Tools of the trade war: Trump’s tariffs may hurt his Asian allies, along with the US
William Pesek writes that the Trump administration’s fervour for tough trade measures may hurt China, but China is too important to friendly nations in Asia and it has several means of retaliating against the US
Should China label Donald Trump’s America a currency manipulator? It’s doubtful that President Xi Jinping would call Washington on its devaluation gambit. Beijing has ample ammunition, though, to yell hypocrisy with the dollar down about 10 per cent in the year since Trump’s inauguration. Two weeks ago, Treasury Secretary Steven Mnuchin even declared dead the 23-year-old strong-dollar policy.
Yet the real fireworks – and threats to Asia’s biggest economy – are yet to come.
No one believes Trump’s lame denials on the dollar. Thirteen months ago, he complained that the “strong” exchange rate is “killing us”. Mnuchin is merely delivering. That will rapidly change the economic calculus in Asia. Xi’s China would find it markedly harder to maintain 6.5 per cent growth. It is a sizeable blow to Japan’s reflation efforts and South Korean, Singaporean and Taiwanese exporters. Central banks from Seoul to Manila are sure to rethink plans to raise interest rates.
The real Trump deliverable, though, is massive trade tariffs, something of which global investors got a glimpse on January 22. The levies of between 20 and 50 per cent the White House slapped on imported solar panels and washing machines were the initial wave of a broader battle that could derail regional stability.
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Trump held his fire for a year, assuming he could bend China to his trade priorities – or to curb North Korea. Rebuffed on both fronts, Trump is telegraphing that his “era of strategic patience is over” mantra extends to trade. Next target: hi-tech industries, particularly those Trump deems to be stealing intellectual property rights. Another: state-owned enterprises benefiting from Beijing’s industrial subsidies.
Trump’s official declaration of combat arguably came where you’d least expect it – in Davos, Switzerland in a speech to the World Economic Forum’s pro-globalisation elite. There, on January 26, the populist firebrand declared that America “will no longer turn a blind eye to unfair economic practises”. Trump’s hardline trade representative, Robert Lighthizer, said the administration “will always defend American workers, farmers, ranchers and businesses in this regard”.
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So will China, of course, setting Asia up for a dangerous tit-for-tat cycle that’s unprecedented in the globalisation age. China’s retaliation efforts tend to focus first on agricultural or automotive products. In 2009, Beijing imposed tariffs on both to protest then president Barack Obama’s policies. This time, Xi’s government is signalling its displeasure with a probe on sorghum imports. China accounts for 79 per cent of all US exports of the cereal grain crop. China has also filed challenges to the new US tariffs at the World Trade Organisation, requesting compensation and consultations.
This White House’s zero-sum world view has it convinced it holds all the trump cards. But Beijing, remember, can squeeze US companies, including cancelling all Boeing orders. It could impose exit taxes on goods manufactured in China. If you think your Apple iPhones and Kate Spade bags are pricey now, just wait. Remember, too, that China owns US$1.2 trillion of US Treasury debt, holdings it could dump in retaliation.
That idea was floated in August 2011, when Beijing recoiled at Obama flirting with closer Taiwan relations. “Now is the time,” state-run People’s Daily argued back then in an editorial, “for China to use its financial weapon to teach the US a lesson.”
Might Trump’s policies spook Beijing into selling? Five weeks before Mnuchin scrapped the strong dollar, Chinese credit rating agency Dagong Global downgraded the United States from A- to BBB+, citing the high fiscal price tag of Trump’s recent tax cut. Trump’s weak-dollar policy could send yields skyward, leaving Washington’s bankers in Asia – including Japan, Taiwan, India and Singapore – with fiscal losses.
Inflation fears are another wild card. A key catalyst behind the recent plunge in US stocks was a 2.9 per cent jump in hourly earnings in January. Punters fear that the Federal Reserve will now be more hawkish, draining the monetary fuel that has powered markets higher.
A trade war would exacerbate market chaos. Asia’s most export-oriented economies would suffer lower trade volumes. Corporate profits would take a hit as US earnings are converted to local money. Even before news of Trump’s weak dollar, Samsung Electronics cited a rallying won – which rose 13 per cent in 2017 – for missing earnings estimates. Considering that Samsung Group generates revenues equivalent to more than 20 per cent of Korea’s annual gross domestic product, a weak dollar is a problem.
Tariffs will raise the stakes. While the real target of levies as high as 45 per cent is China (which Trump says is “raping” America), other sizeable Asian economies would be collateral damage. “The balance of power is asymmetric,” says Pimco Global’s Joachim Fels. Trump, he says, “carries the bigger stick”: the threat of protectionism by the world’s largest economy and issuer of the reserve currency and the securities that are the linchpin of global finance.
Watch: China-US relations in Trump era
Just ask Japan. Any action that destabilises China, Tokyo’s main trading partner, would imperil Japan’s second-longest expansion since second world war. Even Trump’s threatened withdrawal from the North America Free Trade Agreement (Nafta) would hurt. The 24-year-old pact is important to carmakers assembling cars in the US and Mexico, including Honda, Mazda, Nissan and Toyota.
Asia must brace itself for the worst. As investigations swirl and scandals mount, a caged and paranoid US leader is desperate to change the narrative. Hitting China, and by extension the rest of Asia, would delight Trump’s nationalist base.
Never mind that it would be a pyrrhic victory that hurts US consumers, too. Trump, it seems, won’t be satisfied until today’s cold trade war escalates into a hot one that puts the entire global economy in harm’s way.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek