“Things are definitely getting interesting again, aren’t they?” This comment came from a colleague one Tuesday morning, just as we stepped out of the elevator to grab a cup of coffee.
“One moment, the markets are indulging in financial excess like pigs in mud. The next, they’re collectively in disarray.”
“Let me be clear: President Trump’s trade war with China is headed for disaster. Let’s not kid ourselves. For over 25 years, China has outmaneuvered the U.S. in this arena. They hold the advantage.”
“And really, what’s the endgame here? If we cease buying goods from China, how can they continue to purchase U.S. debt? The timing couldn’t be worse. Our deficits are spiraling uncontrollably, projected to exceed $1 trillion annually for the next decade. I struggle to find a path out of this mess, can you?”
“Resorting to printing money to cover government debt isn’t a viable solution. A trade war will only speed up America’s financial collapse. What exactly does Trump hope to achieve?”
“I’ve also heard that China has better financial cushions than we do. So, they might be more resilient to economic shocks. But I wouldn’t count on it.”
“Clearly, as I mentioned, this won’t have a happy ending. But there’s no turning back now.”
“The trade war genie is well and truly out of the bottle. That much is clear. Perhaps President Trump is justified in his belief that a trade war with China is necessary.”
“However, it will likely take a major conflict or a global depression to rein this genie back in. How am I so sure?”
“Because this is how these confrontations typically unfold. The invisible line has been crossed. Both Trump and Xi Jinping are fully committed.”
“There’s no turning back. No retreat. They’ll continue to confront each other aggressively until something significant occurs. Then, it will truly be game on.”
Integration and Disintegration
Our colleague raises some valid points. Are we truly facing a trade war? If so, where might it lead us? Let’s pause for a moment, sip our coffee, and offer some insight.
Global trade has experienced cyclical phases of expansion and contraction for millennia. Take the Silk Road, for instance, established by the Han Dynasty in 130 BC. This trade route facilitated the exchange of goods, culture, and knowledge between East and West for nearly 1,600 years.
The trade along the Silk Road abruptly ended when the Byzantine Empire fell to the Turks in 1453 AD. For reasons that may be unclear, perhaps due to a madman in power, geopolitical dynamics turned inward toward isolationism. The Ottoman Empire closed the Silk Road, cutting ties with the West.
Today, global trade operates through shipping cargo across international waters. Over the past 200 years, trade cycles have often expanded for such extended periods that entire generations may only be familiar with the expansion phase. These prolonged expansionary trends can mislead people into thinking that increased global trade is a linear, uninterrupted phenomenon.
One would have to look back to before 1960 in the United States, Japan, and Western Europe to find anyone who remembers a global trade contraction. China’s latest trade expansion began in the 1970s, while Eastern Europe experienced its own resurgence in the early 1990s.
However, just because global trade has been on the rise for the past 50 years doesn’t mean it won’t experience interruptions. Geopolitical shocks have historically disrupted or reversed long-term trends in global trade. According to the World Trade Report 2013:
“Politics at times intervenes—sometimes deliberately, sometimes inadvertently—to slow or even roll back the integrationist pressures exerted by technology and markets. This complex interplay of structural and political forces explains the successive waves of economic integration and disintegration over the past 200 years; particularly how the seemingly unstoppable rise of the first age of globalization in the 19th century was suddenly halted between 1914 and 1945—by the related catastrophes of the First World War, the Great Depression, and the Second World War—only to be succeeded by a second age of globalization in the latter half of the 20th century.”
Trade War Game On!
At present, it’s uncertain whether we are witnessing the onset of a global trade contraction. The trend of expanding global trade appears to have slowed over the last decade, following the 2008 financial crisis. The emerging trade conflict between the United States and China could very well be the geopolitical upheaval that signals the end of the second age of globalization.
This week, Trump and Jinping likely escalated the trade war beyond the point of no return. They tested each other’s resolve and raised the stakes as the week progressed. By Thursday, tensions reached a boiling point.
Our friends at Zero Hedge have been closely monitoring the situation. Here are some striking quotes from an editorial published by the Global Times, China’s state-owned media:
“Many believe that the Trump administration’s $50 billion tariff on Chinese products aims to pressure China into submission. If that’s true, the U.S. will undoubtedly come out on the losing end. This is because the Chinese government has united its citizens and is ready to stand firm in its confrontation with Washington. A growing number of Chinese citizens believe that an ‘epic trade war’ is inevitable, and they hope it could instill some common sense into the U.S. government, prompting it to change its approach to China.”
“If the trade war unfolds, China will reveal that it also has numerous contingency plans, perhaps even more than the U.S. Chinese experts suggest that China might consider actions to devalue its currency. As the world’s largest trading economy and a major buyer of commodities, China could leverage its influence to elevate the prominence of its own currency, the RMB, in global markets, thereby diminishing the dominance of the U.S. dollar. Such a move would be a significant blow to Washington.”
“Should this trade war materialize, it will represent a full-fledged economic conflict between China and the U.S., rather than a mere skirmish. It would be foolish for the U.S. to assume it would emerge victorious in this trade war. China approaches this issue with confidence and will not hesitate to convey that to Washington.”
By Thursday evening, Trump instructed U.S. Trade Representatives to consider raising tariffs on Chinese imports by an additional $100 billion, increasing them from $50 billion to $150 billion. Just hours later, “Beijing pledged to protect China’s national interests against U.S. trade actions and protectionist measures.”
Now it’s clear: the trade war is on!
Sincerely,
MN Gordon
for Economic Prism
