One Planet – Two Trading Systems: How The US is Easily Winning Trade Wars Except With China

Trade wars are easy for the US to win…with one big exception 

After holding out for over a month after Mexico and the United States concluded a revised trade arrangement to supplant the 1994 North American Free Trade Agreement (NAFTA), Canada has finally agreed to a new set of conditions for entering what Washington is calling the US-Mexico-Canada Agreement (USMCA) which will supplant NAFTA for all intents and purposes.

While the full terms of the new agreement have yet to be made public, it has been reported that as part of the deal Canada will be forced to relax its protectionist agricultural regulations, thus allowing more US products including dairy onto Canadian shelves while certain US industrial manufacturers will be protected against cheaper Canadian made goods. In this sense, USMCA is a more limited agreement than NAFTA and crucially it is one that appears to be authored exclusively on US terms with only very minor concessions made to either Canada or Mexico (perhaps Canada especially).

The protracted negotiations leading up to USMCA illustrate a broader trend within the manifold Trump trade wars across the globe. While the US now finds itself in a position of agitating for unilateralism in trade against the wishes of the vast majority of other nations, the reality is that due to the economic and military power of the United States, the Chinese superpower is realistically the only country able to withstand US pressure in the trade war over the long term. Thus, while countries like Canada and multiple European states have offered robust defences of their conception of free trade vis-a-vis Trump style protectionism, the climb-downs from America’s western trading partners are increasingly a matter of ‘when’ rather than ‘if’. In this sense, the Canadian decision to join Mexico in a new trading arrangement with the US can be seen from Ottawa’s perspective as an inevitable climb-down insofar as the new deal is clearly slanted in favour of US interests rather than multilateral ones.

Canada’s robust rhetoric on trade ultimately led to an inevitable capitulation for the simple reason that for the majority of America’s trading partners some “good” and “easy to win”, trade is better than no trade (aka ultra-high tariffs). While this reality does lend some credibility to Donald Trump’s statement in which he proclaimed that trade wars easy to win, if Trump believes he can apply the same tactics to China and get the same results, he is very mistaken.

Trade wars are indeed rather “easy to win” with countries like Mexico and Canada that are indelibly dependent on US trade. Likewise, while the EU has talked tough on trade with the US, Brussels’s quiet capitulation in respect of attempting to preserve the JCPOA (Iran nuclear deal) in the face of a major sanctions threat from Washington makes it clear that the gap between the EU’s rhetoric and actions remains substantial.

China is neither NAFTA, the EU nor Japan

With China, the story is very different. One of the main differences between China and every other trading partner of the US is that while for Japan, Canada, and South Korea, the chief export market of each respective nation is larger in size and purchasing power parity (PPP) than the domestic market, when it comes to China, the nation with the highest PPP in the world and largest market per-head, every country receiving exports from China ultimately represents a smaller market than its internal market.

Secondly, unlike Japan which capitulated to the mere threat of a US trade war in 1985 by allowing its currency’s value to skyrocket in line with the Plaza Accords, China does not plan to capitulate on any front, let alone in terms of caving to US pressure over the Renminbi. China has no plans to overvalue the Renminbi by allowing a free float which would likely lead to a higher value in the national currency. Likewise, China has no plans to artificially de-value the Renminbi either.

Outdoing the dollar through well managed gradualism

Instead, China aims for a stable national currency in order to avoid boom and bust cycles at home while also doing with the Renminbi what Japan could have never realistically done with the Yen – position itself to become the world’s future reserve currency. Furthermore, China’s managed float (which could easily be called a managed peg) of the Renminbi to other major currencies including the US Dollar, Korean Won, Japanese Yen, Euro and other less globally traded currencies will help the Renminbi to ease itself into its inevitable future position as the world’s major reserve currency.

At the same time, while not taking drastic moves to alter the value of its currency one way or another, China is working to gradually transform the Renminbi into the world’s de-facto reserve currency. As China’s overall GDP is set to overtake that of the US by 2040, as history indicates, the nation with the world’s largest economy will necessarily provide the world with its reserve currency. But far from sitting and waiting for another forty years, China is already taking steps to entice other countries towards using the Renminbi as a currency of bilateral international trade while the addition of Renminbi to the SDR currency basket in late 2015 has further underscored the role of China’s currency as a major player in international markets. This year’s launch of the so-called Petroyuan has further demonstrated that China is very serious about promoting its currency as an alternative to a US Dollar that while strong is increasingly volatile in terms of its reliability in international exchanges among nations targeted by sanctions and other economic pressures from Washington.

Trump’s rhetoric vs. Trump’s manifest goals 

Yet beyond the rhetorical analysis of both pro-Trump protectionists and global advocates of freer trade, the economic realities of how the US is pursuing its trade war indicate that under Trump, Washington seeks the opposite outcome of that which many American policy makers are saying. In this sense, perhaps when Trump says that trade wars are easy to win he is in fact being accurate. The only thing amiss is one’s definition of a victory in such a trade war.

In order to understand what a victory in a trade war might look like from Trump’s perspective, one must first consider Trump’s actions in respect of allegedly attempting to make US goods more attractive across multiple export markets.  In order to make one’s goods more competitive one generally desires a national currency that is relatively weakened and coupled with low interest rates to encourage foreign borrowing. One also seeks a stable global trading system that further encourages the opening up of foreign markets to one’s exports in exchange for favourable borrowing conditions and an increase in foreign investment as a means of pursuing reciprocal trade deals as well as negotiating the lowering of tariffs on a bilateral basis. Indeed, these were some of the very policies (and attempted policies) of both the Bush and Obama years.

