Trade Is a Matter of Survival for China

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by Jim Rickards, Daily Reckoning:

Many investors are familiar with the fact that President Franklin Roosevelt closed all of the banks in America and confiscated all of the privately-owned gold by executive order in the early days of his administration, which began in 1933.

Presidents since then have seized assets from countries such as Iran, Syria, North Korea and Cuba and imposed sanctions on Russia and many other countries by executive order.

Yet, relatively few are familiar with the statutory authority for these orders.

The president does not need an act of Congress to support such extreme actions. The laws have already been passed and the president has standing authority to act like a dictator with regard to financial assets.

The first such statue was the Trading With the Enemy Act of 1917, TWE. This was used to seize German assets in the U.S. during the First World War. It’s how the U.S. took control of Bayer Aspirin from the German firm Bayer AG.

TWE was the authority FDR used to close the banks and seize the gold. It’s not clear whom FDR considered the “enemy” when he used TWE; probably private gold hoarders. But, in 1977, the Congress enacted an even more extreme version of TWE called the International Emergency Economic Powers Act of 1977, or IEEPA.

This is the equivalent of a nuclear weapon when it comes to financial warfare.

IEEPA allows the president to seize or freeze any asset or block any transaction if the president deems it to be necessary in the case of a national emergency.

The problem is that “national emergency” can be defined broadly to include trade imbalances, lost jobs or any other economic adversity. President Trump may now use IEEPA to block a variety of Chinese deals in the U.S. in retaliation for Chinese theft of U.S. intellectual property.

With the U.S. using its nuclear option in financial warfare, investors should hope that the Chinese don’t respond in kind.

President Trump may not appreciate the extent to which China will go to protect its interests. Trade negotiations are not the art of the deal, as far as China is concerned. Their goal is national survival.

China’s economy is not just about providing jobs, goods and services that people want and need.

It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver. The overriding imperative of the Chinese leadership is to avoid societal unrest.

But China is less stable and less powerful than it appears on the surface. Its apparent stability is more of a mask concealing internal divisions.

And it is afraid that its hold on power is weaker than many in the West suspect.

Remember Tiananmen Square?

Rather than showing the power and unity of the Chinese government, Beijing took a different lesson from Tiananmen Square.

As my colleague Kevin Massengill has pointed out, it revealed China’s political fragility.

We all know about the massacre. But what is not widely known is that several army officers refused orders to crush protests throughout China.

Seven retired generals, including a former defense minister, signed a letter opposing the use of force against the people of Beijing:

“Due to the exigent circumstances, we as old soldiers, make the following request: Since the People’s Army belongs to the people, it cannot stand against the people, much less kill the people, and must not be permitted to fire on the people and cause bloodshed; to prevent the situation from escalating, the Army must not enter the city.”

“I’d rather be beheaded than be a criminal in the eyes of history,” said one general commanding forces in the Beijing military district.

They were not the only one who felt that way. As Kevin has noted, armored divisions of 10,000 soldiers allowed themselves to be stopped for days by crowds of students and ordinary citizens who brought them food and water while explaining why their cause was just.

An estimated 3,500 PLA officers disobeyed orders to crush protests. Many Chinese army officers were reportedly executed. Others were demoted, or faced court martial and imprisonment.

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