When you hear certain “populists” bleat about how America is in decline and foreign competitors like China are taking advantage of our weakness, think back to the 1980s. During the Reagan era, pundits warned that the U.S. population was on the verge of becoming indentured servants to the supposedly smarter and tougher Japanese.

This school of thought was epitomized by Michael Crichton’s cautionary novel about an ascendant Japan, called Rising Sun (1992), which became a huge bestseller and blockbuster movie.

I read the book and saw the movie. I now laugh at how the otherwise brilliant Mr. Crichton got it so completely wrong. The title “Imploding Sun” would have been more appropriate. To be sure, Japan is finally getting off its feet, but only after a lost generation of severe economic decline.

Which brings me to China.

China remains a formidable competitor, economically and militarily. However, signs are emerging that the country isn’t on the verge of taking over the world. Not yet, anyway. New data cast doubt on the sustainability of the country’s growth and long-term competitiveness.

The Chinese government reported Monday that the country’s gross domestic product (GDP) grew by 6.2% in the second quarter of 2019, the lowest figure since records began in March 1992. This protracted decline in growth is depicted in the following chart, released July 15 by the research firm Statista.

As you can see, even during the global financial crisis in 2009, China’s quarterly GDP growth did not fall below 6.4%. The latest GDP data came in the wake of trade figures released last Friday, which showed that China’s exports and imports both contracted in June.

Beijing cited tariffs and sputtering growth around the world as the major reasons for China’s weak second quarter. Many investors are unnerved by China’s recent under-performance and rightfully so. China is the world’s growth engine and a key barometer of the global economy’s health.

In January 2019, the Chinese government announced a 1.3 trillion yuan ($193 billion) spending package to stimulate the economy. This shot of steroids only adds to China’s massive existing debt. The country’s total debt now exceeds 300% of GDP, an astronomical number. To be fair, global debt is increasing and other countries, such as the U.S., shoulder considerable debt as well. But by comparison, the debt-to-GDP ratio is 100% for the U.S.

The policy-making mandarins in China’s centralized mercantile economy racked up this debt during previous downturns, by trying to stimulate the economy through infrastructure projects, many of them poorly conceived and wasteful. State banks are now plagued by nonperforming loans.

With the latest stimulus package, China’s leaders vowed they wouldn’t get carried away, as they have in the past. The emphasis this time around has been on modest measures, such as tax cuts for small businesses. We’ll see how the stimulus plays out during the rest of the year. But analysts are increasingly gloomy about China’s prospects.

Will it get even worse?

Economists with investment bank Nomura (NYSE: NMR) stated last week that “the worst is yet to come” in the second half of 2019 for the Chinese economy. Although China’s GDP grew by a better-than-expected 6.4% in the first quarter, Nomura called this uptick “illusory” because it was driven by record-high exports as Chinese and American companies front-loaded the shipment of goods to sidestep higher tariffs.

Another red flag: the volume and value of venture capital (VC) deals in China are in precipitous decline. According to data released last week from research firm Preqin, 1,375 VC deals successfully closed in China during the first half of 2019, a nearly 50% decrease from the 2,593 deals closed in the same period a year ago. The value of deals fell to $19.9 billion in the first half of this year, a 66% decrease from $59.2 billion in the first half of last year. The VC community is souring on China.

After discussions with Chinese leader Xi Jinping at the G-20 summit in Osaka, Japan in June, President Donald Trump shelved additional tariffs of up to 25% on $300 billion worth of Chinese goods. Trump also lifted restrictions on U.S. companies selling equipment to Chinese telecom giant Huawei. However, despite this ostensible trade truce, several sanctions are still in effect and they’re already taking their toll on corporate profits.

In addition to the trade standoff with China, other geopolitical risks are rising. Tensions are growing worse between the U.S. and Iran, while the Brexit mess is sowing political discord between Britain and the European Union.

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The U.S. wants certain trade concessions from China, notably an end to the theft of intellectual property. China refuses to budge. Xi can’t afford to lose face with party leaders and the public by caving to the Americans.

Investors are desperate for any indication that a full-blown trade war won’t occur. Meanwhile, the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), still needs to be approved by the respective legislatures of those three trading partners.

War without end?

Whenever you hear a fatuous pundit on CNBC say that the trade war is close to resolution…don’t you believe it. President Trump will continue to bash China, all the way up to the 2020 election. He has concluded that tough rhetoric against the foreign boogeyman is a political winner. But strategic jockeying with China won’t end with the next election. Conflict between the two great powers will drag on for years.

Does China throw sharp elbows on trade? Absolutely. The ascendancy of the Chinese economy was largely based on cheap labor. For decades, China’s policy has been to purloin or extort technological innovation from the West. China denies it, but the facts say otherwise.

However, when it comes to labor costs, China currently finds itself in a race to the bottom. Transnational firms are increasingly leaving China to relocate in developing countries with even lower wages, such as Vietnam, Cambodia, Malaysia, Thailand, Indonesia, and Bangladesh. Not surprisingly, these alternatives to China are emerging as hot investment destinations.

In today’s interconnected global economy, tariffs only succeed in wreaking havoc with supply chains, dampening economic activity, and squeezing margins. Who loses with tariffs? Everyone, including investors, businesses and consumers.

Fair but tough-minded negotiations, combined with strictly enforced multilateral trade pacts, work best to curb bad actors on trade. But such nuances don’t play well with nationalists.

The Trump administration’s protectionist mindset on global trade is reminiscent of the 1980s, when Japan was viewed as the major threat to America’s primacy in manufacturing and trade. The Reagan administration imposed a wide range of trade restrictions on Japan in the 1980s. They didn’t work.

Ignore the incendiary tweets and mute the TV pundits. Focus on the hard data. The latest numbers don’t bode well for China. That’s bad news for the global economy and the stock market. Stay cautious.

Questions or comments? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.