U.S. vs. China: From Tariff War to Economic War


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On June 29, 2019, Trump and the president of China, Xi, met again at the G20 in Japan in the midst of a potential further escalating trade war. But the outcome looks eerily similar to that of the prior G20 meeting in Buenos Aires on December 2, 2018, when Trump and Xi also met.

Once more, the same post-G20 “spin is in”: Trump declares publicly he has a great relationship with Xi and there’s a great trade deal soon forthcoming between the two countries. U.S. and China trade teams will now begin to thrash out the details on the remaining 10 percent or so of U.S.-China trade differences. In the interim, once again, Trump announced he will withhold imposing more tariffs (this time on an additional $325 billion of China imports to the U.S.). In other words, coming out of the latest G20, it’s almost an exact déjà vu all over again.

Will it be different this time? Will there by an agreement? Or will Trump once again just be buying time—i.e. until just before the 2020 elections? Until he sees China’s economy softening further and he raises U.S. demands further again? Or maybe Trump and his neocon trade advisers—Lighthizer, Navarro, Bolton who are now driving U.S. trade (and most of U.S. foreign) policy—don’t want to compromise and will accept nothing less than China’s capitulation on the nextgen technology  issue that was at the core of the blow up of negotiations in May 2019?

It’s probably becoming increasingly clear to the Chinese that the U.S. did not just launch a “tariff war” back in March 2018. U.S. policy is driving toward a bonafide economic war between the U.S. and China longer-term.

In the nearer-term, the current differences may well transform the “tariff” war into a “currency war” that will spread contagion and reverberate globally across other economies—at a time when the global capitalist economy is slowing fast and approaching a new financial instability. All China has to do is allow its currency, the Yuan-Renminbi, to devalue naturally in response to U.S. policy and the slowing global economy. That  devaluation would more than offset U.S. tariffs. Thus far, China has intervened in global money exchange markets to prevent this. But all it needs to do is allow it to occur according to prevailing economic and market forces and just not intervene further in global money markets to prop up the Yuan. That will become inevitable as the China, U.S., and global economies weaken further in coming months. China doesn’t have to manipulate its currency. It only has to allow global market forces, unleased in large part by Trump policies, to naturally devalue the Yuan.

Then there’s China’s $1.3 trillion of U.S. assets, mostly U.S. Treasuries. It could slow its purchase of new U.S. government debt, which it appears it may now be doing.  Should the tariff-currency war intensify, if necessary, it could stop or even sell off its dollar hoard of U.S. Treasuries. It’s been moving toward that since September 2018, as its purchases of U.S. securities first slowed and then declined in March 2019. That reduction of purchases, if not offset by other economies buying more, would drive up long-term interest rates in the U.S. and in turn the value of the U.S. dollar still more—all of which further slows global growth.

Rising U.S. rates and the dollar will likely precipitate another U.S. stock and junk bond sell-off, similar to that which occurred in late 2018. And we know Trump doesn’t like stock market declines.

There are numerous other “actions” the Chinese could take in response to U.S. neocons intensifying or prolonging the U.S.-China tariff-trade war, further driving the differences into a broader economic war., including various bureaucratic obstacles to U.S. corporations’ majority ownership of operations in China, “buy China” not America in China movements, and restricting the sale of what’s called “rare earths”—minerals key to technology and military production—would likely be imposed. Even if U.S. neocons don’t understand this, or don’t care, widespread business and banking interests do and could intervene more forcefully should Trump’s drift toward economic war continue.

 

Economic Slowdown & Recession “Wild Card”

And there’s a wild card in the trade-war deck that may check the neocons influence: the current softening of the U.S. and China economies, which could force both sides to an agreement.  Trump may grab the major concessions on China purchases and U.S. majority ownership rights in China and announce a big victory—just before the 2020 U.S. elections.

China’s economy is clearly slowing, growing likely no more than 4-5 percent, not the official 6.5 percent. But so too is the U.S. economy, which will start to become more obvious once the data for the 2nd quarter U.S. GDP start to come in by late July.

