Kevin Loane sees the new trade tensions as strategic competition, unlikely to be resolved anytime soon. China's membership of the WTO has not resulted in it being a moderating force

Kevin Loane sees the new trade tensions as strategic competition, unlikely to be resolved anytime soon. China's membership of the WTO has not resulted in it being a moderating force

This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission

By Kevin Loane*

In Tupac Shakur’s social justice battle cry, Changes, the late rapper criticised his government’s priorities: “instead of a war on poverty, they got a war on drugs, so the police can bother me”. More than twenty years after his death, the war on drugs — or poverty for that matter — is little closer to being won.[1]. Meanwhile, the American government has fired the opening salvo in a different kind of battle: one against existing trade arrangements.

Donald Trump is delivering on one of his key economic pledges: to get tough on trade with China. His administration has already imposed tariffs on around half of Chinese imports, and threatened duties on the whole lot. Meanwhile, restrictions on inward investment have also increased. While financial markets have mostly taken rising trade tensions in their stride, in the US at least, there have been warning signs elsewhere.

A September poll of global fund managers found that a trade war was seen as the biggest downside risk to the global economy for the fourth month running, although history suggests that the big risks flagged by fund managers signal good buying opportunities. Separately, almost two in three CEOs polled by Business Roundtable said that trade tensions would negatively affect hiring and investment decisions.

Anxious C-suite executives may console themselves by looking to the upcoming midterm elections as a way out. The party of the incumbent administration tends to do poorly. If Democrats ride a blue wave to power, they will surely oppose the President’s China policy and things will go back to normal, right? Not so fast.

Since a 1991 post-war low of 4%, the share of global GDP accounted for by autocracies has increased almost fivefold, to 19%. Almost all of that can be attributed to China. There’s now more economic activity occurring under autocratic leadership than at the peak of Soviet power, when the US was engaged in a Cold War. Even under our own relatively bearish forecasts for Chinese growth, this share is set to rise for some time.

With WTO ascension, China was offered the chance to become more integrated with the rest of the global economy, in part based on the hope that membership would act as a moderating force. The reality is that the country got richer, without any meaningful change in its political setup. Now, after biding its time and hiding its capabilities, Beijing appears increasingly keen to export its political-economic model. Infrastructure signs in certain parts of Africa are more likely to have Chinese characters than “From the American People written on them.

A city known to its residents for swampy summers and bad traffic, Washington DC is now associated around the world with bitter partisan divide. Amid the rancour, China may be a rare unifying force. On both sides of the aisle, from the right of the Republican party to left-wing Democrats, there’s a growing consensus that US policy towards the Middle Kingdom has been misguided. The status quo doesn’t seem politically palatable anymore. Economic skirmishes between the US and China may become the new normal, whichever party is in power.

It’s almost 50 years since Richard Nixon declared a war on drugs. Over that period, deaths by overdose have continued to increase. Current Sino–US tensions seem to reflect, in part, strategic competition — a national, not partisan concern. As with the struggle against illicit drug use, it’s unlikely to be resolved anytime soon. In a scene from The Wire, Ellis Carver, a member of Baltimore’s Drug Enforcement Unit, says: “You can’t call this…a war. Wars end”. A similar critique could be made about labelling current tensions a trade war. How about trade politik instead?.

[1] Lyndon Johnson declared “unconditional  war on poverty” in 1964, and had some initial success. However, the official poverty rate has seen no downward drift since the 1960s and remains stuck in double digits

Kevin Loane is an economist at Fathom Consulting in London, England. This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

Diplomacy is war by other means, at least partially. There is a strategic aspect to trade and investment. The silly Brits are just figuring out they have sold a strategic asset, ARM to China. China paid essentially zero for it, creating the necessary credit at zero cost.

We happily sell our houses, our businesses and our farmland for Chinese Imperial Credits that are essentially created at zero cost to the buyer. We tell ourselves they can't ship them offshore. Presumably they think they don't need to.

Of course, this is just a repeat of the silly Kiwis who borrowed and spent until the Aussie banks were able to buy the NZ banking system for newly created credit at zero cost to the buyer. This enabled them to turn the place into a giant debt farm. Farming people is just so much easier and better paid than farming other livestock.

Banker's baches from a previous era (it didn't turn out so well for them or millions of others):

Why are we so gullible? Are we so easily scammed because we are just blind to the machinations of people of devious intent, the classic weakness of people of goodwill? How did banking and finance get to be so powerful and turn from a productive technology to one that is so often parasitic or destructive?

I think the Aussies found the answer last week. Greed. From the top anyhow. At the other end of the scale you have breed. The poor will always breed, that seems to be a given, with most cultures that underwrite this with welfare, unable or unwilling to stop it. It's the greed part that could be addressed. Sadly, a lot of the top leaders (elite) are naturally this way. That's why they're rich or in power I suppose. One of the five common factors of dominant cultures in decline is the widening of the gap between rich & poor. This is certainly happening today throughout the English speaking world. Another factor is an isolated leadership. Yep, we've got that too. Why is it that no matter how much we can read & learn about the history of humankind, we seem to keep making the same mistakes over again. Different dominant cultures I agree, but essentially the same mistakes. Do we ever learn? Do we ever read history?

I find it unsatisfying to blame "a few bad apples". It must be deeper than that, something that we set ourselves up for. It is a classic form of a dysfunctional, controlling relationship, that relies on our submission, willing or otherwise. There is something I am missing here.

To compare the response to the unethical trade practices of China with the war on drugs is just imbecilic.