Trade War Game On!

“Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.

“I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come on.  China’s outplayed the U.S. at this game for over a quarter century.  They have the upper hand.

“Besides, what’s the point?  If we no longer buy stuff from China, then how will China buy Uncle Sam’s debt?  And the timing for all this couldn’t be worse.  Deficits are spiraling out of control.  We’re talking $1 trillion or more a year for the next decade.  I don’t see any way out of this quagmire, do you?

“Printing money to buy government debt is no solution at all.  And a trade war will just hasten America’s insolvency.  What is it that Trump thinks he’ll accomplish, anyway?

“I’ve also heard that China’s tickled the debt poodle way more than we have.  So they may be worse off at absorbing an economic shock than us.  But I wouldn’t bet my life on it.

“Obviously, like I said, this won’t end well.  Yet there’s no turning back now.

“The trade war genie’s already out of the bottle.  That’s easy enough to see.  And maybe President Trump is right, and a trade war with China is warranted.

“But in the end, something big – like a massive fighting war or worldwide depression – will need to happen before this genie can be put safely back inside the bottle.  How do I know this?

“I know this because this is how these peacocks on the walk contests always play out.  The invisible line has been crossed.  Trump and Xi Jinping have both gone all in.

“There’s no backing up.  There’s no walking away.  They’ll keep chest bumping each other until something serious happens.  Then it will really be game on.”

Integration and Disintegration

Certainly, our colleague brings up some good points.  Is a trade war upon us?  If so, where will it lead?  Here we take a deep breath, and a sip of coffee, and endeavor to offer some perspective.

Expansions and contractions in global trade have rotated back and forth over long secular trends for thousands of years.  The Silk Road, for example, was established by the Han Dynasty of China in 130 BC.  This trade route provided continuous conduit for the exchange of goods, culture, and knowledge, between east and west for nearly 1,600 years.

Trade along the Silk Road came to an abrupt end when the Byzantine Empire fell to the Turks in 1453 AD.  For whatever reason, maybe a madman was President, geopolitical trends turned inward towards isolation.  The Ottoman Empire closed the Silk Road and cut all ties with the west.

Trade War Game On!

This week Trump and Jinping likely pushed the trade war past the point of no return.  They called each other’s bluffs and raised the stakes as the week progressed.  By Thursday things had hit a fever pitch.

Our friends at Zero Hedge have been closely monitoring the situation.  Here are several choice quotes they alerted us to from an editorial published in the Global Times, China’s state-owned party mouthpiece:

“Many believe that the Trump administration’s $50 billion tariff on Chinese products is meant to pressure China to submit to the U.S. demands.  If that is the case, the U.S. will undoubtedly lose.  This is because the Chinese government has rallied its citizens and is prepared to go toe-to-toe in its fight with Washington.  In fact, more and more Chinese citizens think that an ‘epic trade war’ is inevitable, and could knock some common sense into the U.S. government, so that it will change its way of dealing with China.

“If the trade war happens, China will show that it has just as many reserve plans as the U.S., if not more.  Chinese experts suggest that China could even take actions to weaken the strength of its currency.  Since China is the world’s largest trading economy and the largest buyer of commodities like oil products, China could use its influence to push its own currency, RMB, in global markets to reduce the dominance of the U.S. dollar.  That would be a heavy blow to Washington.

“If this trade war comes to pass, it will be an evenly matched total war between China and the U.S. economies, and not some small scuffle.  It would be delusional for the U.S. to think it will be victorious at the end of this trade war.  China comes up with the conclusion in confidence, and will not shy away from letting Washington know in this situation.”

By Thursday evening Trump had ordered US Trade Representatives to consider raising Chinese import tariffs an additional $100 billion, from $50 billion to $150 billion.  Several hours later, “Beijing vowed to defend China’s national interest against U.S. trade actions and protectionism.”

Now we’re talking.  Trade war game on!

Full article: Trade War Game On! (Economic Prism)

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