Trade war

An economic vendetta gone haywire

Prottoya Chowdhury | Published: May 26, 2018 00:36:27


The general sitting at the helm of the arsenal of the western world's mighty military force adorns himself with his opulent costume and multiple golden laurels earned from countless eons of unprecedented glory and triumph on the battlefield-his countenance is highlighted by the smug, deceptive grin on his face. On the opposite corner of the world, sitting on the throne of the mostly rapidly-growing and diversifying economy of the world, is the Jade Emperor (the middle kingdom) pursing his lips with sharp, acrid disappointment- beneath his stoic facial features lies a dark thought, the thought of retaliation. As the general of the supreme western power continues to exalt protectionism to be  the only refuge from 'unfair trade practices', the mighty Jade Emperor of the east remains utterly silent, like a viper eyeing its prey the moment before it pounces- one step farther down the line opposing shots will rain down in innumerable volleys. Oblivious of this impending threat that could bring about the worst case of global economic pandemonium in ages, the western general does not show the slightest hesitation in striking his counterpart repeatedly. The motto of the western general is: trade wars are 'easy to win'. The motto is starkly contrary to the opinions of some of the world's leading minds in business and economics.

Tariffs, heated speeches, retaliation, rate hikes, bans on imports and a lot more gibberish are what constitute one of the most inane blame games in international trade; trade wars are fought by the most imprudent people, and the bitter truth is that neither of the warring sides emerges a victor in this peevish tit-for-tat struggle. US President Donald Trump has long promised to take action against the United State's rapidly widening trade deficit of $375.2 billion with China, and in recent weeks, his bitter resentment for 'unfair trade policies' has started to materialise from its initial form as a visionary dream of Uncle Sam's glory- the first few volleys of American metal have been hurled towards China. President Trump, after yielding to demand from his panel of economists and financial advisers, signed an executive order that places twenty-five per cent and ten per cent tariffs on steel and aluminium imports respectively to the US; the US stock market and its accompanying indices were rattled, the Dow Industrial Average saw a staggering 1100 points pared that trading week. However, the suddenness was not the most stark aspect of these tariffs- they were directed at many of America's main trade partners. Major metal exporters like the EU, Australia and Canada, some of whom the US gets most of its metal from, were included in the executive order. Corporate America was outraged: they were suddenly transported into a raging inferno.

 In the weeks following the executive order, there was a peaceful hiatus in global markets and foreign relations until President Trump violently shook world markets from their ignorance of global relations by issuing another mammoth tariff worth $ 60 imports; China would be the impassive footer of this mammoth bill. As U.S President Donald Trump first brought the idea to the international limelight and abruptly introduced the idea to the entire world, the Chinese Finance Ministry answered with an aggressive response, stating that China did not intend to fight a trade war but would apply the full extent of its economic might, if it was forced into a trade war. Unfortunately, the threat of a full-blown trade war that has the potential to create worldwide financial pandemonium did not cause a sense of hesitation in the US President- $50 billion worth of tariffs on nearly 1,300 Chinese products were enacted. Economic analysts and investors were baffled as such protectionist measures were the main primers for the Great Depression of the 1930's; global equity markets all across the globe- the DAX of Germany, the FTSE of the UK, the STI of Singapore, the Nikkei of Japan, the Hang Seng of Hong Kong and plenty more- plummeted by considerable margins. However, due to a short period of silence from the Chinese government where no additional comments regarding trade policy retaliation were discussed, the intense pressure on the major world indexes was alleviated as global markets started to rebound.

