US And China Brace For Trade War That Could Rattle Global Economy

As we reported last week, the US non-petroleum trade deficit with China and Mexico - two of its largest trading partners - climbed to its highest level for a 12-month period in December, an embarrassing development for the Trump administration, which has repeatedly promised to protect US industry by raising trade barriers.

However, the rising deficit, bolstered by a weakening US dollar, could ratchet up the political urgency of the Trump administration’s trade agenda. And as the Wall Street Journal points out, the White House is preparing a mix of tariffs and quotas to confront the growing economic threat from China. Though this confrontation could be potentially disruptive for the global system of free trade, even potentially leading to the collapse of the World Trade Organization, a group the Trump administration believes China should never have been allowed to join.

In his column, the WSJ’s Andrew Browne points out that the last time the US became embroiled in a trade war, Ronald Reagan was president. And its adversary was a close US ally: Japan.

 

China

At the time, Japan’s economy was much smaller than the US economy. Today, the Chinese economy has by some measures eclipsed the US. Such an unprecedented trade showdown between the US and China could have far reaching ramifications.

A trade war isn’t a certainty, but if it comes, it will look nothing like the battles that raged in the 1980s over Japanese semiconductors, cars and TV sets.

The forces are more evenly matched this time: America has never faced off in a trade skirmish with an opponent like China in terms of economic size, industrial capabilities and global ambitions.

Japan was a U.S. ally, China increasingly a rival. That raises the risk of tit-for-tat escalation, especially since support for Beijing is crumbling across the U.S. political spectrum as well as in the U.S. business community, traditionally a strong advocate for China trade.

Anti-trade rhetoric has been embraced by both sides, with President Donald Trump’s “America First” proclamations and President Xi Jinping’s “Chinese Dream” scenario.

In this brewing battle fueled by protectionists in both camps (Mr. Trump’s “America First“ finds its nationalist counterpoint in President Xi Jinping’s “China Dream”), each side has an exaggerated sense of its own advantages.

“A trade war is coming because of ideological zealotry and absolutely contradictory estimates of who has more leverage,” says Scott Kennedy, an expert on Chinese industrial policy at the Center for Strategic and International Studies, a Washington-based think tank.

Global markets are wildly unprepared for a full-blown China-US trade war, WSJ  reports. Earlier this month, the Eurasia Group highlighted “protectionism” as one of the biggest geopolitical risks of 2018. One of the reasons, Eurasia Group argues, is because industrialized economies are embracing a wider tool chest of pro-trade measures, including indirect subsidies and bailouts.

Governments aren’t just trying to protect comparative advantages in traditional sectors such as agriculture, metals, chemicals, and machinery out of concern for lost jobs or domestic economic interests. They’re also intervening in the digital economy and innovation-intensive industries as protecting intellectual property becomes an increasingly important priority.

But instead of traditional measures such as import tariffs and quotas, today’s tools of choice include “behind-the-border” measures such as bailouts, subsidies, and “buy local” requirements designed to bolster domestic companies and industries. These measures don’t necessarily circumvent WTO commitments; they rely on a collective inability to update and strengthen existing global trade rules.

WSJ  agrees: Once under way, the repercussions of a trade war would be felt well beyond the combatants themselves. US friends and allies along Asian supply chains would be early collateral damage. China is still to a large extent the final assembly point for imported high-tech components from Japan, South Korea and Taiwan. Navigating increasingly complex global supply chains in a constant state of disruption would be hugely problematic for businesses across industries.

Furthermore, if it escalated far enough, a trade war could take down the entire global trading architecture. That could be Trump’s goal. Many in his administration, including trade representative Robert Lightizer, believe the biggest mistake the US ever made was to usher China into the World Trade Organization in 2001. Aides say Trump regularly threatens to pull out of the rules-setting body.

Trump has in the past suggested that Chinese help on North Korea could head off US trade action. In a phone call  with the US president on Tuesday, Xi suggested that trade issues should be resolved by "making the cake of cooperation bigger."

Meanwhile, Trump expressed disappointment that the US trade deficit with China has continued to grow" and made clear that "the situation is not sustainable."

In private, however, senior Chinese officials believe Beijing has many tactical advantages: Some are cultural - the Chinese people, one says, are more prepared to endure economic hardship.

 

Surplus

Perceptions of US bullying would rally the population around the Communist Party, whereas US opinion would fracture among constituencies for and against trade hostilities.

