Teetering

A US negotiating team is currently in Beijing trying to discover enough consensus points to forestall an escalating trade war between the largest and the second-largest economies in the world.

Although the talks are still in progress and little real ground for a compromise has been marked out, markets around the world rebounded with what might be unwarranted euphoria. Equities were buoyant in the first week of the year, recovering some of the value lost in the terrifying downturn we saw last December.

When Donald Trump announced tariffs will be imposed on goods imported from China, and when Bejing retaliated by imposing commensurate tariffs on good coming from the US, dark clouds gathered over the rest of the economy. A trade war will certainly be damaging for both countries.  It will mean global economic growth will likely slow in the coming period.

The looming trade war already reflected in slower Chinese growth. Carefully targeted retaliatory tariffs announced by China will surely hurt farmers in the American Midwest, Trump’s political base.

When Donald Trump and Xi Jinping met on the sidelines of the G-20 meeting last month, they agreed to suspend tariff increases for 90 days to enable trade negotiators to work out the issues. The negotiations going on in Beijing this week follows through on that agreement.

If the talks succeed, the trade war might be called off – to everyone’s relief. If they fail, the 90-day cooling period will lapse and the trade war could resume in earnest. This is why the world has its eyes fixed on the negotiations on-going in Beijing. The entire global economy teeters on the brink of a severe recessionary cycle.

 We should hope for the best and prepare for the worst.

As the negotiations are in progress, the leaders of the two countries are putting up brave fronts, claiming they could feasibly weather a trade war. The brave acoustics seek merely to strengthen each side’s negotiating position. Everyone knows resumption of the tariff war will be painful not only for the two countries engaged in it but for all countries expecting to benefit from robust global economic growth.

There are times when a shortsighted reading of national interest undermines rather than advances the long-term goals of nations. This looming trade war is an instance of that.

Sobering

Last month, Defense Secretary Jim Mattis resigned from his post over disagreements concerning Trump’s erratic Middle East policy. His replacement will be Patrick Shahanan, a former executive of major arms supplier Boeing.

There are clear conflicts of interest here that will come into play when the US government purchases equipment according to how the country’s defense concerns are defined. But we will discuss that at some later time.

In one of his first speeches after being named to the post, Shahanan told his audience to focus on three things: “China, China, China.” That seems to indicate that US policy, in the Trumpian word at least, sees the Asian power as it main “strategic competitor”. The logical imperative of this is that US policy will be aimed at containing China’s rising power.

The trade war Trump initiated is an application of this strategic view. This trade war is not really about some intellectual property infraction here and there that negotiations might smoothen out. It is about the huge trade surplus China enjoys over the US, a factor of broad strategic consequence.  Therefore the trade war is aimed at constraining China’s growing economic power.

The American negotiating team will work within this strategic view. China is well aware of that and will refuse to yield to US demands.

That is a sobering thing to consider. At play during the negotiations are factors other than technical trade issues. Both sides will be saddled with big power considerations.

In a word, the US will try to overhaul the existing terms of trade in order to constrain China’s export juggernaut. China, for its part, will try to maintain the existing trading status quo that empowers its economy.

This is why the US keeps repeating largely unsubstantiated charges of “intellectual property theft” and even calling for an international boycott of some of China’s leading technology companies such as Huawei. The ultimate goal seems to be to stymie China’s trading capacity.

For its part, China has offered to cut tariffs on 1,700 import lines. In December, Beijing added 700 more items to that. The world’s second largest economy committed to import $2 trillion annually from the rest of the world and up to $40 trillion over the next 15 years.

The objective here is to reassure the rest of the world that China’s export industries will not be unbridled. It seems to imply the Chinese state will restrain its balance of trade surpluses through what might be called “command purchases.”

We know how this is done. Beijing has promised the Philippines purchases of our agricultural exports and a couple of million in tourist arrivals. That is meant to mitigate the huge trade surplus China enjoys in our bilateral trade.

We are not sure if the American negotiating team will be impressed by similar commitments. But it will be a stretch to even think of turning the balance of trade in America’s favor.

Last month, the price of Apple stocks dropped drastically. This was after it was announced that profit targets would not be met because of disappointing China sales. This underscores symbiosis that has evolved between the US and China – a fact Trumpian policy tends to understate.