and Stalin drooled and fought over.

I think the odds are 50/50 that this ends badly, with the PLA being used by rulers that cannot stand chaos and scrutiny. In the West protests and recessions cost leaders their jobs (as several US Presidents and European leaders can attest); in authoritarian societies the leaders lose their heads (much harder to replace).

China has a long history of internal rebellions and counter moves by the established power, with some 250 rating a name since 1,000 BC. Now, that is one every 12 years or so. If I were the Sports book manager at Caesar’s Palace, I would post 11-1 there would be bloodshed with something that will acquire a name like Tiananmen Square, Du Wenxiu Rebellion or Kent State for a local example.

Underlying the tinderbox that is China are the following comparisons to US:

                                                          China                                    US

Pop. Age 16-40                       476 million                          110 million

Per Capita $                            $5.000                                  $75,000

Food Expend                           37%                                     6%

Housing Expend                      12%                                     20%

Health Expend                         6%                                       5%

If the yuan collapses on its own or is manipulated lower, it will devastate Chines savings and bring inflation to levels not since 1994 when inflation peaked at near 28%. The rise of inflation up to that point was a factor in the Tiananmen Square protests/massacre in 1989 and helped drive the economic reforms of the early 1990s.

So, the Chinese government is in a predicament. Weakening its currency is a weapon in the trade war, but that is taking place in an export-driven economy employing 200 million males between 16-40; with limited prospects for a mate; spending 50% of their income just for food and housing. Their US counterparts are spending half of that on food and housing allowing more for beer, entertainment and courting. And remember unlike the 250 uprisings over the last 3,000 years 65% of China’s population is now increasingly urban and 55% have internet access, which was not a tool used in the collapse of other dynasties.

Now how will President Trump and the US react? There are some questions that have no answers and as they say in Vegas: NO LINE.

 

 

Joe Petrowski

Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. He currently serves as Director of Fuels for Yesway, where he oversees all operations of the fuels team, including pricing, procurement, and management of the firm’s fleet services program. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008, he was named CEO of the now combined Gulf Oil and Cumberland Farms, whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is Managing Director of Mercantor Partners, a private equity firm investing in convenience and energy distribution, and a member of the Gulf Board.