US manufacturing giants like Boeing in General Motors would probably throw a fit and withdraw their support for Trump and his agenda. Both companies see China’s economy, which is fairly open relative to Japan’s in the 1980s, as a crucial growth market. If US initiates a trade war - something that Trump has already threatened with his investigation into Chinese IP practices - China has a detailed game plan to respond, and the total flexibility to carry it out. For example, the Chinese government would abandon Boeing in favor of European Airbus. Diversifying soybean supplies - possibly relying more on Brazil - would be another option.

Browne says the US should count on Chinese retaliatory actions being highly targeted - state by state, congressional district by congressional district - to inflict the maximum US job losses, and single out those politicians most gung-ho about trade action.

Many US trade experts don’t mince words: They believe China would prevail in a trade war with the US, and that the US economy would suffer lasting damage.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, thinks China would win. Among his reasons: China’s ability to concentrate pain, and the outcry from affected businesses in America’s more open political system. He argues that "the political costs to the Trump administration of maintaining new protectionist measures will be much higher than the costs of retaliation to the Xi regime."

Derek Scissors, a trade expert at the American Enterprise Institute argues that the major US advantage is that China is far more dependent on trade for its financial health.

"A shorter, smaller-scale trade conflict favors China due to its comparative agility,” he says. “The more serious it gets, the worse China would fare because it’s badly outmatched monetarily."

In the 1980s, Japan had to back down, agreeing to voluntary export restraints and moving large parts of its auto manufacturing base to the US to create jobs and defuse tensions. China won’t be pushed around in the same way.

Still, China has other leverage: Rumblings about China ditching Treasurys - reports that have been denied by Chinese authorities but still managed to rattle markets - show the PBOC might be willing to use its balance sheet as leverage against the US.

And as central banks across Europe flock to the yuan, the US could be increasingly vulnerable to rising interest rates as its share of global reserves dwindles.

 

Comments

NoDebt espirit Tue, 01/16/2018 - 22:38 Permalink

"Many US trade experts don’t mince words: They believe China would prevail in a trade war with the US, and that the US economy would suffer lasting damage."

If that is true, the China should welcome a "trade war" as soon as possible.  I don't see anything indicating they are seeking such.

 

In reply to by espirit

francis scott … infotechsailor Wed, 01/17/2018 - 00:15 Permalink

When you bolster a trade deficit aren't you making the deficit even stronger? Increasing it? Bigger?

 

You can't just use a weakening currency to buy imports, you must use the currency the seller asks for.

So when you buy Chinese imports with (weakening) dollars, the Chinese corporations will raise the

dollar price of their exports and that higher price increases your trade deficit.

 

If you buy Chinese imports in Renminbi, with a weak dollar and a strong yuan, when the time

comes to compute your trade deficit, the price you paid with the stronger yuan will show that  

the cost in dollars of your imports was more.  

 

A weakening dollar bolsters your trade deficit and makes it bigger.

 

It's a lot like Viagra.  :-)

 

In reply to by infotechsailor

52821740 07564111 Wed, 01/17/2018 - 02:40 Permalink

Speaking of sleeping at night - 075 I'm interested to hear what sort of ethics (if any) you find of value? I gather you think Democracy,  independent media and human rights are all overrated? 

I don't believe everything I read in the western media about Russia and Putin and I think it would be great if we could be friends but what seems to make that difficult is Russia cozying up to nasty regimes and seemingly not valuing those things above.  I know that western governments have been guilty of the same at times (Saudi Arabia for instance) but it's not modus operandi of western countries. 

In reply to by 07564111

YUNOSELL 52821740 Wed, 01/17/2018 - 06:03 Permalink

Democracy, human rights and independent media are all a myth Americans believe they have. Effective propaganda has convinced them of all that, so more direct forceful methods weren't required (though the US is starting to employ more Draconian methods as of late). Americans used to have all this many many years ago. It is sad since the Declaration of Independence and Constitution of the United States were truly beautiful documents, but they were written at a time when the US was being oppressed, and now 200 years later the US has become the oppressor.

The most important 'value' that people in all countries should hold dear is that of sound money, where the goal posts are not always changing to benefit the money 'changers' as with inflation, manipulated interest rates, asymmetric information abuse, etc. The US oligarchs will not allow this, since they will fight tooth-and-nail to maintain their exorbitant privilege benefit through holding the world reserve currency, but finally most other countries in the world are catching on to this and a slow, calculated pull away from the petrodollar is taking place.

