By M D Nalapat
Trump’s tactics rely on tariffs on all Chinese exports to the US. Should that fail, China will seek to reduce the near-monopoly of the US dollar on global trade.
BEIJING: The mood is sombre in the giant capital city of the world’s second-biggest economy, and it is not because of the smog that is visible in the skies. Since the close of the 1970s, there has been a usually unspoken agreement between Washington and Beijing that the two need to work together where global economics is concerned, even if not always in the politics. This has helped both countries, and it would be difficult to point to one or the other as the primary beneficiary. True, China has for long exported much more to the United States than it has bought from it, but a goodly part of that surplus has gone into US treasuries, assisting the Federal Reserve to keep domestic interest rates down and consequently, business prospects higher. In contrast to countries welcoming fast growth, the Reserve Bank of India since the days of C. Rangarajan (as Governor) has followed the Gandhian dictum that to grow rich is evil and that poverty is a blessing. Hence, whenever the RBI saw the economy doing better than it was comfortable with (which was a smidgen above the Nehru rate of growth, i.e. 3%), the Board of Directors would watch in approval as the Governor and his deputies raised interest rates and reduced liquidity. Indeed, fortunately for China, neither Deng Xiaoping nor Chinese bankers saw the steady double digit rise in that country’s GDP as being a source of worry. Instead, they stoked the flames which fed the engine of growth, ensuring that within a generation more than 600 million Chinese were lifted out of poverty. Had Yaga Reddy or Subba Rao or Raghuram Rajan or Rangarajan of the RBI been in charge of the monetary levers of China during that period, it is certain that to this day, China’s GDP would not be much above India’s, which was the same as China’s in the 1970s, but which is now nearly five times smaller. Although the top tier of the RBI grows breathless with awe in the presence of US or European central bankers, they accept with alacrity the advice of such bankers to keep “irrational exuberance” in India down by raising interest rates and choking liquidity. Modest 9% growth in India is regarded as “irrational” by monetary agencies in prosperous countries. The present RBI Governor, Urjit Patel, seems on course to do more than any predecessor to slow down the Indian economy, through restrictive policies following in their wake, having already ensured his place in monetary history by the way he handled (together with the then Revenue Secretary) the 2016 demonetisation of 86% of the nation’s stock of currency at four hours’ notice.
President Trump’s tactics are similar to those adopted by Businessperson Trump, which is to seek to shock, cajole and when needed bully the other side into quickly raising the white flag of surrender. A man who has seen several bankruptcies, Trump is not afraid of disaster, having an innate belief in his capacity to overcome them. It is clear that the objective of his stance on China is to ensure that for decades to come, the US will continue to be the top economy on the globe, and not get overtaken by China. Forcing down the growth rate of China to below 5% could create tensions, affecting the hold of the Chinese Communist Party (CCP) over the loyalty of the 1.3 billion people of China, who have over recent decades become far more demanding of economic progress than was the case during the era of Mao Zedong. Each Chinese leader is judged by his (so far there has never been a “her”) success in ensuring the rapid growth that is the main plank of the regime’s appeal to its people, and should this falter, the expectation in Trumpworld is that the hold of CCP General Secretary Xi Jinping would get diluted enough to enable challengers to emerge and possibly succeed. The “trade war” is actually an attempt at regime change through economic means, exactly as is being attempted in the case of Russia and Venezuela, two other countries whose leaders are not popular within the Washington power elite. But what if the white flag does not get speedily raised by the other side? Trump’s tactics rely on the first charge, in his case tariffs on all Chinese exports to the US. Should that fail to secure the concessions he seeks, there is no Plan B, which means that the target country will implement its own Plan A, which is to seek to reduce the near-monopoly of the US dollar on global trade and financial settlements. President Trump’s ace is not the present condition of US industry and commerce, but the legacy of post-1945 dominance by his country and the financial and other instruments of that dominance. The 2008 financial collapse showed the dangers of Asia, Africa and South America relying on institutions within the US and the EU for carrying on their trade. Ten years on, the rest of the world is much better able to devise alternative systems for payments and for commodity flows than the channels controlled by the US and its post-1945 Atlanticist allies, and the 2018 trade war launched by the US on China will hasten such a process.
Xi Jinping has no option but to soldier on, for to blink now would be to court a fresh round of hostilities before the middle of next year. A Chinese concession today will only whet the appetite in Washington for further concessions tomorrow, followed by surrender the day after. This is a lesson that Kim Jong Un has learnt well, which is why it would be equal folly to expect North Korea to sacrifice its nuclear and missile capacity on the basis of assurances that have a reliable history of being serially broken. Although the trade war may bring pain for China (and for the US) for about two years, by the close of that period, Xi Jinping (who will become more, rather than less popular within China if he is seen as standing up to Trump, rather than conceding) is likely to succeed in ensuring that workable substitute financial and global supply chains get formed, including in cyberspace, so as to bypass those controlled by the US. The 2018 US trade war on China is the herald of tectonic shifts in the global balance of economic power.