US-China trade war

Relations between the two major powers are increasingly strained, with the current standoff on tariffs threatening to escalate into an all-out trade war. That, in turn, could devastate the still sluggish global economy. As ROBIN CLAPP explains, this is part of the new world disorder of increased instability and confrontation.

Donald Trump has massively raised the stakes in the increasingly ill-tempered and rapidly escalating trade war between the US and China, the world’s two most powerful economies. His announcement – under the rarely invoked International Emergency Economic Powers Act – that Chinese telecoms giant Huawei and 70 of its affiliated companies are set to be added to the ‘Entity List’ effectively bans them from acquiring components and technology from American firms without obtaining prior government approval.

Trump referred to Huawei as a "foreign adversary which poses unacceptable risks to national security", terms reminiscent of those used by US politicians during the cold war to describe the Stalinist former Soviet Union. Huawei will be blocked from purchasing semiconductors from US firms, which will have an immediate and damaging impact on its ability to develop important parts of its manufacturing process. US-based companies wishing to continue trading with Huawei will have to apply to the Commerce Department for a licence to sell their technologies.

This dramatic move follows the presidential announcement two weeks ago that existing import tariffs – the 10% introduced in September 2018 on $200 billion of Chinese goods sold in the US – could be raised to 25%. Among the commodities affected would be food ingredients, construction materials, bike parts and burglar alarms. The threats do not stop there, however. Trump insisted that a further 25% tariff may be affixed on another $325 billion-worth of goods unless China backs down and reduces its level of exports to the US. That would cover practically every commodity arriving from Beijing.

According to Trump, the dispute is rooted in China’s deeply unfair trading practice of seeing the US as an easy dumping ground for its commodities. He cited the US Census Bureau’s data for 2018 which revealed a $419.2 billion trade deficit between the two countries. His latest measures come in addition to the US tariffs of $50 billion on specific Chinese technology goods – aerospace, automobiles, communications technologies and robotics – imposed in June 2018.

That signalled the beginning of this more acute phase of protectionism, which is inextricably linked to a wider geopolitical struggle that is unfolding between the rival super-powers, as Philip Stephens commented in the Financial Times: "At a recent gathering of US policymakers and experts, speaker after speaker took to the podium to voice fears that China is stealing a march in harnessing 5G digital technology and artificial intelligence applications to its military ambitions. The danger in all this speaks for itself. Treating China as a certain enemy is a sure way to persuade Beijing that it should behave as such. Mistrust begets mistrust, which in turn could provide the spark for open conflict. China is no innocent – witness the ever present cyberattacks on western militaries and vital infrastructure. But demonising everything it does simply opens up the path from a trade war to something much rougher. What the two nations need above all are common rules of the road to avoid escalation. Otherwise we are heading towards an altogether hotter war". (16 May 2019)

The clash lays bare the different strategic objectives of the US and China. Threats and mutual distrust characterise the current relationship. Symbolising this new era of cold conflict is the way both protagonists have contemptuously side-lined the World Trade Organisation, regarded by the capitalist powers in previous decades as the arbiter in disputes of this character.

China’s regime immediately responded to Trump’s provocations by declaring new tariffs on $60 billion-worth of US imports beginning on 1 June. New regulatory hurdles could face US companies seeking to operate in China, while US agricultural produce such as soya beans, cars, luggage, electronics, housewares and foods have already been threatened with $110 billion-worth of tariffs due to commence at the end of May.

Playing for high stakes

There have also been hints from Beijing that, if pushed into a corner, it could respond by beginning to sell some of its vast US treasury bond hoard. This would cause panic in an already weakened global bond market. Recent fluctuations have led some economists to state that, after the threat of protectionism, a potential meltdown in the US bond market is feared to be the second-most likely trigger for the next crash. The impact on the wider world economy and the financial markets has been to induce fears of a greater likelihood of a deep downturn. On 7 May, the Dow Jones lost 471 points and the S&P and Nasdaq indices opened with similar sharp falls. US firms with significant sales in China, like Caterpillar and Apple, were particularly badly hit and remain vulnerable.

A US trade delegation is due in Beijing shortly to seek to revive trade negotiations, and Trump and Chinese president Xi Jinping are expected to talk at the G20 summit in Japan at the end of June. These diplomatic exchanges may result in some secondary points of apparent agreement but the essential rivalry will not be resolved through diplomatic tęte-ŕ-tętes.

There is no doubt that Trump is playing for very high stakes in his confrontation with China. Protectionism hurts both economies. An escalating trade war can quickly result in higher prices for US consumers faced with having to pay for increased tariffs on foreign-made goods. Eleven million US workers currently work in industries that produce goods which have been or will be targeted for reprisal by China. Fifty-nine percent of US manufacturers have already complained of rising production costs as a result of tariff hikes.

Many of the targeted industries are in run-down rural areas of the US where Trump performed well in 2016 and needs to do so again in 2020. Living through the worst economic crisis in 30 years – driven by low commodity prices, trade war pressures and record flooding – farmers are particularly vulnerable. In Wisconsin, two dairy farms closed every day in 2018, unable to carry on despite being eligible to share in a national $8.52 billion direct payment subsidy set up by the Department of Agriculture to cushion the impact of tariff war.

