IMF warns of growing trade war
The head of the International Monetary Fund Christine Lagarde has repeated earlier warnings that the trade war between US and China threatens to result in a cut to global growth and has called on Washington and Beijing to pull back.
In a report published earlier this week, the IMF estimated that the latest round of tariffs could see a reduction in growth by 0.3 percent next year and, when earlier tariffs are added in, the hit will be a 0.5 percent reduction, equivalent to $455 billion, “larger than the size of South Africa’s economy.”
“These are self-inflicted wounds that must be avoided,” Lagarde said in a note accompanying the report. “How? By removing the recently implemented trade barriers and by avoiding further barriers in whatever form.”
The IMF warning on growth, which comes amid already apparent signs of a slowdown in the world economy, was issued in the lead up to a summit meeting of the G20 to be held in Japan on June 28–29, following a meeting of the organisation’s finance ministers this weekend. The main focus of attention at the summit will be on the meeting between US President Donald Trump and China’s president Xi Jinping to be held on the sidelines.
It had been hoped that the discussions would provide a breakthrough in the trade negotiations. But that prospect is increasingly unlikely under conditions where the US is intensifying its economic war against China as exemplified in its banning of the communications giant Huawei from the acquisition of US components.
Speaking to reporters in France yesterday, Trump said he would make a decision on whether to enact tariffs on another $325 billion worth of Chinese goods after the G20 meeting. “I’ll be meeting with President Xi and we’ll see what happens but probably sometime after G20.”
Since the breakdown of the US-China talks, the entire international trading system has been thrown into further turmoil by Trump’s decision to impose tariffs against Mexico, beginning next Monday at 5 percent and rising to 25 percent by October, on the demand that it take action to halt the flow of immigrants and refugees to the US.
Talks between Mexican and US officials were held on Wednesday and were set to resume yesterday but as of this writing no announcement on their outcome has been made. If the tariffs do go ahead they will completely disrupt trade between US and Mexico, which is the second largest exporter, after China, to the US market.
Whatever the immediate outcome of the conflict, Trump’s threat to use tariffs over the issue has sent a shock wave through the international trading system because it makes clear the US is prepared to use economic and trade warfare measures to pursue all of its policy objectives, not simply those on trade, serious as that is.
The breakdown of the trade talks with China came after the US accused Beijing of backtracking on previous commitments. However, a white paper issued by China at the weekend disputed this assessment and detailed instances of where the US had overturned previous agreements.
It noted that in early February 2018 the US government expressed the wish for a high level consultation on trade and economic matters. Those discussions went ahead and made “substantial progress” on an agreement to increase Chinese imports of agricultural and energy products. But on March 22 last year the US unveiled its report under Section 301 of the 1974 Trade Act accusing China of technology theft and announcing a 25 percent tariff on $50 billion worth of Chinese goods.
China continued to engage in discussions and on May 19 last year the two sides issued a joint statement agreeing to refrain from a trade war and to continue discussions. But ten days later the US announced an escalation of the tariff regime, with a 10 percent tariff to be imposed on $200 billion worth of Chinese exports from early July.
After the meeting between Xi and Trump on the sidelines of the G20 summit in Argentina in December last year, negotiations continued and, according to the white paper, “the countries had agreed on most of the issues.” But on May 6, the US accused the Chinese side of backtracking and raised the tariff on $200 billion Chinese exports from 10 percent to 25 percent.
The white paper said the accusation of Chinese backtracking was “totally groundless.” “It is common practice for both sides to make new proposals for adjustments to the text and language in ongoing consultations. In the previous more than ten rounds of negotiations, the US administration kept changing its demands.” It said the “more the US government is offered, the more it wants.”
In a comment published on Wednesday, Financial Times economic columnist Martin Wolf, who has previously labelled the US a “rogue superpower,” wrote that “on many points” outlined in the white paper “the Chinese positions are right.”
The US focus on trade imbalances was “economically illiterate,” the view that theft of intellectual property had caused “huge damage” to the US economy was “questionable” and the proposition that China had “grossly violated” its commitments to the World Trade Organization in 2001 was “hugely exaggerated.”
Pointing to the wider implications of the conflict, he wrote: “Across-the-board rivalry with China is becoming an organising principle of US economic, foreign and security policies.”
And he made clear this was not just a product of Trump but had deeper roots.