However, it later appeared that the prospect of an intercontinental trade-war was inevitable: China responded with the imposition of a $3.0 billion worth of tariffs on US agricultural products including pork and wine on April 2. Again, this was followed up by another equivalent of $50 billion worth of taxes on 128 US products that included US tech and aerospace industries; China was fighting back, fighting in a calculated manner without any hesitation, and it seemed as though the faded possibility of an all-out tit-for-tat battle between the two greatest superpowers on the world stage had been reinvigorated. The first victim of this global attack on trade and manufacturing were the major US stock indexes such as the Dow Jones, the Nasdaq Composite and the S&P 500, with the Dow Jones enduring a nosedive that pared it by roughly 2.4 per cent or about 600 points on Friday, April 6 last. What followed this initial blow to trade was an inundation of outrage and concerns from global policymakers, investors, multinationals and corporate executives. The US and China, two of the largest and most rapidly advancing economies of the world, are in essence the backbone of the global economy as they constitute a large fraction of the global GDP (gross domestic product) and possess the largest production lines and manufacturing sectors in the world, and a trade war in the current geopolitical economic scenario would deter global economic expansion, global GDP per capita growth, specific industry sector development in developing countries and job creation all throughout the world-petty clashes between human minds would reverse the roaring 10-year global bull market. Trade wars are never won by either of the warring sides, and in the event of escalating trade tensions between the US and China, corporations from both nations and large multinationals with operations all over the world will be facing a severe decline in revenue as the demand for their products overseas has been truncated by a slew of tariffs aimed at creating a dire protectionist economy. Ultimately, a trade war would leave two of the most prosperous economies in the world utterly crippled in its wake; amends and repairs to the economies would take decades. In the midst of this economic pandemic, American and Chinese foreign investment in other countries, equivalent to roughly $5.3 trillion and $1.8 trillion respectively, are bound to shrink by large amounts and stagnate as those assets are liquidate and repatriated to offset losses and additional production and maintenance costs. As the two superpowers continue to subsist on their offshore liquid assets, an insatiable vacuum for foreign capital is created in developing economies all around the world where US and Chinese foreign capital was previously invested- yet there is no Robinhood of nations that will rise to the unfortunate demise of the nations who were relishing their first taste of economic stability. What is really surprising and striking to note about this probable economic struggle is that it would be spurred by controllable human actions, not unavoidable circumstances.

 Most people of the modern era believe in a common myth: the US is bound to import products whose tags read 'made in China'. In reality, although US imports of Chinese products totalled roughly $506 billion in the fiscal year (FY) 2017, it only comprised about 17.45 per cent of the total US imports; the real reason for America's dependence on the Chinese economy is due to a variety of reasons, which include imports of Chinese commodities, the acquisition of US treasuries and bonds by the Chinese foreign reserve and America's lack of industrial alternatives.

 In spite of US import of Chinese goods being miniscule in the grander scheme of American macroeconomics, there are little to no industrial alternatives that the US has currently: the 'Great Stagnation', a significant decrease in the increase of US jobs, wages and the development of specific US industries has persisted for 45 years from the year 1973 and economies such as India, Vietnam, Thailand and Taiwan, although boasting cheaper labour and production costs, still have not reached the production capacity that is sufficient to meet US demands for those specific products that are currently imported from China. Hence, China is the only viable option that the United States has on the table as of the current time.

China's current position as the single largest holder of US treasuries and bonds is easily overlooked by the masses but it is one of the primary reasons why the Chinese government is able to assert its control on US policy and the US economy. As of December 2017, the Chinese foreign reserve contained $1.185 trillion worth of US bonds and treasuries followed by Japanese foreign reserve which had about $1.062 trillion worth of US treasuries and bonds. China has been notorious in international trade for its sly manipulation of the Renminbi (RMB), and its large foreign reserves are to blame for that. The possession of nearly $1.2 trillion worth of American debt allows the Chinese government to artificially increase the price of the US dollar against the Chinese RMB; as foreign revenue is in the form of US dollars, Chinese corporations make a greater profit in relation to the RMB- in essence, China controls the US dollar index. This control not only gives China an added leverage while trading with its American counterpart, but it heavily restricts the US from placing sanction on Chinese trade as they run the immediate risk of devaluing the US dollar.

In simple terms, the current macroeconomic scenario in the world is too good of a cone to cause petty trade-spats and feuds between major trading nations. The global bull market has existed for nearly a decade and still has the logistics to continue to prosper and develop all around the world at exponential rate- why squander such a golden opportunity when so little of them comes by? The world should not be fixated on microeconomic trends and issues, but it should rather look toward a long future of increased revenue, positive earnings and GDP growth and industry sector development. The current vendetta between Uncle Sam and the Jade Emperor is a microcosm of economic recession- let's hope the world turns back before it falls into the abyss of  worldwide recession, keeping in mind the fallout of "Great Depression" of 1930's.

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