Wall Street has been sceptical about whether Trump would take on China in the manner he has apparently threatened to do. The chief market strategist with JonesTrading reflected the new anxiety of the financial markets: "The challenge for investors is deciphering whether this is another bluff by the president, an attempt to lower expectations in order to provide an upside surprise, or actually a potential breakdown of the trade negotiations and an escalation of the trade war".

With the impact of 2017’s tax cuts waning and unmistakeable signs that the US economy is beginning to run out of steam, the 2020 presidential election presents a challenge for Trump. China bashing plays well with the Republican right, and many Democrats, seeking to shore up their electoral bases, have also demanded firm sanctions against Beijing, accusing the White House of ignoring China’s economic threat and enjoying growth at America’s expense. Big US firms that do not have substantial trade links with China – those earning less than 5% of their profits there – have also supported a tough line against Beijing.

Yet consumer and industrial activity in both the US and China slowed in April. Market analysts at Morgan Stanley, Bank of America-Merrill Lynch and Blackrock, the world’s largest fund manager, have correctly warned that a prolonged trade war is now the most likely trigger for an impending global recession.

US economy stutters

With all the world’s major economic blocs performing sluggishly, it will be difficult for the US to maintain annual GDP growth above 2% through the rest of Trump’s term of office. Interest rates were raised in December for possibly the last time this decade and, with economic growth beginning to slow at the end of 2018, the US Federal Reserve has formally abandoned any plans for further three-quarter point interest rate rises this year. Moreover, it has had to continue the quantitative easing programme it introduced in the wake of the 2008 banking crisis, in order to keep the economy from having a sudden financial seizure.

The risks to the US housing market are currently similar to the levels seen in 2002-03, before the onset of the subprime mortgage crisis, according to an IMF Global Financial Stability Report published in January. Years of ultra-low interest rates and loose lending by financial institutions have once again created a toxic mix that increases the potential risk of a housing price collapse. More evidence of the sclerotic state of the US economy came in April with an unexpected slide in retail sales, reflecting a fall in consumer confidence in a sector that accounts for 70% of GDP. There were also falls in overall industrial production and in the manufacturing sector.

Debt (sovereign, corporate and consumer) is an ever-present threat to the stability of the world economy. Rising levels of corporate debt mean that companies around the world need to repay or refinance as much as $4 trillion over the next three years, according to the OECD. Company borrowing has ballooned since 2008 and, standing at $13 trillion, is more than double the level before the 2008 crash. In the US alone, retail investors own $2 trillion of corporate debt. Falling profit margins – caused by (albeit uneven) rising US wage pressures and a world economy that is growing more slowly – are causing the most indebted businesses to run into trouble.

The pool of more risky debt is growing fastest of all, trebling since 2012. Such debts are now roughly equal to the subprime mortgage debt figure in 2007, the financial detonator for the crash that followed a year later. There are some other eerie similarities, too. This can be seen in the rapid growth of corporate debt leveraged loans, bundled up into packages by banks that sell them on to investors, who subsequently engage in secondary market trading with little or no robust regulatory oversight.

China’s economic challenges

China’s entire economy is worth $14 trillion, making it the largest competitor to the US. It has grown at a 10% compound annual rate since 1980, when Deng Xiaoping opened the door to rural businesses (township and village enterprises) and foreign firms (mainly in the coastal zones to begin with). It is now the biggest manufacturing nation on the globe.

Clearly, the transition from a fully nationalised, planned economy towards capitalism has gone a long way and can appear complete at first sight. But the rule of the Communist Party elite prevails, with substantial elements of state banks and industries remaining intact. Many of these strategically important state-owned enterprises, mostly in heavy manufacturing or energy production, have been kept alive since 2008 through heavy doses of central bank borrowing. The state remains firmly in charge of economic management and the overall approach is top-down, authoritarian and target driven.

The CWI has described China as a unique form of ‘state capitalism’. The state’s primary concern is to maintain the economic reins and not to unleash those economic liberalising forces that precipitated the collapse of the planned economy in the Soviet Union in 1991, leading to the restoration of capitalism there and throughout Stalinist central and eastern Europe. Provinces like Guangdong have become the motors for developing Chinese capitalism, but the continued existence of powerful state monopolies and the control of the Communist Party are an attempt to ensure that no threats to social stability from economic dislocation will be tolerated.

The great recession in 2008, caused by the wild excesses of the western neoliberal model with its largely unfettered dependence on financialisation, was a sober warning to China, rudely curtailing those domestic voices that had sought to go further down this road. An unprecedentedly large stimulus programme launched by the regime largely inoculated China from the worst effects of western contagion. It also threw an economic lifeline to the rest of the world, without which the recession may have developed into a full-blown 1930s-style depression.