Another Bretton Woods negotiation should have taken place after the 2008 economic crisis, but it didn't. Countries like China and Russia waited patiently for the US to get their house in order, but they didn't. Now, based on the evident large accumulation of gold by China and Russia and other countries, these countries are taking matters into their own hands to try to return sound money and leaving the USA behind.

In reply to by 52821740

trulz4lulz 07564111 Wed, 01/17/2018 - 02:50 Permalink

People like myself, are going to be very out numbered in the states in case of WW3. In case shit gets really weird I'll be the feral hillbilly hiding In the woods and swamps of ne Indiana. Go easy on that place. Really not much there but oxyheads, trailer parks and aparents full of Somalians (not sure what that's about. Go easy on that spot, it has beautiful lakes and hills, decent farmland too. 

In reply to by 07564111

ReturnOfDaMac espirit Wed, 01/17/2018 - 00:49 Permalink

Sorry espirit, China is a lot of things, stupid ain't one of 'em.  Everybody in the world, save the exceptionals, already know you cannot trust this version of the USSA to keep it's word ... on anything.  NATO to Russia, we won't expand.  US to Saddam, we won't invade.  US to Ghadaffi, give up your nukes we won't bother you.  US+world to Iran, it's a good deal.  The list goes on, and on, and on.  This version of USSA doest not keep it's word.  To paraphrase Babylon, Treaties: "ink on a page".

Like him or not Vlad is rational, calculating, keeps his word and actually has a brain that works.  Who would YOU trust as an ally if you were China?

In reply to by espirit

D503 07564111 Tue, 01/16/2018 - 23:26 Permalink

It's always amusing to watch someone pound their chest for love of country and proposed endless murder of citizens from other nations. It wasn't too long ago I was downing shots of vodka with lemon with a couple of droogs who gave me a baby Lenin pin before they left, and now some dipshit on ZH is waving his dick around blathering about how copypaste China and Russia are going to stop the CFR et al by killing Americans and their countrymen alike.

How about you just kill the fuckers pushing the pieces around so we can get back to doing shots? Or does mother Russia have her dick so far up your ass that you're just a war shill human-shaped condom anymore?

In reply to by 07564111

Koba the Dread NoDebt Wed, 01/17/2018 - 01:36 Permalink

I think the key word here is "war". Rapacious murderers since 1609, Americans can only think in terms of war. Neither China nor Russia think that way; they think in terms of trade and in the world of trade, absent psychotic monopolists, everyone can benefit from trade. Re-read Adam Smith, David Ricardo and John Stuart Mills (or for most of you, try reading them for the first time. Hint, it goes much faster if you don't move your lips while you read and run your finger under the line you're reading.).

In reply to by NoDebt

WallHoo Koba the Dread Wed, 01/17/2018 - 02:12 Permalink

Yeah everybody can benefit from trade...But russia(no hate there) and especially china seem to be the only ones  running a trade surplus.

 

I would like to see how u muricans think of "free trade" if that huge federal budget deficit suddenly disappears...Or how will germany japan china and korea will feel if they actually start practising free trade...

 

Grow some balls and trade war the shit out of them...

In reply to by Koba the Dread

Stuck on Zero cheka Tue, 01/16/2018 - 22:32 Permalink

Forget tariffs and sanctions. Simply declare that all dollars held overseas are henceforth "trade dollars."  You can buy products made in the USA with trade dollars but you cannot buy treasuries, property, factories, or anything else. Trade would very quickly become balanced and fair.

In reply to by cheka

Pliskin cheka Tue, 01/16/2018 - 23:59 Permalink

So America stops buying shit from China...and starts buying the same shit from other countries.  How does that get the overall trade deficit down?

China, in turn, stops buying shit from the U.S, which other countries (Totaling 1.4 billion people) are going to increase trade with the U.S. to make up for the lost trade with China?

Anyone?  Anyone?

Nevermind!

U.S.A   U.S.A   U.S.A!

In reply to by cheka

Don Sunset Tue, 01/16/2018 - 22:28 Permalink

Should've started with outright tariffs instead of the unfair tax law that is going to cost the GOP many seats including the white house.  In the end it will mostly probably get reversed.