OF CHINA-TARIFFS AND BREWING TRADE WARS: COULD THERE BE A GEOPOLITICAL DIMENSION TO ALL THIS MADNESS
I wrote the article below on 23rd March, 2018. I first sent it to, and it was published at, iAffairsCanada. It has been reproduced here. At the bottom, I have added a note taking into account the US-Africa Strategy launched by U.S. National Security Advisor John Bolton in early December, 2018 at the Heritage Foundation. More below.
Commentary about the second round of tariffs signed by President Trump on March 22nd, 2018 aimed at the People’s Republic of China has focused on the possibility of a trade war, the outcome of which, a variety of pundits and analysts have stated, would leave everyone worse off. Today, on the March 23rd, 2018, China’s Ministry of Commerce proposed to its government a list comprising of 128 products from the United States on which tariffs could be levied as well.
The stakes, as stated by Trump before signing the second round of tariffs, were that the United States was incurring a colossal trade deficit of between US$370billion and US$504billion, and that it sought to reduce this by blocking certain Chinese goods. With the focus on Trump’s daily theatrics, which enjoy enormous television airtime, commentators in the media have fallen into the error of presuming that there is no method or underlying strategy to Trump’s policies. In fact, many say he is non-ideological, opportunistically bumbling from position to position in order to distract from the much touted Mueller investigation into Russian interference during the election and collusion with the Trump Campaign. Critiques about Trump and his administration have been fleshed out through this narrative and have consequently portrayed him as shallow, random and vacuous. But I dare say that when considered holistically, there is a discernible agenda being pursued by the Trump administration which ought to be taken seriously, and whose mistakes - just as those mistakes committed by previous US administrations - should not always be taken as evidence of exceptional incompetence.
But here is why I think there may be a wider agenda behind these recent policies:
After the much derided Tax Bill was passed, some media outlets reported that the US had grown its budget deficit (the gap between government spending and revenue: not to be mistaken for either the trade deficit or the national debt) by more than double in order to cover for the losses in revenue occasioned by the tax cuts. This means the Federal government is borrowing money in order to meet its spending obligations. Additionally, the US administration has been actively pursuing greater investments into their economy, particularly in infrastructural programs, from Saudi Arabia, and in the process preferring large corporate partnerships over smaller, local businesses. In addition, the revised national security doctrine which Trump falsely boasted had made him the first President in American history to make economics an integral part of national security is also illustrative: there, realizing the shortcomings of hard, hegemonic power and dwindling economic influence, the US introduces an economic doctrine of postures to check emerging powers and to safeguard US interests. The clear course of action here is that the Trump administration is pursuing a kind of inverted Keynesian economics aimed at:
(a) increasing domestic spending in strategic economic sectors with the aim of generating local demand while subsidising corporate costs through a deficit spending and corporate tax relief wealth transfer program,
(b) allowing for interest rates to occasionally rise to manage the Federal Government induced excess liquidity in the domestic market (which has just been announced today, 23rd March, 2018) to mop up excess liquidity or to anticipate inflationary pressures,
(c) attracting foreign capital to the United States through increased interest rates and lower corporate tax levels under a sweeping deregulation doctrine for big corporations (which has also been reported in Turkish media, that dollars have become scarce as financial flows, since the Federal interest rate hike, are now toward the United States),
(d) increasing the size of financial corporations which would help extend their global reach thereby entangling more of the global economy into the American orbit.
Interestingly, America’s allies and countries in this hemisphere such as the EU, Canada, Mexico, Brazil, Australia and South Korea have been granted exemption status. Japan, the sole anomaly, finds itself in the company of China, Russia and other countries outside this ally and hemispheric enclave. This, in economic terms, is tantamount to extending tariff structures beyond the American jurisdiction onto the EU, Canadian, South Korean and Brazilian frontiers. This imposes a large de facto “customs union” within which an American controlled free trade area would or could exist.
When this is considered in conjunction with the deficit spending in the United States, which could potentially become inflationary (evidenced by the interest rates hikes), the United States is then able to create a geo-economic zone in which it is the central and most important economy. The media’s obsession with stock prices after the tariff announcement might be missing the point that when higher interest rates and profitable bonds become available, money is often withdrawn from the stock market and deposited into savings accounts or federal bonds. Indeed some of it is also withdrawn due to risk averse behavior which also contributes to the declining stock prices as investors sell them off. I think the administration could have already anticipated this.
The de facto “custom union” however created by the tariffs along with the monetary measures taken, could be to ensure that excess spending by the Federal Government automatically channels dollars towards:
(a) domestic goods and services which are competitive within that “custom union” which would by default be American goods and services as a fact of proximity to American consumers.
(b) foreign goods and services which are essential to American economic productivity in the external EU, Brazilian, South Korean and Canadian markets. There are reports of potential quotas to be imposed by the US to these external markets in the New York Times which perhaps lends credence to this second point.
