Friday, April 06, 2018

Waking the dragon: Trump's trade war is a risky strategy

President Donald Trump has started a trade war claiming he is protecting American jobs and interests [FT / BBC / Time / CNN].

Starting with steel, to appease US workers that have seen a decline due to cheap imported steel especially from the likes of China, Trump has focused more specifically on the Middle Kingdom imposing a wide range of tariffs in retaliation to China's failure to tackle the issue of intellectual property theft.

It is true to say that China has ignored the issue of IP theft over the years. From cheap ripped off DVDs and fake Gucci handbags to reverse engineered technology covering mobile phones, cars and wind energy technology, China is awash with copied products.

But Trump's trade war will do little to persuade Xi Jinping and China to crackdown on IP theft. Indeed it will only only reinforce well established anti-western and anti-American sentiment and lead to growing nationalism.

Hostile foreign forces

In 2012 as tensions grew over territorial claims connected to the Daiwu Islands anti-Japanese protests took place in cities across China.

Thousands of people took to the streets in Shenzhen, Guangzhou and a number of other cities demanding that Japan leave the islands in the East China Sea where a Japanese flag had been symbolically raised on what the Japanese called the Senkaku islands. In Shenzhen, some demonstrators attacked Japanese restaurants and smashed Japanese-made cars [BBC / CNN / Wikipedia].

So could Trump's trade war, directed at China, trigger similar nationalistic feeling?

Since Nixon, every successive US president has toured China. Relations with China have strained under Barack Obama's Asia pivot strategy, US support for Japan in the Senkaku Islands dispute, as well as Donald Trump's threats to classify the country as a "currency manipulator" as part of a potential trade war.

Trump's latest policy however could sour relations significantly and the US has much to lose. It has been said that no-one wins in a trade war. But China could out manoeuvre the US in many ways.

Working towards self-sufficiency

Although China does much trade with the US it is not entirely reliant on the world's largest economy. And while it currently imports many products from the US and the rest of the world China has already begun initiatives to become self-sufficient by 2025 [China Daily / Trade Ready].

China has welcomed global trade with open arms. But it is clear that China does not want a gun held to its head when trading with other countries. China is already embarking on a $300-billion plan to become nearly self-sufficient by the year 2025, a move that will give Chinese companies a major edge in the push to squeeze out foreign enterprise.

And Trump's trade war with China could make the country less hospitable on a number of fronts.

Increased tariffs could make US products less attractive to Chinese consumers. Furthermore as China targets particular sectors such as soybeans could have particular marked effects.

China has hit the US with proposed tariffs on pork, beef, soybeans and cars which are mostly produced in regions mostly supportive of Trump. As exports dry up and prices slump US producers could find themselves in a world of hurt.

China's nationalism

US companies could find themselves being targeted in China should nationalistic fervour increase especially if America is seen as an aggressor. The line Western anti-China forces is never far from the lips of the nationalist propaganda machine in China. History is much ingrained and memories run very long indeed.

Just as China has never forgotten the Nanjing massacre, when Japan slaughtered thousands of Chinese as it attempted to take over China, so China remembers the humiliation it experienced from imperialist colonisation.

For much of the second half of the nineteenth century, China suffered humiliating defeats in the First and Second Opium Wars with the British, wars with the French, Portuguese, and even the Japanese.

The sense of humiliation is so deeply entrenched in the Chinese psyche, that even today while the rest of the world considers China a strong and powerful nation, many Chinese often feel they are being singled out, bullied and mistreated. As such there is a constant and watchful eye for "hostile foreign forces."

This complicates the Sino-US relationship. A simple trade dispute can be interpreted by the Chinese as a Western way to undermine China. Indeed, some extremists already regard China's holding of trillions of US foreign reserves as a conspiracy by the US government to colonise the Chinese economy. There is increasing anti-American rhetoric in Chinese social media, with posts accusing Uncle Sam of plotting to dismantle China "in the way it did to the Soviet Union." [Forbes]

China's secret weapons

As a week of tit for tat rhetoric and proposed implementation of tariffs has racked up China has declared there will be a series of comprehensive measures to follow should Trump continue with his trade war.

It is unclear what measures might be implemented, but China certainly hold many cards.  Life could become very difficult for US companies operating in China. Few see it as a possibility, but China could begin off-loading US treasuries which could have a disastrous effect on the US and world economy [CNBC].

China holds $1.17 trillion of US government debt and some economists and investors worry if there is a trade war, China could reduce its US debt holdings as a political weapon against the Trump administration tariffs proposal. Should that happen, the US dollar could fall and other countries could follow suit and sell their holdings.

There is also the virtual monopoly China has in terms of its global supply of so-called rare earths without which the technological world could grind to a halt.

China is still responsible for roughly 95% of the world's production of rare earth elements. Whilst China has found itself criticised by the World Trade Organization for imposing export quotas in the past, but that is unlikely to deter it from repeating such actions [Investing News].

Rare earths are used in TV sets, cancer treatment drugs, camera lenses, battery-electrodes, welding goggles, computer hard drives and electronic components. Indeed without rare earths even America's military could find itself up the creek without a paddle.

Napoléon Bonaparte is reported to have once said, "China is a sleeping giant. Let her sleep, for when she wakes she will move the world."

One Chinese proverb is also rather apt. "If you ignore the dragon, it will eat you. If you try to confront the dragon it will overpower you. If you ride the dragon, you will take advantage of its might and power." A metaphor perhaps that it's better to cooperate than to resort to conflict.

In this spat between the US and China it all depends who you believe represents the dragon.

tvnewswatch, London, UK