Road leading to a full blown trade war

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“If it really does get to be a big war, we have many more bullets than any of these other countries…”

These bellicose words from US Commerce Secretary Wilbur Ross are a feature of the US’ approach to trade disputes with friends and foes alike.

Divisions and sudden about turns are also features, causing confusion and contributing to market volatility.

This is pointing to the road leading inexorably to a full blown trade war, becoming more a question of when not if.

Geopolitics and economics

Gold chart overlaid on world map
Geopolitical gold

The US has trade disputes with its NAFTA, EU and Asian partners but these take second place to China.

The fundamental driver behind the US’ trade dispute with China is China’s rise as an economic power. This threatens to upend decades of US global dominance.

Measures by the US are primarily aimed at China’s ‘Made in China 2025‘ industrial policy.

This policy aims to move China up the value chain, become self sufficient and a leader in high tech development and production.

The policy is seen as such a threat that US trade negotiator, Robert Lighthizer demanded China make:

“…fundamental changes that allow U.S. companies to keep their technological edge over Chinese competitors were critical to the future of the U.S. economy.”

Trump has also complained bitterly about damage to the American economy. He claims it’s caused by the trade agreements and practices of the US’ trading partners and competitors.

He points to the US’ $375 billion trade deficit with China. Trump has also slammed German car makers, “Look at the millions of cars they sell in the US. Terrible! We’ll stop that,”.

American midterms and America First


US midterms 2018 political landscape

The American mid terms, due 6 November, are also a driver behind the tariff agenda along with Trump’s promise of ‘America First‘.

Trump’s election victory was due in large part in appealing to working class communities in areas like the Rust Belt. Three decades of decline has devastated the industrial base of areas like the Rust Belt.

Steel, aluminium and construction related products are all important Rust Belt industries and have been Trump’s first targets.

Differences within the administration

There are also American policy makers that realise a trade war will not be without casualties on their own side. Bloomberg reports on differences within Trump’s administration:

“Hard-liners such as U.S. Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro are pushing for structural changes to China’s policies. Treasury Secretary Steven Mnuchin and NEC Director Larry Kudlow are more receptive to a deal aimed at lowering the bilateral trade deficit.”

There are further signs of splits in the US’ policy making elites. The U.S. business group, the Chamber of Commerce, has also attacked Donald Trump’s handling of trade disputes. They argue that the, “…retaliation by its partners would boomerang badly on the American economy”.

Lacking in experience

Some of the US trade measures have been ill conceived leading to unintended consequences. The gutting of departments of experienced staff by the Trump administration is partly to blame.

Take for example, the US imposed sanctions on Russian company Rusal, the world’s second largest aluminium producer. The result was to send aluminium prices sky rocketing and cause collateral damage to other sectors and forced the US to modify its sanctions.

A Reuters article remarked on the débâcle:

“Unlike previous cases of sanctions on Russia, European countries did not have a chance to consult with Washington on punitive moves that would have ripple effects in the European economy, the sources said. One reason for the lack of dialogue: the U.S. State Department no longer has a Sanctions Policy Coordinator to liaise with other governments…”

Xi Jinping overreach?


Xi Jinping at the Great Hall of the People celebrating the bicentenary of Karl Marx’s birth

There are those confident that China does not have the fire power to withstand the pressure from the US.

Jude Blanchette, a senior advisor at Crumpton Group‘s China Practice, told Bloomberg that:

“People are going to look back at this year as the pivot point when Xi Jinping overreached and sparked an international backlash against the party and China’s development model on multiple fronts,”

However, former US Treasury Secretary Larry Summers in an interview with Der Speigal, where he reflected business concerns, warned:

“Business leaders fear that this blundering approach will lead to retaliation against them and favoritism by China toward its European and Japanese competitors.”

Painful transition

There is still optimism in some quarters that the US will pull back. In the same interview above, Larry Summers hopes:

“At some point, there will be a turning back. For Trump, stepping back from his policy will take the form of finding a way to declare a victory.”

But there is little evidence that Trump is playing a game of bluff given his readiness to escalate. Any retreats are more in the shape of regrouping rather than concessions.

China has shown every intention of defending its interests. China’s Global Times reports on China’s readiness to fight a trade war:

“Washington disregards fairness, is too self-interested and obsessed with the stick approach. This means Beijing must prepare for trade disputes that cannot be solved quickly. China doesn’t want a trade war, but is not afraid of fighting such a war.”

These trade wars are an expression of a far deeper strategic challenge – The challenge of a painful transition from a uni-polar world to a multi-polar one.

This is why the road is leading inexorably to full blown trade war. It’s now more a question of when not if.

Gary Hollands

3rd July 2018

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