"Decoupling from China" - no winners in a trade war

U.S. Decoupling From China Forces Others To Decouple From U.S.

Moon of Alabama,

24 August, 2019

The U.S. is decoupling itself from China. The effects of that process hurt all global economies. To avoid damage other countries have no choice but to decouple themselves from the U.S.

Today's Washington Post front page leads with a highly misleading headline:

The headline above the article is also wrong:

Trump retaliates in trade war by escalating tariffs on Chinese imports and demanding companies cut ties with China

It was China, not Trump, which retaliated. Trump reacted to that with a tweet-storm and by intensifying the trade war he started. The piece under the misleading headline even says that:

President Trump demanded U.S. companies stop doing business with China and announced he would raise the rate of tariffs on Beijing Friday, capping one of the most extraordinary days in the long-running U.S.-China trade war.
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The day began with Beijing’s announcement that it would impose new tariffs on $75 billion in goods, including reinstated levies on auto products, starting this fall. It came to a close Friday afternoon with Trump tweeting that he would raise the rate of existing and planned tariffs on China by 5 percentage points.

Beijing’s tariff retaliation was delivered with strategic timing, hours before an important address by Powell, and as Trump prepared to depart for the G-7 meeting in Biarritz.

After Trump's move the stock markets had a sad. Trade wars are, at least in the short term, bad for commerce. The U.S. and the global economy are still teetering along, but will soon be in recession.

The Trump administration is fine with that. (As is Dilbert creator Scott Adams (vid).)

U.S. grand strategy is to prevent other powers from becoming equals to itself or to even surpass it. China, with with a population four times larger than the U.S., is the country ready to do just that. It already built itself into an economic powerhouse and it is also steadily increasing its military might.

China is thus a U.S. 'enemy' even though Trump avoided, until yesterday, to use that term.

Over the last 20+ years the U.S. imported more and more goods from China and elsewhere and diminishes its own manufacturing capabilities. It is difficult to wage war against another country when one depends on that country's production capacities. The U.S. must first decouple itself from China before it can launch the real war. Trump's trade war with China is intended to achieve that. As Peter Lee wrote when the trade negotiations with China failed:

The decoupling strategy of the US China hawks is proceeding as planned. And economic pain is a feature, not a bug.
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Failure of trade negotiations was pretty much baked in, thanks to [Trump's trade negotiator] Lightizer's maximalist demands.

And that was fine with the China hawks.

Because their ultimate goal was to decouple the US & PRC economies, weaken the PRC, and make it more vulnerable to domestic destabilization and global rollback.

If decoupling shaved a few points off global GDP, hurt American businesses, or pushed the world into recession, well that's the price o' freedom.

Or at least the cost of IndoPACOM being able to win the d*ck measuring contest in East Asia, which is what this is really all about.

Trump does not want a new trade deal with China. He wants to decouple the U.S. economy from the future enemy. Trade wars tend to hurt all involved economies. 

While the decoupling process is ongoing the U.S. will likely suffer a recession.

Trump is afraid that a downturn in the U.S. could lower his re-election chances. 

That is why he wants to use the Federal Reserve Bank to douse the economy with more money without regard for the long term consequences. That is the reason why the first part of his tweet storm yesterday was directed at Fed chief Jay Powell:

In his order for U.S. companies to withdraw from China, some close to the administration saw the president embracing the calls for an economic decoupling made by the hawks inside his administration.

The evidence of the shift may have been most apparent in a 14-word tweet in which Trump appeared to call Xi an “enemy.”

“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” he said in a Tweet posted after Powell gave a speech in Jackson Hole that contained implicit criticism of Trump’s trade policies and their impact on the U.S. and global economies.

Jay Powell does not want to lower the Fed interest rate. He does not want to increase bond buying, i.e. quantitative easing. Interest rates are already too low and to further decrease them has its own danger. The last time the Fed ran a too-low interest rate policy it caused the 2008 crash and a global depression.

Expect Trump to fire Powell should he not be willing to follow his command. The U.S. will push up its markets no matter what.

From Powell's perspective there is an additional danger in lowering U.S. interest rates. When the U.S. runs insane economic and monetary policies U.S. allies will also want decouple themselves - not from China but from the U.S. The 2008 experience demonstrated that the U.S. dollar as the global reserve and main trade currency is dangerous for all who use it. Currently any hickup in the U.S. economy leads to large scale recessions elsewhere.

That is why even long term U.S. ally Britain warns of such danger and looks for a way out:

Bank of England Governor Mark Carney took aim at the U.S. dollar's "destabilising" role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.

The dollar's dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole, Wyoming, in the United States.
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Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.
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China's yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready.

The best solution would be a diversified multi-polar financial system, something that could be provided by technology, Carney said.

Carney speaks of a "new Synthetic Hegemonic Currency (SHC)" which, in a purely electronic form, could be created by a contract between the central banks of most or all countries. It would replace the dollar as the main trade currency and lower the risk for other economies to get infected by U.S. sicknesses (and manipulations).

Carney did not elaborate further but is an interesting concept. The devil will be, as always, in the details. Will one be able to pay ones taxes in that currency? How will the value of each sovereign currency in relation to SHC be determined?

That the U.S. dollar is used as a global reserve currency under the Bretton Woods system is, in the words of the former French Minister of Finance Valéry Giscard d'Estaing, an "exorbitant privilege". It if wants to keep that privilege it will have to go back to sane economic and monetary policies. Otherwise the global economy will have no choice but to decouple from it.