Instead, Donald Trump has taken the opposite strategy. In addition to pursuing sanctions and/or tariffs on much of the industrialised world including China, Russia, the European Union, Turkey, South Korea, Japan, Canada, Mexico, Iran and many more, the US is presently taking a number of other steps which indicate that there is no inherent desire on the part of the Trump administration to make US goods more competitive on the world market.

At present, the US is forcing much of the world into the arms of the Chinese free trading model which would appear to be the opposite of Trump’s publicly described intentions. And yet because Chinese credit lines are now easier to secure and offer better terms than American ones and because China is opening up its own markets more than at any time in its history while openly courting win-win free trading agreements with its partners across the developing world, an increasingly closed door America is making the Chinese open door look all the more appealing.

In addition to the economic “fortress America” making China look more open, reliable and stable in terms of being a long term economic partner by comparison, China’s perennial appeal of being a nation that tends to combine free trading agreements with generous developmental cooperation in Asia, Africa and beyond along with the fact that China does not demand changes to a trading partner’s system of internal governance nor military alliances (quite unlike the US), means that China’s position as the superpower bastion of a new free and fair trading order is becoming increasingly solidified.

At the same time, America’s gradually increasing interest rates. This along with the Federal Reserve’s divestment strategy in the developing world and the resultant strong Dollar has combined to increase the purchasing power of Americans while increasing the real terms debt of much of the developing world that will be looking for new lines of credit in places other than the US – and that’s just among the nations that haven’t been shut out from the US financial system due to sanctions.

One planet-two systems

Taken in totality, the US is putting immense pressure on all developing nations both fiscally and monetarily. While China must now shoulder much of this burden on behalf of its partners, because China is uniquely well placed to do so, Donald Trump’s policies are actually hastening the long term (and frankly inevitable) ascension of China to the position of not only the world’s number one over all economy in terms of GDP (China has already surpassed the US in terms of purchasing power parity) but Trump is also hastening the rise of China as the world’s leader of a wider free trade consensus and the world’s leading financier for the rest of the developing and even much of the economically developed world.

By using a strong Dollar to increase American purchasing power while making the prospect of trade with the US unappealing both due to monetary realities and due to the fact that the US is now seen as an increasingly unreliable partner (however strong the US economy is), it would appear that Donald Trump is not interested in competing with China. In fact, Trump is playing a completely different game from China entirely so far as trade is concerned.

Rather than look towards rivalling China as an increasingly open economy that prioritises long term sustainable growth and innovation, Trump’s United States is looking to take a road that prioritises self-sufficiency, stability and more modest growth over the long term. While China’s long planned historic opening of its own economy could have been an opportunity seized by Trump to embark on the win-win formula that in Trump’s lexicon is known as “fair trade”, Trump instead decided to escalate his tariff war against China at a time when Beijing is more prepared than ever before to have foreign goods on its shelves, including those from the US. The result has been that while China moves to create more open, free and fair deals with much of the world, the US is being left out. In many ways though this is exactly where Trump wants to be.

Trump’s strategy is therefore far more similar to that of Japan than that of China. In aiming to be a country with high domestic purchasing power but whose goods are naturally overpriced by the standards of purchasing power across the wider world, Trump is preparing the US to become a more insular and self-sufficient economy that is cautious in respect of imports and whose exports will rely on a “take it or leave it” quality rather than one of negotiated or de-facto bilateralism.

Just as Japan continues to rely on the quality of its exports having the ability to overcome questions of cost, it could also be the case that in future years, a protectionist US will resort to the historic Japanese process of selling goods at a loss in order to overwhelm the geo-economic competition and generate revenue in terms of volume rather than on the basis of a dollar-for-dollar sale price.

While the US has to catch up with Japan in terms of education rates and workforce discipline, as a larger nation with vastly more natural resources, the US is actually in a position to become more economically Japanese than Japan so long as it continues to invest in modernising its own domestic industry – something that has been woefully neglected since the late 1970s. If the US hastens its energy self-sufficiency strategy and continues along its current trajectory to be a net energy exporter, the US will become even more secure in its self-sufficiency, not least because energy is among the top commodities that can be shifted on the “take it or leave it” basis.

But if the combination of a strong Dollar and Trump era tax incentives can motivate businesses to re-invest profits into innovation on the Japanese model, it could well be that in spite of short term hostility towards a free trading world order, a long term and perhaps counter-intuitive win-win could be the result of Trump’s overall reckless trading strategy.

In this sense, the world is headed to a place where in spite of broad international trends towards freer trade and multilateralism, because of the overwhelming confidence that the current US administration has placed in protectionism, the future of global trade is likely to develop along the lines of two parallel systems. On the one hand there will be the Chinese model of openness, multilateralism, confidence in bespoke global partnerships and sustainable investment strategies and on the other hand there will be the protectionist US offering the world its goods on a “take it or leave it” unilateral basis. Thus, one can characterise the future of global trade with the phrase: ‘One planet – two systems’…a Chinese one and an American one. 

Conclusion

Just as modern China and modern Japan coexist in spite of antithetical economic practices and a dark geopolitical history, so too might a win-win scenario unfold in future years where a less globally involved US economy learns to coexist with an outward looking and forward thinking Chinese economy. Of course, many nations are suffering in the interim. That being said, so long as China can work with its partners across the developing world to weather the current crisis, there could be light at both ends of the tunnel for the partners of both major economic superpowers that are each travelling in the opposite direction, in spite of a great deal of unfortunate and unnecessary collateral damage in the interim period.

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