On Wednesday in “A Trade War With China Will Plunge The World Into Recession – But This Idiot Doesn’t Care,” I talked a bit about Peter Navarro, the Harvard-educated economist/professor who, thanks in no small part to his documentary “Death By China” and book of the same name, has become Donald Trump’s muse on trade.
Navarro will head Trump’s National Trade Council and is widely expected to imbue the new President with a profound sense of urgency when it comes to making good on campaign promises regarding America’s relationship with China.
Not surprisingly, Trump seems blissfully unaware that Navarro is viewed by his peers as something of a hack. If the goal was to legitimize Trump’s crusade against Beijing, the new administration has failed miserably – at least in the eyes of the academic community.
Of course we shouldn’t expect Navarro’s reputation to matter. After all, we’re talking about a President-elect who appointed Steve Bannon chief strategist.
But the stakes here are high. Despite the black and white, zero sum world that Trump and Navarro imagine they live in, there will likely be no winners in a US/China trade war. But there will be losers, most notably the global economy which could well tip into recession should the new administration follow through on what is a truly Draconian set of economic proposals.
That doesn’t seem to have occurred to Trump (although it probably has to Navarro who would probably rather double down than admit to being the outspoken champion of a hopeless economic platform). It also doesn’t seem to have dawned on the incoming commander-in-chief that the US might well get the short end of the stick in a trade war with the Chinese. Consider the following from Bloomberg:
China would outlast the U.S. in a trade war, which is a “distinct possibility” next year after President-elect Donald Trump takes office, a commentator wrote in the $1 billion Pine River China Fund’s investor letter.
China’s government would be better placed than the U.S. to marshal state resources to cushion the impact on exporters, wrote James Wang, a City University of Hong Kong professor who pens a monthly commentary for the fund. Privately-owned Chinese exporters would be worse hit than state-controlled peers because they have less political clout in Beijing, he said.
“By design, decision-makers in a democracy face difficulties coordinating a relief effort and must eventually face a political backlash from impacted domestic producers,” Wang wrote. “On this basis, the Chinese may have more runway to play the long game in a trade war.”
“The balance of power worldwide is much more diffuse compared to the early 20th century, and players like China and India have emerged to create new political centers of gravity,” Wang wrote. “However, as economic and political paralyses spread across the developed world, the most likely outcome is a trade war.”
Although Trump insists that his policies will benefit the US economy, a look at the linkages between American commerce and Chinese markets tell another story. Here are some useful bullet points from Citi that help to illustrate the pitfalls of a trade war:
- The US has been China’s largest export market for decades until recently with a share of 18% in 2015. However, US access to China’s markets has been improving steadily since China’s ascension to the WTO in 2001, and rising rapidly since the global financial crisis. US exports of goods to China rose from merely US$16bn in 2000 to US$116bn in 2015, while the Chinese market share of total US goods exports has seen a marked increase from just 2.2% to 7.7% over the same period.
- In particular, the US runs a large services trade surplus with China reflecting its comparative advantage. In 2000, China accounted for only 1.8% of total US services exports, but the number has increased fourfold to 6.0% in 2014. Out of the US trade surplus in services, China contributed to 12% in 2014, rising from only 2.6% in 2000 (Figure 23).
- After a period of rapid growth, US foreign direct investment into China appears to have peaked, and its share declined to 1.5% in 2015. However, the accumulated FDI in stock terms by US multinational companies remains one of the largest among OECD economies in China.
- The Chinese market has become progressively more important to US S&P 500 corporates. In 2015, the Chinese market accounted for about 2% of earnings, against only 1% of earnings made in the Japanese market.
- With China’s huge reserves, the US has also become the largest market for Chinese capital outflow. As of September 2016, China holds 18.8% of foreign UST holdings (against the total outstanding of US treasuries at US$15.4tn). China’s reluctance to own US treasuries would mean higher risk-free rate for the world, which would potentially affect the volatility if not the level of funding costs, in the US economy (Figure 24).
Note the bolded passage above. That suggests Beijing could ultimately use the sale of US paper as a geopolitical weapon with very real consequences for global rates.
Although China has said it has no intention of going that route, one wonders if a few brash moves or flippant outbursts from Trump might prompt the Politburo to change its mind…