“The US president has the gut instinct of a nationalist and protectionist. Others provide both the framework and the details. The aim is US domination. The means is control over China or separation from China. Anybody who believes a rules-based multilateral order, our globalised economy, or even harmonious international relations, are likely to survive this conflict is deluded.”
The US view in regard to China was “might makes right” and this was reflected in the US insistence that it should act as “judge, jury and executioner” in regard to any agreement.
Underscoring the breakdown of the trading system, he noted that in the US side, “liberal commerce is increasingly seen as ‘trading with the enemy.’”
Describing the US-China conflict as the “most important geopolitical development of our era,” Wolf did not explicitly raise the threat of war, preferring to say that it was “dangerous” and ran the risk of turning into an “all-embracing conflict.”
However, others have been more direct. Following a bellicose speech by the US Acting Defense Secretary Patrick Shanahan at the Shangri-La Dialogue conference held in Singapore last weekend, the Philippines defence minister, Delfin Lorenzana, warned of war.
“With the untethering of our networks of economic interdependence comes growing risk of confrontation that could lead to war,” he said. “Our greatest fear, therefore, is the possibility of sleepwalking into another international conflict like world war one.”
New US Tariffs Spell Doomsday for China’s Economy
An economist foresees the meltdown of China’s economy as a result of U.S. tariff increases
June 5, 2019 Updated: June 5, 2019
Editor’s Note: This is an abridged translation of an article by Wang Shangyi, which was originally published in SecretChina on May 27.
The additional 25 percent tariff imposed by the United States on $200 billion worth of Chinese goods will trigger a new round of factory closures in China, driving economic collapse.
After more factories close, foreign exchange earnings will decrease, prompting Chinese officials to reduce foreign exchange purchases and implement more stringent foreign exchange controls. In addition, the domestic financial system will take a hit, which will further escalate economic and financial collapse.
Factory Closures and Relocations
The 25 percent tax rate will reduce Chinese exports in two ways. Firstly, it directly halts the export of a considerable amount of products, and factories will rapidly transfer orders and production capacity outside of China. In the short term (within one year), this will exceed $50 billion, or even up to $100 billion. In the medium term (within two years), the majority of production could be transferred abroad.
Secondly, the export base crackdown will force all relocatable manufacturers to move away. Regardless of whether it’s the $200 billion export segment or the $267 billion one, after seeing the sharp increase in taxes, they will all be anxious to move.
The Chinese Communist Party (CCP) officialdom fully trusts in U.S. investment bank Morgan Stanley, which erroneously concludes [in a July 11, 2018 report] that the United States will suffer more losses than China, and that Trump would not dare to overdo the trade war.
The report’s false and irresponsible GDP calculation has been propping up CCP officials’ confidence that “China will win” the trade war. But the CCP does not realize that after exports are blocked, this not only directly affects the entire export industry chain, but also the financial bubble—especially the real estate bubble—which will soon burst.
Trump, however, can both stimulate the return of American capital as well as increase tax revenue, because it is mainly the interests of Wall Street that are negatively impacted.
Exports to Other Countries Affected
The closure of factories in China that produce goods for export will directly affect China’s real economic output by as much as 6-8 times. The 25 percent tariff increase on $200 billion goods will cause an even greater impact by forcing large numbers of factories to move out of China. These factories not only service exports to the United States, but to other countries as well.
After factories relocate due to the tariff, Chinese exports will be impacted to a multifold degree. Assuming that exports to the United States account for a 50 percent portion, after factories move out of China, there will be a $100 billion reduction in exports to the United States. At the same time, there will be an export reduction of $100 billion to other countries, doubling the reduction in Chinese exports.
Major Industrial Chains Impacted
Of the $200 billion goods affected, most come from low technology industries with major industrial chains, such as clothing, shoes and hats. Although such products have a low unit price, the majority of raw materials, auxiliary materials and accessories are produced in China, and can drive China’s industrial chain by 3-4 times as well as meet the demand for peripheral services. So the economic impact is huge.
Considering the accumulation of multiple factors, GDP output can be driven by 6-8 fold. Once the factories move out, the 6-8 fold GDP will disappear. Actually, the reduction of $100 billion in exports to the United States will result in a reduction of $60-800 billion GDP; that is, 4.2-5.6 trillion yuan GDP will be lost.
GDP Reduction and Unemployment
A reduction of trillions of GDP in the physical export economy will deal a heavy blow to the Chinese economy and push the Chinese economy into collapse mode. This consists of two aspects: One is that GDP is greatly reduced. Using 90 trillion yuan ($13.04 trillion) GDP as a basis, if GDP decreases by 4.2-5.6 trillion yuan, that is a reduction of 5-7 percent.