The U.S. 1st Quarter GDP numbers were propped up by temporary factors associated with inventory over-investment and net exports, both of which are fading rapidly this quarter. Moreover, U.S. household consumer spending is barely growing, most recently at less than 1 percent, the housing sector has slowed for the past 17 months, manufacturing orders and production is now stagnant and business investment has turned negative. Lagging indicators, like jobs, are now beginning to turn down as well. The U.S. Central bank’s lowering of interest rates in the second half of 2019, which is helping to drive the massive $1.5 trillion in stock buybacks and dividend payouts scheduled for this year, may succeed in putting a temporary floor under stock markets. But the real side of the U.S. economy is being driven to slow down, or even worse, by year end. More bank research departments, big finance capitalists, and even some economists—a notoriously conservative and timid forecasting lot—have begun to predict recession by year-end 2019.

A more rapidly slowing U.S. economy, may change the trade negotiations dynamic, forcing both sides to some kind of a deal. And if the U.S. slips into recession by winter 2019-20, (which this writer has also been predicting the past year) the pressure to cut a deal will grow.

Trump may yet be convinced to take the China concessions already on the table—and temporarily suspend the U.S. demand for China’s capitulation on the technology issue. Trump could then take what’s been offered by China—i.e. to buy $1 trillion more U.S. farm goods and allow U.S. corporations majority ownership of operations in China—and declare a major victory in the trade negotiations in 2020 just before the elections. The nextgen tech-military confrontation—the real core of the U.S.-China dispute—could then be revisited later. Because for Trump, a “deal is never a deal,” but subject to reopening whenever he chooses.

Breaking an agreement is standard practice for Trump. Just ask the Mexicans, where Trump recently threatened to levy 25 percent more tariffs even after the U.S. concluded a new NAFTA 2.0 deal last year. Or ask the Iranians, who thought they had an agreement with the U.S. Or the Europeans who thought they had a Climate deal. For Trump, negotiations are a continuing process, punctuated by happy-talk events stroking foreign leaders, followed by more threats of sanctions, and personal insults and intimidations, to force a reopening of deals once thought concluded by trading partners—allied and challengers alike.

In other words, even if a China-U.S. trade deal is done, the trade war with China will not be over. It will have just begun, as it evolves toward a broader “economic” war after the 2020 elections, perhaps even before.

The key to a China trade deal occurring sooner rather than later, is whether Trump and U.S. big bankers and multinational capitalists can convince the neocons and the military industrial complex to agree to a short-term deal with China now that provides only token nextgen technology concessions—backed by the Trump-Neocon assurance that the U.S. will re-open the technology offensive after the 2020 elections once again.

For the U.S. economic and political elites are in basic agreement with the neocons and won’t allow China to challenge U.S. global hegemony in the next decade by leveraging nextgen technologies that are the key to both economic and military hegemony. It’s just a question of timing. Take two bites of the bargaining apple from the Chinese, and come back later for the big bite: the fight over nextgen technology. Either that or Trump and the Neocons will continue to insist on three bites all at once.

This writer’s guess and prediction is that the now-slowing U.S. and global economy will result in the former, and the U.S. will reopen any deal reached and renew its technology demands after the 2020 elections. 

 

Historical Precedents

Just as European and American imperialists jockeyed and maneuvered in the years leading up to 1914 and the first world war, with their focus on disputes over markets and global natural resource control, in the 21st century the jockeying and maneuvering has similarly begun—albeit this time with a different focus on nextgen technologies, over who controls global money flows, whose currency will continue to dominant, over who calls the shots in global institutions like the IMF, World Bank, WTO, and so on.

The 2020s decade ahead will prove a highly dangerous period. The global capitalist economy is slowing, as has always done periodically. A new restructuring of global capitalism is on the agenda, as it was in the late 1970s, in the mid-1940s, and during the years immediately leading up to 1914. 

Trump’s trade wars and other policies should be understood as part of a broad reordering of U.S. economic and political policies, and relations with other nation states, allied and adversary alike, to ensure the continuation of U.S. global economic and military hegemony for the coming decade. Nextgen technology development is at the core of that restructuring and restoration of U.S. hegemony. Trump is just the appearance, the historic vehicle, behind the deeper global capitalist transformation in progress.                                                                                                               Z

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Jack Rasmus is the author of the forthcoming book, The Scourge of Neoliberalism: US Policy from Reagan to Trump, Clarity Press, September 2019; and the recently published Alexander Hamilton and the Origins of the Fed, Lexington books, March 2019. He blogs at jackrasmus.com and his website is www.kyklosproductions.com. Dr. Rasmus tweets at @drjackrasmus and hosts the Alternative Visions radio show on the Progressive Radio Network.