Taking the dragon by the horns, Donald Trump, President of the United States, on Friday, slapped China with additional tariffs. The announcement, made in a series of tweets, followed a turbulent day on Wall Street.
Earlier during the day, China announced that it was preparing to impose tariffs on $75 billion worth of US imports. This followed a bloodbath on Wall Street as the Dow Jones fell by over 600 points.
After the markets closed for the weekend, Trump went online and stated that he was increasing tariffs from 25 per cent to 30 per cent on existing $250 billion worth of Chinese imports from 1 October.
Also, the 1 September tariffs announced earlier — and the ones Trump was willing to reconsider in the wake of the holiday season — would be imposed on $300 billion worth of imports from China at 15 per cent, even though the earlier announcement was for 10 per cent.
The new set of tariffs impact all Chinese imports to the US, given the former’s exports totalled $558 billion in 2018.
Attending the G7 summit in France, Trump remarked about having ‘second thoughts’ about the tariffs announced. Before the statement could be seen as a silver lining in the tariff cloud, the White House followed up with a statement declaring how the president regretted not raising the tariffs even higher.
However, on Monday morning (August 26), Trump tweeted about how China wanted to resume negotiations and the stated the possibility of two nations ushering a ‘calm resolution’. The markets responded positively to the news with Dow futures trading higher though a permanent resolution is still a long shot.
From being America’s greatest enemy on Friday evening, Xi went to being a great leader of a great country on Monday morning, as another day unfolded in the ongoing trade war.
The trade war between the US and China is no longer merely about trade, as it once was, but about the larger game being played out in their respective nations, and more importantly, between them.
The threat to the global economy and world order stems from how Trump and China’s President Xi Jinping view the trade war.
For Trump, the view is that of a zero-sum game, where exports must balance imports and along with that he means to address theft of intellectual property and bringing back jobs, both of which are critical to his MAGA (Make America Great Again) campaign.
Trump’s pursuit of the trade war stems from his protectionist ambitions for the US.
For Xi, the view is starkly different. In Trump and thus the US, he sees an adversary in China’s pursuit of global economic and political dominance.
For the masses in China, under the influence of a state-directed media, the fall of the Soviet Union in 1991 and Japan’s lost decade of economic growth starting in the early 1990s are typical cases of an American conspiracy.
In the ongoing trade war, China sees itself where Japan and the Soviet Union once were.
In many ways, the trade war between the US and China is no longer about two superpowers trying to outsmart each other on the economic front but about the global order descending into another Cold War-like situation while witnessing a faltering of the world economy.
What are the indicators pointing to a faltering global economy?
One, the market sentiment. For the stock markets, the trade war is as good as poison for the unpredictability and uncertainty it ushers. In 2018, the Shanghai Composite fell by over 24 per cent, the worst in ten years.
Dow has been witnessing strong turbulence for weeks now as tariff announcements and Trump’s feud with the Federal Reserve have added to the woes from the trade war.
On Friday, the Dow Jones fell 623 points and is expected to fall further when the markets open on Monday. The S&P registered a drop of 2.6 per cent, it’s third-worst of 2019. Over the previous week, the S&P alone has fallen by 1.4 per cent.
The tremors were also felt in Europe with Germany’s Dax and France’s Cac down by over 1 per cent each. In London, the FTSE 100 fell by 0.5 per cent.
At this point, it shall not be an overestimation to state that the fate of trillions of dollars in world markets rests on the whims and fancies of Trump via a single tweet!
Two, the turbulence from the markets is now starting to affect the bond markets. On Friday, the bond yields, which move in the opposite direction to prices, felt the impact with the yield on the US 10-year note falling 8.3 basis points to trade at 1.52 per cent, its second-lowest point in 2019, and one of the lowest points this year.
The decreasing yield on long-term US securities is usually an indicator of weak investor sentiment in the short-term.
To make matters worse, the yield on the 3-month US treasury note has been more than that on the 10-year treasury note for over a quarter now. This negative difference is known as the infamous inverted yield curve, and historically, has been an indicator of a slowdown.
Three, the stress on Wall Street and in the bond markets is intensifying the battle between the Federal Reserve and the White House. In his tweets on Friday, Trump went so far as to state that the Fed chairman, Jay Powell, was as big an enemy of the United States as Xi himself.
Interest rates are critical to the US bond market as bond prices and interest rates share an inverse relationship. Also, loosening up of interest rates aids credit expansion.
With no end to the trade war in sight, no serious resolution at the G7, and the lack of will to usher a juicy fiscal stimulus in collaboration with the Democrats leaves Trump with the sole option of blaming the Fed, or in this case, Powell.
Earlier this month, Trump had tweeted that the Fed must look at cutting the interest rates by 100 basis points over a short period to curb the global slowdown.
However, at this point, it is beginning to feel as if Trump wants to use the Fed to further his trade war or perhaps further his trade war to bully the Fed.
Four, the prolonged trade war is hurting business investments in companies across the United States. On Friday, Trump also tweeted the need for companies to discard China and look elsewhere for their supply chains.
From an entrepreneurship perspective, the prolonged trade war raises uncertainty concerning future investments, setting up of manufacturing and logistics supply chains, and so forth. Not only does this hurt profits but it also stalls job creation.
