Trade Wars: Dear President Trump, Laser Fire Your Trade Bullets, Don’t Scatter ‘EmBloombergQuintOpinion
Trump unleashes debilitating trade wars;
China retaliates with ‘beggar thy neighbour’ tit-for-tat tariffs;
Global economy precariously poised at the edge of a 1930s style crash;
It is the end of globalisation!
Ordinary people’s heads are spinning with hyperbolic headlines in the pink media. There is a fear of creeping economic apocalypse. But really, is it that bad? Does China deserve a maverick president’s ‘punishment’? Are Trump’s punitive levies like the Smoot Hawley tariffs of 1930 that tipped the world into the Great Depression? Can he recalibrate his ‘trade war’ to make it a ‘surgical strike’ instead of a scatter bomb which could end up hurting him and the free world?
I will try to answer these questions simply, to help ‘non-experts’ figure out such complex issues. As usual, a few critical clues should first be exhumed from history.
It Started With Nixon-Kissinger Yanking China Back Into The Global Mainstream
It was President Richard Nixon, another maverick, who changed the world on that fateful day in February 1972. His words got bounced around the earth on a new technology called satellite television: “The United States acknowledges that all Chinese on either side of the Taiwan Strait maintain that there is but one China and that Taiwan is a part of China. The United States government does not challenge that position.”
Until then, the United States did not even recognise China, reserving all its goodwill for Taiwan, its key ally, and China’s implacable foe. But the Nixon-Kissinger designed Shanghai Communique was meant to yank an isolated China into the global mainstream, away from the Soviet Union’s communist embrace; and boy, was it successful!
Deng Xiaoping’s Audacious Soviet-Japanese Escape Velocity Growth Model
Deng Xiaoping, China’s legendary leader, seized the opportunity with over two billion native hands. He crafted an extraordinary strategy of “peaceful rise”. In my book Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise (Penguin Allen Lane 2010), I have described how China pulled off its economic miracle.
Essentially, China ‘brutally’ extracted economic surpluses from its people in the first couple of decades of reform (1970s/80s). This extraction was almost Stalinist in coercion and sweep (but with two critical differences which I will come to later):
- From tillers: since all land in China was owned by the state, peasants were ruthlessly evicted on a paltry compensation, and the land was sold to investors, including major foreign ones, to build factories and world-class infrastructure. The state accumulated huge surpluses in the process.
- From labor: wages were kept artificially low, creating super-profits in the hands of factory owners, as hordes of poor people from the countryside were kept in exploitative employment, without a fair wage or working conditions.
- From savers: interest rates were suppressed, thereby transferring surpluses from individual savers, who got a very low return, to government and private, including foreign, investors. Again, this created super-profits for state-owned-enterprises (SOEs) or domestic oligarchs or major foreign investors.
- From consumers: by keeping the Chinese currency (Renminbi) under-valued via a government fiat, consumers were forced to pay higher prices for imported goods, while exports to America and the rest of the world were subsidised. Foreign investors were able to buy Chinese assets at artificially low prices, yet again creating super surpluses for them (and via taxes, for the state). This also ignited an inward rush of dollars, which, while not strictly a surplus, did give the Chinese government a permanent hard currency horde to play with.
It is at this point that Deng played his master-stroke, breaking the Soviet choke of Cold War insularity, militarism, and muscular war-talk:
- Saying that “growing rich is glorious” (it’s not clear that he ever said that, but he certainly meant it) he picked a leaf from Japan, opening China to foreign trade, travel, influences, investments; he was utterly against the Iron Curtain-like opacity and prickliness that had defined The Warsaw Pact.
- He then funneled those trillions of dollars of surpluses into physical and social infrastructure, creating productive assets—roads, bridges, railways, ports, power plants, airports, new cities, factory parks, hospitals, schools, universities etc.—on a scale that was hitherto unknown to human civilisation. In my book, I’ve called it the “escape velocity” model of infrastructure creation – i.e., a country invests its surpluses so aggressively and rapidly that it escapes the gravitational pull of lingering low growth; instead, in one hop, skip and jump, it discontinuously leaps on to a higher trajectory of growth, income, and wealth creation.
That was Deng’s genius at work: he fused the seemingly irreconcilable models of Soviet and Japanese growth into a uniquely Chinese paradigm.
Also Read: Trade Wars: The Past And The Present
America Gained ‘Big Time’ Through China’s Growth Mayhem
Cheap Chinese imports fueled an American consumption boom through the 1990s and early noughties (2000s). For example, iPhones were ‘designed in California but manufactured and assembled in China’. And as China used its hard currency trillions to buy American treasury bonds (as a liquid, safe-haven investment), U.S. interest rates fell to their lowest point ever, triggering an amazing rise in asset prices (stocks and real estate). With one stroke, Americans felt richer and consumed insatiably.
What Went Wrong?
Three things. American prosperity entered an unreal bubble that burst in 2008 (as capitalist greed, excess and fraud created a toxic balloon). China proved to be an evil, untrustworthy global citizen which refused to play by the rules. It became the biggest perpetrator, accounting for nearly $250 billion of U.S. intellectual property (IP) theft every year, as per a 2013 IP Commission Report by the National Bureau of Asian Research, a non-partisan think tank. And finally, as grunge blue-collar jobs moved to China, America’s rust belt went into a deep funk, with big layoffs and joblessness in smokestack industries.
It was a perfectly volatile cocktail, waiting for… Donald Trump! For his polarising message of “whip China, force Asian marauders to pay for stealing our jobs, and make America great again”.
Also Read: China Trade War Is Still Avoidable
But Then, Where Has Trump Messed Up His Counter-Attack?
President Trump may have correctly diagnosed the problem, but he’s made a terrible error in choosing the cure. The problem was always with an egregious, wayward China which had to be ‘gently browbeaten’ into playing by the rules.
Instead, Trump made the Napoleonic error of spraying his friends with a scatter-gun in his blind fury to hit China with a few trade bullets.
- He should never have pulled out of the Trans-Pacific Partnership or Paris Climate Accord; he should have increased American influence on these multi-lateral bodies to pigeon-hole China.
- He should have strengthened trade alliances with the free world, from NAFTA to the European Union, Australia, Japan, and India; instead of skirmishing and sending some of them scurrying into China’s embrace.
- He should have used his free-world alliances, the ‘concert of democracies’, to raise hell against China at the World Trade Organization; and under the cover of that righteous din, he could have attacked China with a few hard-hitting, exceptional tariffs; he would have gotten away without creating today’s bedlam!
- Finally, he should not have singled India out on the ‘Harley Davidson’ red herring or clubbed India/Japan with China on the steel/aluminum punitive levies; especially since India has an equally debilitating trade deficit with China and could have been a willing ally in the battle for a fairer trade regime.
Also, India’s trade surplus with America is shrinking, so a corrective is already working – then why pick a fight with a friend?
Is it too late for President Donald Trump to pull back, reassess, recalibrate, and push out with a new strategy? One in which he uses a laser gun to target China, but rebuilds alliances with his free-world friends? Thereby ‘gently browbeating’ China to come clean, especially since China has the savvy to understand that it needs the world a tad more than the world needs it?
Perhaps there is still time, if President Trump gets free from tweeting and sacking colleagues.
Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, and ‘Super Economies: America, India, China & The Future Of The World’.