According to China’s official statistics, its GDP growth is 6 percent, so China’s GDP growth will be cancelled out. Considering the GDP from December 2018 to January 2019, this number may be minus 20 percent. At the minus 20 percent level, another 5 percent reduction results in minus 25 percent, clearly indicating that the Chinese economy has entered the mode of collapse.
The other aspect is mass layoffs and the sharp increase in unemployment. The steep decline in output from 4.2-5.6 trillion yuan ($608-$811 billion) in low and medium-end exports will result in the loss of 10-20 million low and medium end jobs. One can only imagine the impact such a large-scale job loss would have on social stability.
Further taking into account multiple international trade relations, the reduction in Chinese exports is even greater. When China reduces exports by $200 billion, even without considering the loss of foreign exchange after foreign-funded factories move out, the State Administration of Foreign Exchange would have to reduce imports by $200 billion in order to make up for the $200 billion lost in exports.
But since imports from the United States are basically necessities and cannot be reduced, China must reduce imports by $100 billion from other countries. In order to balance trade, these other countries will also reduce imports from China, leading to a new round of bilateral trade reduction, whereby China’s exports and imports will both shrink. Afterwards, if the minimum amount figure is used, China’s exports will be reduced by another $100 billion. That is, GDP will be reduced by 2.5-3.5 percent, and employment will decrease by 5-10 million people.
Foreign Reserves and Financial System Hit Hard
China’s foreign reserves and financial system will also be hit hard. Foreign reserves will decrease by 200 billion U.S. dollars, and base currency will decrease by 1.4 trillion yuan. According to China’s existing deposit reserve ratio (14 percent for large banks and 12 percent for small and medium banks), using a 6 times currency multiplier, it will be 8.4 trillion yuan ($1.2 trillion) in revaluation.
If the CCP starts to “print money without an anchor” to fill the 8.4 trillion yuan ($1.2 trillion) gap, then the same amount of money will face a sharp reduction in actual foreign reserves, further exacerbating the foreign reserve crisis. If “printing money without an anchor” is not used, currency will be reduced by 8.4 trillion ($1.2 trillion).
Although 8.4 trillion yuan ($1.2 trillion) accounts for only 4.7 percent of 182 trillion yuan ($26.3 trillion), it is invaluable to the current stock market and property markets, and the reduction will directly trigger a new round of stock market crashes and the accelerated collapse of the property market. The stock market will fall off by at least 25-30 percent, and the property market by more than 30 percent.
In the context of the blow-up of the P2P (peer-to-peer lending) and other usury, the 8.4 trillion will cause most medium and small-sized banks to fall into bankruptcy crisis.
A foreign reserve crisis will also directly cause the CCP to face a survival crisis. If China does not reduce imports, foreign reserves will be reduced by 200 billion U.S. dollars, and China’s real foreign reserves will be strapped for cash. The CCP will have to adopt more stringent foreign exchange controls to reduce the foreign exchange losses.
At present, the CCP’s foreign exchange controls are already quite tense, which has caused some people to be alert. As regulations become increasingly strict, the number of people detecting a problem will increase dramatically, not only accelerating the withdrawal of funds out of China, but funds invested in China will also be greatly reduced, exacerbating foreign exchange tensions.
Once the foreign exchange black market appears, it is equivalent to the loss of foreign exchange control, and will quickly spread like wildfire.
Large-Scale Decline and Crisis
After exports decline sharply, the stock market and the property markets plunge, banks fall into bankruptcy crisis, tens of millions of people lose their jobs, and the CCP’s institutional economy will fall into a large-scale bankruptcy crisis.
As the stock market continues to plummet, companies owned by CCP moguls will no longer be able to withdraw assets from the market. As the property market continues to plummet, trade volume will decrease, and a large number of real estate companies will go bankrupt. The railroad and other infrastructure projects will be unable to be maintained, upstream industries will completely shut down, and the support services industry will close, further causing unemployment for tens of millions of people.
Car sales will continue to decline, causing another round of production suspensions and layoffs. Local government tax revenue will reduce drastically, and due to reduction in currency, it will be even more difficult to issue bonds, large amounts of pension insurance, medical, and institutional wages will be suspended, and local governments will prepare to go bankrupt.
Wang Shangyi is an economist at the China Economic and Cultural Research Institute.
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