Real wars are like that. Easy to start, always promising quick, assured victory – and invariably they disappoint. The initial, confident blueprint barely lasts twenty-four hours - before war’s own, inherent dynamic – the arrival of the unexpected, the unforeseen – shocks initial smugness. And the adrenalin rush from finally having triggered the long-contemplated, action-plan becomes quickly smothered by the realisation that this newly minted war will have to be fought in muddy trenches.
And Trump wars there are: A multi-dimensional war on China; on Iran; on Angela Merkel and the liberal Euro-élite (“worse than China”) – and Trump’s ‘siege’ attrition of the global institutional ‘blocks’ (WTO and NATO).
The Chinese and Russian leaders have understood, and are busy digging their own trenches for a long war. And Trump too, is adjusting. Draft legislation is being mooted to eviscerate one of Trump’s pet hates: the WTO. He wants to end the WTO distinction between developed markets and emerging markets – and the special consideration given to the latter. He regards this two-tier distinction as a type of liberal-style ‘affirmative action’ for states – such as China – that do not merit any special trade ‘consideration’, in his view.
Trump also has expressed his irritation at the ‘level playing field’ notion by which any advantageous tariff awarded to one state must then must be given to others. He prefers to transact bilaterally, and differentially, with other states on trade, and on defence. (That is to say that the US defence umbrella should not be propagated generically, but in a differentiated manner, as a parcel within a wider, mercantilist and specific, bi-lateral arrangement.)
To this end, the draft legislation is expected substantially to hand the prerogative for trade tariffs to the US President and to the Executive, thus marginalising Congress. It may also entrench more firmly the protection of national security pretext for imposing tariffs, which does exist within the WTO structure – albeit as a special category, and not as a blanket cause for scattering tariffs across the trading field.
China, on the other hand, is aware that it cannot prevail on a battlefield confined to tariffs alone (China only imports around $130 billion worth of U.S. goods, implying that it has only a limited ability to match U.S. tariffs, dollar for dollar. The U.S. however, imported $505 billion of goods from China last year, and has promised tariffs on $250 billion worth of those products). The Chinese leadership thus has already begun to recast its defences against Trump’s attempt to seize the WTO strategic heights, through signaling to the EU the serious threat posed to trade by the putative loss of the WTO terrain – and offering to form a joint strategic defence of this outpost. (The EU, however, believe that they somehow already hold the moral, and ‘reasoned’, high ground, and are not in need of allies: the Chinese initiative was rebuffed).
So China is digging-in for a long-term struggle. Its main (first) priority is to avoid major disruption to its economy. This implies (as a second priority) pursuing deep structural changes: reducing China’s vulnerabilities to supply-chain outages or blockades for its identified ‘techno-strategic industries’, which the CCP has prioritised (IT, including 5G networks and cybersecurity; robotics; aerospace; ocean engineering; high-speed railways; new-energy vehicles; power equipment; agricultural machinery; new materials; and biomedicine).
Again (in order to preserve energy security), whilst the 400,000 bpd of crude which China imports from the US (worth some $1 billion), are not yet listed for retaliatory tariffs, the Chinese government, nonetheless, has threatened a 25% import tax on US oil imports – and Chinese importers are anticipating events: "The Chinese have to do the tit-for-tat. They have to retaliate," said John Driscoll, director of consultancy JTD Energy, adding that cutting U.S. crude imports is a means "of retaliating (against) the U.S. in a very substantial way". Driscoll said China may even replace American oil with crude from Iran: "They (Chinese importers), are not going to be intimidated, or swayed by U.S. sanctions”.
According to the Japan Times, in a harbinger of what's to come, an executive from China's Dongming Petrochemical Group, an independent refiner from Shandong province, said his refinery had already cancelled U.S. crude orders: "We expect the Chinese government to impose tariffs on (U.S.) crude," the unnamed executive said. "We will switch to either Middle East or West African supplies".
And Iran has introduced too, its unexpected, flanking military move into the wider field of this conflict, by threatening to slow or, ultimately stop, the passage of crude through the Strait of Hormuz - should Iranian oil exports be strangled by US secondary sanction threats. Were Iran to tighten the Hormuz bottleneck, the possible consequences for the global economy would be such that the US would find itself under huge political pressure to resolve its stand-off with Iran, ASAP.
As John Kemp of Reuters summed it up earlier this month: “The White House can drive Iran’s oil exports to zero, or it can have moderate U.S. gasoline prices; but it probably cannot have both.” Iran well understands today’s difference from the 2014 episode of (the Obama) Iran sanctions, when US Shale production and the return of Libyan output, was able to compensate for the lost Iranian production. The oil market today is tight, and Iranian threats (even if hypothetical in respect to Hormuz), will of themselves unnerve a brittle market, and increase the risk premium in the oil price (one of which – the Brent benchmark which sets gasoline prices - has already risen 67% since last June).
And finally, China has begun to re-position on the dollar, widening the band in which the Yuan fluctuates – slowly it seems, detaching itself from the dollar, devaluing gently - and moving towards pegging more to the basket of China’s trading partner currencies. This move to a more flexible Chinese exchange rate is deflationary, as Russell Napier notes, “the USD selling price of Chinese exports will likely fall, putting pressure on all those who compete with China … the USD will rise, putting pressure on all those, particularly EMs, who have borrowed USD without having USD cash flows [by which] to service those debts.”.
But so far, the US Federal Reserve chairman’s refusal to join the monetary ‘shoring up’ of the globally deflationary dynamic (Powell in Zurich on 8 May stated explicitly that he bears no responsibility for the consequences of his monetary policy on emerging markets), implies that China’s deflation will be exported directly into the US and European economies.
What does all this mean? For the US, it prefigures increasing pressures on an already tapped out, and over-indebted, American consumer (consumer expenditure was absolutely flat last month); but separately, the devaluing Yuan presages a clear and present danger to the US stock market (Chinese past devaluations have stimulated market falls). “China can, and will devalue the yuan” Tom Luongo writes, and expand the People’s Bank of China’s (PBoC) balance sheet, to keep the banking system liquefied, and bail out whoever is structurally important to the banking system … China needs a rapid expansion of its money supply if the Yuan is going to be any kind of regional trade settlement currency. And what better time to do that but when the U.S. is trying to blow up the status quo between itself and the European Union which is dependent on exports?”
And what will be the consequences for China? Growth is slowing (best realistic estimate is 4% - too low for systemic economic and social stability). Does China then face a major crisis? China’s economy is less vulnerable than the West to a 2008 type of banking domino implosion, given its state controlled banking system, but the personal financial sector is complex, and more susceptible to its highly leveraged investment strategies.
Does China face a social risk? Well… Chinese state media has unleashed a full-on propaganda blitzkrieg, slamming Trump's government as a "gang of hoodlums", with [Chinese] officials vowing retaliation, while the chairman of Sinochem just become China's official leader of the anti-Trump resistance, quoting Michelle Obama's famous slogan "when they go low, we go high". In short, social distress will be channeled into anti-American sentiment, setting us up for the next round of escalation.
So perhaps the more immediate consequence will be a major default in EMs.