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Market Oracle FREE Newsletter

Trading Lessons

Time to Safeguard Global Free Trade

Politics / Protectionism Apr 11, 2018 - 10:47 AM GMT

By: Dan_Steinbock

Politics For a year, President Trump has promoted global division and trade friction, while China has defended global trade and cooperation. It is time to defend the open, global economy.

If President Xi Jinping’s speech was highly anticipated in the Boao Forum, it was even more eagerly waited in Washington and Wall Street, as trade tensions have begun to penalize US markets.


In his keynote speech, Xi urged countries to “stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks.” The ultimate goal is to make economic globalization “more open, inclusive, balanced and beneficial to all.”

Xi presented plans to further open up the Chinese economy, including lower import tariffs for autos and other products, enforcement of the legal intellectual property of foreign firms, and improving the investment environment for international companies.

It was a balancing act that highlighted China’s goal to safeguard open global economy, even amid Trump’s trade wars.

Trump’s trade war

In early March, President Trump introduced a global tariff of 24 percent on steel imports, while launching a 10 percent duty on all aluminum entering the US.

On March 22, Trump directed his administration to make a case against Chinese technology licensing in the WTO, launched a slate of tariffs at $50 billion on Chinese products and proposed to step up restrictions on Chinese investment in key US technologies. That’s when China, in response to US steel and aluminum tariffs, imposed tariffs on $3 billion worth of US goods.

On April 2, China imposed tariffs of up to 25 percent on 128 US products, in response to steel and aluminum tariffs. The next day, the US proposed tariffs on $50 billion worth of Chinese electronics. Afterwards, China launched $50 billion in tariffs on more US products, including soybeans, cars and chemicals. And on April 5, Trump said he was considering an additional $100 billion in tariffs against China.

With substantial geopolitical leeway, Trump is also playing targeted countries against each other. That’s why he has granted “initial exemptions” to US NAFTA partners, Mexico and Canada, and “temporary exemptions” to the EU, South Korea and others on steel and aluminum tariffs.

Over a year ago at Davos, President Xi Jinping stressed the need for global cooperation to sustain global recovery. In a trade war, he said, “no one will emerge as a winner.”

In the White House, that wisdom got lost in translation. Now the only question is how costly that policy mistake will prove.

Costly consequences

President Trump may be in for a cruel awakening. For now, the economic impact on Chinese companies and banks is still limited. The US accounts for only 15 percent of China's goods exports, and China's domestic activity - not net exports anymore - now fuels its economic growth. US economy will carry a substantial burden, however.

Second, Trump’s unilateral tariffs will soon begin to hit hard the constituencies that were vital for his triumph in 2016 and who remain critical to Republicans in the fall mid-term elections. These farmers and blue-collar voters gave Trump a mandate to negotiate better terms with US trade partners, but not a carte blanche, and certainly not a license for a trade war.

China is the largest customer for America’s farm surplus at over $20 billion per year. Since US farm groups have greatly benefited from the reduction of trade barriers over time, there is an unease across the US heartland that Trump's tariffs could upend decades of progress. Even worse, if trade friction worsens with NAFTA and EU partners, US farmers would take hits from all directions.

Third, as US sovereign debt now exceeds $20.7 trillion (107% of GDP) and Trump’s infrastructure initiative is fueled by record-high leverage, trade war is undermining America’s critical revenue sources.

Fourth, Trump’s trade war is escalating at a time when even rising interest rates can no longer ensure a strong dollar, and petroyuan is on the ascend. Moreover, with $1.2 trillion of US debt, China remains the largest foreign holder of US Treasuries. And it also has $3.1 trillion of foreign exchange reserves.

Fifth, if Trump proceeds in the trade war path, he would undermine US ties with its NAFTA partners, alienate EU allies while undercutting US alliances with the rest of its trade and security partners in Asia. Over time, that would undermine not just trade, but investment and finance with America’s biggest economic partners in North America, Western Europe and East Asia.

Sixth, global growth prospects are not immune to the trade war. Before Trump’s tariffs, global investment flows remained well behind their peak a decade ago. World export volumes reached a plateau already in early 2015. In finance, global cross-border capital flows have declined by a 65 percent since 2007.

Prohibitive lessons

For now, the damage of the Trump tariffs is still reparable and reversible. However, the net effect of further escalation would result in critical erosion in global investment, trade, and finance. That has potential to derail the fragile global economic recovery and disrupt international supply chains.

In that case, four decades of bilateral confidence-building could be undermined in four weeks and mistrust would soon spread to US relations with its partners in Americas, Western Europe and East Asia.

In that path, there is a historical precedent. After the US economy drifted into the Great Depression in the 1930s, Washington enacted the Smoot-Hawley Tariff Act, which led the way to tit-for-tat retaliation, and ultimately paved the way to much worse.

Trump’s unilateral tariff war is on the wrong side of history.

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world. and the founder of Difference Group. He has served as at the India, China and America Institute (USA) , the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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