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The Trade War

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Trade War, US, China, Europe

Published in 2014, Henry Kissinger, in his book titled ‘World Order: Reflections on the Character of Nations and the Course of History’ wrote that ‘the United States (US) if separated from Europe in politics, economics and defense, would become geopolitically an island off the shores of Eurasia, and Europe itself could turn into an appendage to the reaches of Asia and the Middle East’. The underlying idea here is a simple one. It insinuates that relations are the grounds wherefrom power and influence sprout. Isolation and protectionism lead only to the narrowing of national stature and reduced global relevance.

The question is what has led the US under Trump, to think that where all other methods of warfare have failed, a trade war which essentially means ‘more isolation’ will bring back the power over global affairs it became used to since the diminishing days of the Cold War. While it is generally held that nobody wins in a trade war, there are some in the field who say that a stronger and bigger state has greater chances to win. But then, is a country bigger and stronger if it has the stronger GDP, a higher growth rate, a more extensive network of trading partners, more strategic allies, and a greater financial capacity for ‘substitutability’? If the trading of a particular commodity is cut off from a major trading partner, can the commodity or the partner be substituted is a query that has given the trade war a different dynamic than those preceding it.

While it is generally held that nobody wins in a trade war, there are some in the field who say that a stronger and bigger state has greater chances to win. But then, is a country bigger and stronger if it has the stronger GDP, a higher growth rate, a more extensive network of trading partners, more strategic allies, and a greater financial capacity for ‘substitutability’?

When a tariff is put in place, consumption among people from the tariff imposing state, of that particular commodity either as a finished product or for value addition is inhibited. Tariffs alter consumption patterns which force people to not use the more tariff-laden commodities sold at higher prices or to substitute the very source itself, which comes with problems of financial and political oversight among many.

Given that the US is the largest consumer of Chinese goods, when Trump imposed tariffs on imports of steel and aluminum, many industries that use steel from China had to hamper their production. In fact, in October, Peter Harrell, fellow at the Center for New American Security, said that ‘the US’s aggressive use of sanctions may finally spur allies and major companies to develop alternatives to the US financial system that gives our sanctions enormous global weight’; which means that targeted countries may not just be looking for substituted commodities but more importantly for substitute global financial systems.

It also means that if America is imposing tariffs on imports from its European and Latin American allies along with China, Russia and others, it is doing so at the cost of a global void in the international market that supposedly has to be filled back up by some natural rule of economics.

Economics is a hard discipline to understand. It is social, statistical, probabilistic and therefore extremely speculative; as formulas and charts constructed on scientific grounds yield over-generalizations because no formula can induct all the possible scenarios and factors that can affect an event. Yet it can be said that the void created by a decline in trade, will eventually give way to ‘substitutes’ within or independent to the prevalent financial system as well as means of transactions and transportations which will ultimately free the targeted countries of the fear of obstructions in the future. Such a transition will emerge from the brunt major countries have to face under sanctions.

Anyways, the Federal Reserve had remedied this beforehand via pumping a lot of cash in the system through quantitative easing; a course in economic policy narratives that is set to see a comeback if Trump keeps on clashing with the Fed. Quantitative easing essentially refers to more money is put in the banks for people to borrow which would in turn mean more money being circulated for business and consumption. In theory it also means a cheaper dollar in the world market which would result in increased US exports. In a ‘currency war’, stronger economies, who have a greater volume of exports win with a depreciated currency for that would mean cheaper exports and increased competitiveness in the global market. However within the wider scope of a trade war, a currency war is used as another tool for coercion. That is the very reason why Trump keeps accusing China of deliberately devaluing its currency to combat US tariffs. Furthermore and much more to Trump’s chagrin, reports of an interest rate hike might give China more room to maneuver the yuan as it battles the Trump administration on its economic front.

That is the very reason why Trump keeps accusing China of deliberately devaluing its currency to combat US tariffs.

In 2016, the International Monetary Fund (IMF) included the yuan in the basket of currencies that make up the Special Drawing Right (SDR/XDR), an alternative reserve asset to the dollar. The same year Premier Xi launched the Asian Infrastructure Investment Bank (AIIB) which will focus on infrastructure projects in Asia, part of the Belt and Road Initiative (BRI). In 2015, the yuan became the fourth most used currency in the world which still needs to relax to the dollar conversion rate, a step China is reluctant to take. In a wave of abandoning the US dollar as an exchangeable entity, several states including China, Japan, Turkey and India have been slashing their dollar reserves, while Russia has slashed its investments in American debt down to zero. All this shows a slow but progressive move of the world economies from the dollar to perhaps a yuan in uncertain times and an equally uncertain future.

The narrative of the essay is to the address the question as to whether the trade war is leading the US to perpetual isolation in global commerce. The query gains more relevance in the context of an increasingly regionalized world, where states tend to secure themselves within their own economic blocks simultaneous to states like Britain and Germany who  want to be more in control of regional and international economic narratives. Even more so, the casualties of Trump’s trade war have been friends and foes alike, and its recoils have been felt around the globe.

Have the sanctions only been a means of punishment, aimed at modifying China’s behavior towards its trade with the US? If so, the US should think twice before levying such sanctions which it cannot be forced to backtrack from, as that may reverse the punishment, to the punisher. A case in point is the the Russian giant Rusal, the world’s second-largest aluminum producer, whose value plunged to $4.15 billion from $9.2 billion after US sanctions in 2018. Trump had to backtrack from this sanction only 10 months later and it seems that the same will be repeated in the case of Huawei, as Trump has recently made a statement saying that ‘Huawei is something that is very dangerous… You look at what they’ve done from a security standpoint, a military standpoint. Very dangerous” … but “it’s possible that Huawei would be included in a trade deal’.

At the time Trump imposed sanctions on Rusal, Peter Harrell, a fellow at the Center for New American Security, said that ‘the US’s aggressive use of sanctions may finally spur allies and major companies to develop alternatives to the US financial system that gives our sanctions enormous global weight’.

That is where the natural course of things is headed because by definition, financial systems are created to provide financial services for members and clients. They are intermediaries and facilitators, but not coercers.

That is where the natural course of things is headed because by definition, financial systems are created to provide financial services for members and clients. They are intermediaries and facilitators, but not coercers. They provide, in an increasingly competitive world, the trust and security of the smooth and safe flow of transactions around the world. For that reason, they are not supposed to be converted into tools of punishing sovereign states or enforcing them into the dominant narrative. Trump’s conversion of the global financial System into an arena of geo-economic warfare is probably the worst mistake the superpower has made. However, the community of nations must be wary of replacing the Yuan for the Dollar as the next geo-economic coercer. It must look for a more horizontal system.

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