A second Great Recession?
It’s the long term that counts and this trade war will probably not be settled for a long time.
Ten years ago last month, the financial services firm Lehman Brothers filed for bankruptcy protection, triggering the 2008 crash and the subsequent Great Recession from which the world’s economies have still not fully recovered.
Will we look back on this month as the turning point when US President Donald Trump’s trade war with China unleashed the second Great Recession?
In the past week, the slow dribble of tariffs and counter-tariffs has rapidly grown into a full-fledged confrontation between the world’s two greatest economic powers.
In July, the United States imposed tariffs on US$34 billion worth of Chinese exports to the US, extending them to another $16 billion of Chinese goods in August.
China responded cautiously, announcing roughly comparable tariffs on $50b of US exports to China in August.
Trump deemed that unfair and he slapped a 10 per cent tariff on another $200b of Chinese exports to the US, due to go into effect at the end of this week.
He warned that if China retaliated again, he would impose a similar tariff on all the rest of China’s exports, another $267b.
Trump also threatened to raise the rate of the tariff to 25 per cent if there is no US-Chinese deal that meets US requirements by the end of the year.
Did he imagine that this threat would force an autocratic regime like China’s to back down and lose face? Who knows.
The Chinese replied hard and fast, announcing a new tariff on all the rest of America’s exports to China, worth some $60b.
So if Trump fulfils his threat and hits the remaining $267b of Chinese exports as well, soon all America’s imports from China and all China’s imports from the US will be paying tariffs.
China, trying to lower the temperature, is keeping its tariffs on US goods down to 5 per cent for the moment, but it can’t hold that line forever if the US goes on ratcheting up the ones it has imposed on China.
Trump has got the trade war he was clearly itching for and it’s a much bigger deal than his spat with the European Union or his bullying of Canada.
It’s the long term that counts and this trade war will probably not be settled for a long time.
Multibillionaire Chinese businessman Jack Ma predicts it could last 20 years, which sounds a bit pessimistic, but as long as it lasts, it will poison relations between the world’s two greatest powers.
Trump seems to think China’s economy is now so wobbly that the tariffs will push it over the edge, forcing it to come to the US begging for mercy.
It’s true that the Chinese economy is growing very slowly, if at all, and nobody believes the official figure of 6 or 7 per cent annual growth. It’s also true the Chinese financial system is as overloaded with bad debts as American banks were in 2008.
But China is only a sham capitalist economy. If lost exports to the US trigger a financial collapse in China – an unlikely but imaginable outcome – Beijing would slam the doors on international capital flows, bail out the Chinese banks and flood the domestic economy with cheap credit.
In this scenario, it’s international trade that would collapse, which wouldn’t be in anybody’s interest.
Meanwhile, Xi Jinpings’s regime would be stoking Chinese nationalism and blaming the US for all the domestic misery. Indeed, Xi and the Communist Party hierarchy are coming to the conclusion that Trump’s trade war is designed to ‘‘thwart China’s rise’’. There can be no compromise with the US if that is the case.
That’s not just Chinese paranoia. There really are those around Trump, and elsewhere in Washington, who are encouraging his obsession with the American trade deficit with China for exactly that reason. Yet his obsession is completely misplaced: 85 per cent of the 7 million American manufacturing jobs lost since 2000 were eliminated by automation, not by trade.
This nonsense is going to go on for a long time and everybody will end up at least slightly poorer, but it probably won’t bring on the second Great Recession. It may, however, start the second Cold War.