Even without the dangers of tariff war with the US, China has to confront many economic challenges. The most pressing is the slowdown in its growth rate, which at 6.6% last year was the lowest since 1990. Stripped of the creative accounting that accompanies Chinese statistics, it is believed that the economy’s underlining trend growth rate is now just around 3%. The IMF has forecast that lower year-on-year growth will follow until 2021, the adverse impacts of which will be felt acutely in the west and in developing economies.

China’s fearful regime

Beijing has sought to reverse this dangerous trajectory in a number of ways. A new stimulus programme totalling $477 billion of loans was hurriedly brought forward in January. Alongside of this, the central bank cut the amount of cash that banks have to hold in reserves for the fifth time in a year, thus freeing up more liquidity. Borrowing rates for small businesses have been cut and, in February, interest rates were surreptitiously cut by the use of complex financial instruments. A further economic package of stimulus measures now seems likely. It would be aimed at the private sector to cushion the blow from US tariffs, particularly in the light of April’s retail sales figure which recorded a 16-year low.

Although company debt is 395% higher than a decade ago and low-quality bonds now account for over half the total owned and traded, political fears have become paramount. The overheating of the property market in 2018 created steep price rises in the big cities, prompting concern about social unrest. Curbs on borrowing were quickly introduced to dampen the market and measures were taken to introduce additional controls in the overheating shadow banking system. Now, however, with wages rising by only about 2% last year and sales of mobile phones static, the government is wrestling with and seeking to neutralise the rising political temperature, reflected in a growing number of bitter strikes, largely unreported but a source of great fear for the elite.

The monetary stimulus provided in 2018 appears to have had a very limited effect and export growth is being badly affected by increasingly bellicose measures launched in Washington. This is crucial for China, where trade with the US is running at around $2 billion a day. The state has responded by tightening its grip. The share of new bank loans going to government-owned firms has risen from 30% to 70%. The private sector is being increasingly stifled. Its share of output has stagnated and rules have been enforced that companies must establish party cells which may then have a say over hiring and firing, and key investment decisions.

The Chinese leadership is well aware that a slowing growth rate creates a perilous position for its continual rule. A senior strategist at the Chinese Academy of Social Sciences warned: "Without a certain level of economic growth speed, structural adjustments or economic system reform will be baseless".

Xi will seek to steer the economy away from its dependency on investment and exports, but the dizzying growth rates of the last 40 years were based, initially, on moving the population out of low-productivity jobs in agriculture into higher-productivity manufacturing. That has now happened in key areas of the country. Despite spectacular infrastructural projects, cutting-edge robotic and AI technologies, and massive advances in science and technique, the necessary transition to a consumer-led, service-driven economy is akin to undoing a Gordian knot. This is because of the present geopolitical situation and the emergence of a US administration that no longer sees China as a potential international partner but as an economic and military rival that has to be curbed.

Increasing instability and conflict

On the international stage, Chinese influence and prestige has been massively bolstered through the multibillion-dollar Belt and Road Initiative, a state-backed strategy to promote its influence around the world, while boosting its economy. Huge new infrastructural links between Asia, Europe and Africa have been undertaken, all with the aim of increasing China’s levels of global trade. In this sphere, US imperialism is also attempting to limit Chinese expansionism. It has warned the British government of serious security consequences if Huawei is allowed to have a role in the 5G technology roll-out, and is seeking to place restrictions on the EU’s interactions with Chinese firms.

Post-2008 the world economy and inter-imperialist relations are much more complex than the evangels of neoliberalism and globalisation proclaimed at the turn of the 21st century. There has been a perceptible deterioration in cross-border investment, while most trade is already intra-regional – in both Asia and Europe. Relative to world GDP, trade, bank loans and supply chains have all stagnated. There is a growing contradiction between this trend and the current composition of the global financial system in which the US remains the principal banker and financier. A retreat into partial regional or even national spheres of influence is one more indication of capitalism’s present cul-de-sac.

Imperialism cannot resolve its own contradictions. The period of super-charged globalisation that developed after the collapse of Stalinism has been partially derailed by the 2007-08 recession. This has bequeathed in its wake a new era of palsied growth rates, more open clashes between capitalist nation states, and the weakening and splintering of regional trade blocs along national lines. In addition, it has seen the emergence of right-populist movements demanding restrictions on the ‘free movement’ of labour and trade and which appear to have filled the void, at least temporarily, left by the transformation of the former social-democratic parties into fully capitalist formations.

It is not clear how far the present threats of full-blown trade war will go. Or whether Trump will fully deliver on his ultimatums and how China will respond. Rooted in this conflict, however, is an ideological rivalry expressed through economics, territorial spheres of influence and military-technical imperatives. The unipolar world proclaimed by George HW Bush in 1990 is now a distant fiction. Instability and competing interests between the imperialist powers are here to stay.

What is apparent is that only the working class can bring an end to this unstable international order. It is vital in China, in the US and everywhere else that the struggle is stepped up to confront, expose and overthrow this system. The international waves of protest around climate change show the desire and determination of millions, especially young people, to fight for something better.