As of now, the difficult choice before business groups is to either endure the trade war until the 2020 US Presidential elections or start preparing for a complete overhaul of their supply chains — a process that could see other south-east nations making significant gains, and an opportunity that India must not fail to capture.
However, even if Trump does manage to inspire the likes of Apple and Amazon to move out of China after winning in 2020, it will be a terrible blow to consumption and growth in China itself.
Already, the country registered its slowest quarterly expansion in three decades in Q2 of 2019. Put simply, there is no happy ending to this.
Five, the issue of theft of intellectual property (IP) is now being widely debated in the US. As per a report from the IP Commission in 2017, the annual loss to the US economy from IP theft and pirated goods and services could be more than $800 billion.
IP theft alone constitutes somewhere between $180 billion to $540 billion to the US economy annually, that is between one to three per cent of the GDP.
Interestingly, China and Hong Kong together constitute the source for over 80 per cent of counterfeit goods. At one point in 2013, the percentage stood at 90.
For long, the difficulty in measuring IP theft has given state-owned enterprises in China, both national and provincial, a free run in manufacturing and supply. This has resulted in export of cheap products from the country, modelled on famous brands.
While addressing the issue of IP theft completely may take at least a decade, it will act as a catalyst for companies to look beyond China in the future.
Six, the trade war offers a way for Xi Jinping to garner support in his country for his autocratic regime in the face of an imminent slowdown and debt problem.
While the trade war acted as a trigger for China’s economic slowdown, Xi will not shy away from using the trade war as an American conspiracy to come down hard on dissidents.
The same trade war could also result in the complete political annexation of Hong Kong if Beijing desires so. For a bill that stands withdrawn at the moment, the protests in Hong Kong have gone on for far too long.
Routine skirmishes with the local police force and a falling GDP could push China to consider flexing its political muscle in Hong Kong.
Given Hong Kong’s GDP alone was 2.9 per cent of China’s in 2017, annexing the city politically would make sense for Beijing in the wake of a prolonged trade war.
With hardly any resistance to the move in mainland China and no hard resolution at the G7 in support for Hong Kong, and China’s diktat to the multinationals in the city, the fall of Hong Kong is imminent, especially if the trade war goes on.
For Trump, the trade war is a double-edged sword. While for many Americans, a President finally standing up to China may be a reason enough to vote Republicans in 2020, the same could alienate many others. And why is that a possibility?
Firstly, the weight of the tariffs falls on American consumers and industries as they are expected to shell out more for products and raw materials. This has already strained many industries in the US.
Secondly, the new tariffs on $300 billion worth of Chinese imports could dampen the Christmas spirits and thus may make people rethink the idea of a prolonged trade war. Eventually, it will all boil down to how the tariffs work and how they impact the average American consumer that votes next year.
Here, Trump has far more at stake than Jinping but then Trump has lived each day of his presidency like it was his last.
Seven, currency manipulation. Trump has labelled China as a currency manipulator when China’s currency fell beyond the seven-per-dollar level earlier this month. If the trade war continues, Beijing could consider manipulating its currency further to shield their exports.
However, that will aggravate the already problematic situation of debt and inflation within the mainland. And yet without manipulation, exports may not remain competitive and could result in job and operational losses in China.
Again, there are no winners here in the long run. The markets around the world would continue to suffer as well.
Eight, and most importantly, the long-term thinking on either side of the Pacific concerning Iran and North Korea. As the trade war continues to alienate the two superpowers, Trump would find himself without significant support in the Korean peninsula.
Backed by China, the North Korean regime could embark on a series of misadventures and skirmishes against South Korea and Japan, both US allies, and cause significant damage to Trump’s 2020 prospects back home.
In the long run, no solution to the US-North Korea dispute can come without China, and this is where China may find Trump’s weak spot.
On the Iranian front, China could get other signatories of the nuclear deal (JCPOA - Joint Comprehensive Plan of Action) on board, continue defying sanctions by the US by increasing their imports and trade with Iran.
While this will alienate the US in the larger scheme of things, it will also be another problem for Trump’s White House to deal with. Simply put, even amidst a slowdown, Beijing can cause significant geo-strategic problems for Washington DC.
Nine and lastly, the making of new world order. The trade war will strengthen China’s resolve for self-reliance and dominance in the Asian sphere, as the Soviets once desired in Europe.
This would not only take the world back to the era of the US-USSR Cold War but also create a new world order where China seeks political and economic colonisation in Asia and Africa, a pursuit it has undertaken in the form the Belt and Road initiative.
For China, the game is far bigger than one or two presidential terms, and they stand to gain more but at what cost?
One may argue that by prolonging the trade war, Trump has stood up to Chinese economic autocracy and its routine flouting of the WTO regulations and dumping practices, and rightfully so.
The tariffs have put an end to the globalised economic structure that was the hallmark of the 20th century after 1945. Today, that same world order stares at a possible collapse.
Even with righteousness on both sides of the Pacific, there are no winners in the trade war but only losers — domestic and global. For the markets, this righteousness is a precursor to a global recession.
Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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