Trump’s Trade War Bullet A Direct Hit on ‘Dinosaur’ China

(Click here to read the original article in Japanese.)

 

 

 

By Hideo Tamura

 

The United States-China trade war holds something in common with the American film Jurassic Park. The United States, which possesses vast wealth and technology, regenerates and breeds the long-extinct dinosaur—the Chinese empire—upon which it becomes unruly. Its subsequent containment by the U.S. resembles the Trump administration’s hard-line policies towards China.

 

The new film in the Jurassic Park series currently being screened (Jurassic World: Fallen Kingdom) apparently revolves around saving the dinosaurs from yet another extinction. But how will the parallel U.S.-China trade war plot develop as it unfolds before our very eyes?

 

Having become the most powerful politician in China in the autumn of 2012, Chinese President Xi Jinping introduced the “Great Revival of the Chinese People.” His goal is to achieve self-sufficiency in China’s high-tech industries by 2025, and overtake the U.S. in terms of gross domestic product (GDP) to become the world’s largest economy by 2035.

 

Looking at China’s global military ambitions, military bases are being constructed on reefs occupied by China in the South China Sea. Mr. Xi has proclaimed the modern-day Silk Road Economic endeavour, his “Belt and Road Initiative,” incorporating the Eurasian continent and even its surroundings.

 

In a blatantly imperialistic move, China is providing loans with high interest rates to other Asian countries so that these neighbors will build the infrastructure China covets—such as ports—and China can confiscate all of it when the recipient countries are unable to pay their debts.

 

It is the U.S. that has been supporting China’s growth. The Clinton government of the 1990s invoked a policy of involving China in the global economy, invited it into the World Trade Organization (WTO), and provided it with an opportunity to increase its exports. Since then, successive U.S. governments have followed this practice, facilitating the acceleration of China’s trade surplus after the bankruptcy of the Lehman Brothers in September 2008.

 

Let’s look at the graph to see what happened.

 

 

The People’s Bank of China, the nation’s bank of issue, buys U.S. dollars according to a fixed exchange rate enforced by China. It then issues the Chinese yuan and pours it into state-owned commercial banks, state-owned companies, and local governments. Vigorous investments are made in the development of domestic enterprises, such as industrial facilities and real estate, and high economic growth is achieved.

 

The biggest supply source of the U.S. dollar for China is the America’s trade deficit. That this cumulative amount increases the Bank’s assets, and is interconnected with China’s GDP growth, is glaringly obvious when you look at the graph.

 

China’s monetary and financial system is decidedly different from that of Western capitalist countries. In the case of Japan, for instance, the Bank of Japan purchases securities, such as government bonds, from the financial market to supply funds. They have almost no foreign currency assets.

 

Chinese people, who traditionally tend not to trust paper currency, prefer gold or the U.S. dollar. Two-thirds of the total assets the People’s Bank of China consists of foreign currency assets. Without demonstrating that it is backed by the U.S. dollar, the Chinese yuan would lose credit.

 

Now, Mr. Trump has dropped a bombshell in the shape of trade sanctions upon China. Bombshell number one came on July 6 and consisted of USD34 billion in trade sanctions. Another USD16 billion are to be imminently added onto that, but there is even more.

 

President Trump has prepared an additional shocker of USD200 billion in sanctions, and he has even hinted at increasing that by a further USD300 billion. Added up, the total imports from China targeted by U.S. sanctions would rise to USD550 billion, exceeding the actual import amount of USD520 billion.

 

If Mr. Trump succeeds in his intention to impose high tariffs on all Chinese imports, the blow to China’s financial economy would be unfathomable.

 

China’s balance of international payments (current account) surplus remains at USD120 billion. If its trade surplus with the U.S. drops drastically, China’s external balance will not just simply drop to a deficit. Quantitative easing will become difficult, and monetary tightening, inevitable. The high growth seen until now would become impossible to achieve. The real estate market would collapse, and financial institutions would be faced with a huge amount of bad debt.

 

Having to rely upon loans from other countries to maintain domestic finances, the advancement of the “Belt and Road Initiative” would be out of the question. The purchasing of foreign high-tech companies and the expansion of the military budget would stagnate.

 

China’s economy is already coming to a slowdown. The recovery plan involves revitalizing exports through devaluing the Chinese yuan and financial easing through increasing the amount of currency unbacked by the dollar. Either way, the credibility of the Chinese yuan will be compromised within the country.

 

When authorities devalued the yuan in the summer of 2015, there was at one point a capital outflow of a trillion dollars per year, and foreign currency reserves were reduced drastically. Since 2015, the Xi government has tightened its capital regulations and has banned foreigners—including Japanese—from taking foreign currency out of China. Nonetheless, capital outflow on the scale of USD200 billion to USD300 billion per annum has persisted.

 

 

For China, Trump’s bombshells represent one disaster after another.

 

Recently, there have been broad indications of increasing criticism directed towards Mr. Xi, who wields dictatorial power in his native city Beijing. Given the tumultuous state of the financial and economic system resulting from the U.S.-China trade war, it is easy to find the story credible.

 

To return to the beginning, will Mr. Trump—much like in the newest film in the Jurassic Park series—work towards saving the dinosaur China by loosening sanctions? Or will Mr. Xi be the one to hoist the white flag of surrender?

 

I hold both scenarios to be impossible. Mr. Trump will not relent until he stops China’s growth, while Mr. Xi’s standing in domestic politics is at risk unless he remains firmly consistent.

 

 

Click here to read the original article in Japanese.

 

 

Hideo Tamura

Author:

Hideo Tamura is a senior staff writer and a special commentary writer for the Sankei Shimbun.

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