Trade wars

"There are decades where nothing happens and there are weeks when decades happen!" is a quote from Vladimir Ilyich Lenin but it could as well be a Chinese proverb from ancient time.

Today the markets are stunned that in the end there was no deal between the real estate mogul and the descendants from Sun Tzu who wrote the basics of Chinese military strategy in 500 BC.
 
"The art of the deal" or war by another name?

A quick overview from the BBC
https://www.bbc.com/news/business-48196495

The United States could have spent many more years exchanging paper money against Chinese goods, it cost nothing literally. The arrangement did work beautifully for over 50 years as the Gulf monarchies recycled their petrodollars in US and European assets with no end in sight. Why not China? But of course the Chinese had other ideas. While American corporations invested massively in buying back their own stocks to inflate their value artificially finding no other investment with a better ROI, Chinese companies doubled down on technology to bridge the gap and in some respects, they have succeeded. 

I was stunned a month ago to find out that my Wawei phone did not work anymore in the US. New Chinese 5G technology may represent a menace to America but my "old" Wawei phone? Likewise, the arrest of Meng Wanzhou, CFO of Wawei in Canada in January was an unmistakable message that the gloves were off.

Because the transition from UK to US hegemony between the two world war happened smoothly, there is a false assumption in the West that this should always be so. History says otherwise. The Chinese are doubtless aware of this and preparing accordingly.

In all likelihood they consider that we are already at war. Thanks to nuclear weapons it may hopefully never turn to a hot war but the game is on and the prize will be to secure access to technology, resources and raw materials. (as always) 

Trump considers that China has everything to lose by not negotiating and even threatened that he would be ever tougher after his reelection in 2020. But I am afraid that this is not how China is approaching the "game". We live in a dollar based and therefore US dominated international system. Would the system breaks down, which is a clear possibility, the US has far more to lose and more than any country, should be aware of the risk.

With the silk road initiative, China has started the process of reorganizing the world in a Chinese centric way, nothing less. This too means war by another name.
25% tariff on Chinese goods will only accelerate the process of reorienting the world trade routes. A recession was coming anyway and would have crashed international trade in late 2019, early 2020. It will now be transformative and we should prepare accordingly.

On June 17th, 1930 President Hoover signed the Smoot-Hawley Act which imposed tariffs on more than 20,000 imported goods.
This coincided with the worst economic downturn of the 20th century. U.S. GDP declined 8.5 percent in 1930, 6.4 percent in 1931 and 12.9 percent in 1932.

From a data specialist point of view, I found the market comments over the weekend stunning in their over reliance on data. Listening to commentators, it looks like every twitch and itch of the market is having a direct effect on Trump statements putting him in a stronger position when the market rise and in a weaker one when it falls. Could there ever be a worse approach to negotiating with China which almost by definition is taking a long term approach to the issue? There will be no elections in China in 2020. But by 2030, the country must be number one, whatever it takes!

 In a future post, we will be looking at the impact on Japan, squeezed between its relations with the US and its dependency on Chinese manufacturing. As well as the canaries in the coal mine of international trade in Asia: South Korea and Singapore.