Point (b) thus reveals a liquidity outlet into external markets managed by flexible quotas aimed at helping to further stabilize the US Dollar from inflation particularly to try cushion consumers/voters thus providing the Federal Reserve some breathing room especially now that it has the ability to move interest rates down should a liquidity crunch occur, or move up should excess liquidity be detected. The strategy in this aspect is possibly to manage the price level of high velocity goods and services by closely managing the quantity of money.
My argument here is not that the concerns about trade wars or inflationary pressures become irrelevant or unfounded as a result this line of policy: rather, that if national interests, especially long-term ones, are brought into consideration, a cost-benefit analysis might reveal the rationality behind these policies. The trade war therefore which some are talking about is perhaps not the central point of concern from other core interests of the current US government. This is because US interests in pursuing these policies could be served by adding a geo-economic dimension to geo-political interests in a world in which the world order which largely privileged the US as a hegemonic power seems to be in disarray, and in which military or hard power is too blunt a tool to re-consolidate fissiparous regions in which new powers are emerging with their own national interests replete with military, economic and political instruments of their own. The ineffectiveness of sanctions, for example, illustrates that countries now have channels which go around the United States financial system.
The EU for one, once created with heavy American involvement, to create a manageable bloc seems to be moving in a direction increasingly determined by German interests which complicate the US policy of containment of Russia and EU’s general dependence on the US. In the middle-east, Iran - a country with its own interests - continues to undermine the order imposed there by the US as well, combining with Russia to keep Syria under the leadership of Assad while extending its influence into other critical regional spheres such as Lebanon with a powerful Hezbollah and an Iraqi leadership which appears to be flirting with closer ties with Tehran. In the far east, China’s emerging financial and economic orbit complicates the U.S.-South Korean alliance which is critical to maintaining an American military presence there. A reduction in hostilities between North and South Korea would free up China by eliminating the justification for a continued military presence on the Korean Peninsula which presently appears to be more for containing and challenging China than for North Korea. Australia too, a strong ally of the US, seems to be allowing Chinese investments into important industries as well, especially in the North-Eastern parts of that country.
The US is thus leveraging its economic muscle to pull, through economic brinkmanship, the various zones and their attendant interests into the US orbit, while in the same stance, attempting to isolate emerging powers through the tariff firewall of the de facto “customs union”. This is not entirely different from the “surplus recycling system” which emerged after World War 2; the difference now is that there is not a comparable desperation and destruction which would automatically move countries and regions in this direction in spite of these economic incentives. Once acquired and exercised to whatever degree, national interests are very difficult to dismantle. It is thus likely that Germany will quietly seek to undermine this by leveraging its own economic might within an already fragile and internally besieged EU. China too, which has taken a cautious response to the tariffs, is likely to pursue the construction of its economic orbit with greater urgency through their regional bank and infrastructural programmes such as the Silk Road.
But interestingly, Africa as a continent has been ignored. There is perhaps no palpable threat to the international order emanating from there under prevailing trade arrangements (even though Africon has grown in recent years and has enjoyed increased funding to extend operations from the west into the central, northern regions of the continent). In the medium to long term, this could be a costly oversight for this simple reason: China and Russia did not destabilize the US international order through military might alone - rather, it was through high rates of economic growth which increased their footprint and significance, which complicated a containment policy achieved through their economic and diplomatic isolation and military pressure. (See note below.)
In recent years, talks about a single-market and a single-currency in Africa have grown louder, the most recent of which just happened in Kigali this past week where 44 nations signed onto a common market agreement estimated at a combined economic size of US$2 trillion with a population of 1.2 billion people. Failures in governance and lapses in state authority, as well as coordination and integration challenges between African states and regions, are being addressed through sustained efforts to eliminate “colonially imposed barriers to trade” in the form of “artificial” national borders and non-intertradable local currencies. Teething problems remain and will persist into the near future but it is a start. As these states continue to consolidate and centralize power within their own borders and begin to build frameworks for regulating financial flows and extractive industries while developing other new sectors such as infrastructure and technology under a common security framework - supply chains which have depended on African instability, civil unrest, wars and conflict, porous borders, underdeveloped legislative frameworks and disparate regulatory systems across countries, and overall weak states will begin to be disrupted. The ripples of which will be felt far beyond Africa’s borders. Perhaps then, a new realignment, should the US succeed to rein in the troublemakers of this present period, will finally come to Africa.
In sum however, it is of little use to dismiss - just out of our natural revulsion of Trump and his administration - their activities as haphazard, inherently self-limiting and short-sighted. This might provide temporary psychological relief anchored in an inconsequential affirmation of our own moral superiority - but, it might also come to our bemused detriment, especially those of us from regions so easily forgotten in this world.
Note: The US launched a strategy for Africa towards the end of 2018 by John Bolton (the US National Security Advisor at the Heritage Foundation). In that strategy, the US will attempt to challenge the large and growing influence of especially China and then Russia on the continent: challenging China on the financial, and Russia on the military hardware and technology transfer, fronts. The policy is extremely paternalistic, reviving ideas and imageries of Africans as incapable of making decisions without the adult supervision of westerners. See a synopsis of it here.