Opinion

Economic war to global recession

BREAKTHROUGH - Elfren S. Cruz - The Philippine Star

August 8, 2019 | 12:00am

The United States and China are on the brink of an economic war which could lead to a global economic recession.

It started as a trade war; but, now the possibility of a currency war has become a likely scenario. For years, China has been warned that it cannot continue to enrich itself at the expense of other countries. For a variety of reasons, almost every country in the world has serious trade deficits with China. Although it can be argued that this is not necessarily China’s faults, others have argued that it has run up trade surpluses through state subsidies, currency controls, technology thefts and controls on imports and foreign investments. Whatever the reason, other economies, sooner or later had to tackle the increasingly serious problem of trade deficits leading to a weaker economy.

The common impression is that this US-China trade war is purely a Trump affair. However, even the Democratic Party actually supports most of this anti-China campaign. It should be noted that the American labor unions are staunch supporters of the Democratic Party. They have long been stating that the government must protect the American workers from the continuous flight of American jobs to China. One of the leading Democratic candidates, Senator Elizabeth Warren, has made policy pronouncements that parallel Trump’s trade war with China.

China and the United States have been engaged in a trade war since 2018. It begun when Washington accused Beijing of allowing intellectual property theft and restricting foreign investments unless there is a joint venture, On March 2018, the USA applied tariffs initially on $50-$60 billion worth of goods which included 1,300 categories of Chinese imports. Beijing responded by placing tariffs on 128 products it imports from the USA.

In June 2018, China accused America of launching a trade war and said it would impose similar tariffs on US goods. Washington declared that it would impose tariffs on additional $200 billion of goods. China again imposed tariffs on additional products. Last May 2019, Trump stated that the previous tariffs levied on $200 billion worth of Chinese goods would be raised to 25 percent. On June 1, 2019, China announced it would raise tariffs on additional $60 billion worth of American goods.

Last Aug. 1, Trump announced on Twitter that additional 10% tariff will be levied on the “remaining $300 billion of goods”. He was apparently referring to the remainder of the $500 billion trade deficit which was not yet covered by additional tariffs. Within four days, China announced its retaliatory measure which went beyond tariffs. China ordered state-owned enterprises to stop buying agricultural products which are the US main exports.

The most worrisome move is that the Central Bank of China allowed the remimbi to fall below 7.0 to $1 which is below their currency “red line”.

Before the trade war began, China was buying 25 million to 30 million tons of soybeans a year from the US. So far only 5.3 million tons of soybeans were delivered in the first five months of this year compared to 15.2 million tons in the first five months of 2018. The Xinhua News Agency has reported that Chinese companies have already started suspending purchases of American farm products as retaliatory measures. Until now, the trade war has been confined to the imposition of additional tariffs. The banning of import of certain products has added a new dimension to the war. It is possible that Washington will ban the importation of certain Chinese products.

The Trump administration has labelled China as a “currency manipulator” after the Chinese Central Bank allowed the renminbi to fall below a key threshold. Trump accused China of weakening its currency to create an unfair trade advantage.

According to Eswar Prasad, a Chinese financial system expert at Cornell University: “The US Treasury’s designation of China as a currency manipulator signals that the trade war is expanding into an all-out war and open economic warfare between the two countries.” Stock markets around the world were visibly shaken. According to the Financial Times: “US stocks recorded their biggest one-day drop this year and bond yields dropped as investors worried that US-China trade tensions hold back global growth. On Tuesday, Asian stock markets opened sharply lower.”

Many economists and political analysts are suddenly recalling Aug. 9, 2007. The American stock market fell by three percent. There was no panic that day; but, it was the beginning of what would eventually be called the global financial crisis or “meltdown”. Ever since the trade war started, geopolitical scholars have warned that these two biggest economies in the world are on a collision course, that the trade war between the two will have no easy resolution and eventually lead to an all-out economic war.

Paul Blustein, who writes about the relationship between the United States and China, wrote: “The Chinese sent a strong signal that they are ready to rumble. To depreciate the currency at such a fraught time sends a signal that they are prepared to endure a heck of a lot of pain and it doesn’t surprise me that [stock] markets would finally come round and say, ‘This could be really bad.’”