Last week, US President Donald Trump announced that under the rarely invoked International Emergency Economic Powers Act, the Chinese telecoms giant Huawei and seventy of its affiliated companies are set to be added to the ‘Entity List’. This effectively bans them from acquiring components and technology from American firms without obtaining prior government approval. This has massively raised the stakes in the increasingly ill-tempered and rapidly escalating trade war between the world’s two most powerful economies.
Trump referred to Huawei in terms reminiscent of those used by US politicians in the post-1945 Cold War era to describe the former Soviet Union. This “foreign adversary which poses unacceptable risks to national security” is now to be blocked from purchasing semi-conductors from US firms. This will have an immediate and damaging impact on its ability to develop important parts of its manufacturing process.
Companies based in America that wish to continue trading with Huawei will henceforth have to apply to the Commerce Department for a licence to sell their technologies.
This dramatic move follows the Presidential announcement that existing import tariffs of 10%, introduced in September 2018, on $200 billion of Chinese goods sold in the US, could now be raised to 25%. Among the commodities affected would be food ingredients, construction materials, bike parts and burglar alarms. The threats do not stop there. Trump insists that unless China backs down and reduces its level of exports to the US, a further 25% tariff may be affixed on another $325 billion worth of goods. This would, effectively, cover every commodity arriving from Beijing.
All of this is additional to the US tariffs of $50 billion slapped on specific Chinese technology goods, covering aerospace, automobiles, communications technologies and robotics. These were imposed in June 2018 and signalled the beginning of this more acute phase of protectionism. This, in turn, is inextricably linked to a wider geo-political struggle that is unfolding between the rival super-powers:
“At a recent gathering of US policymakers and experts, speaker after speaker took to the podium to voice fears that China is stealing a march in harnessing 5G digital technology and artificial intelligence applications to its military ambitions. The danger in all this speaks for itself. Treating China as a certain enemy is a sure way to persuade Beijing that it should behave as such. Mistrust begets mistrust, which in turn could provide the spark for open conflict. China is no innocent — witness the ever present cyber-attacks on western militaries and vital infrastructure. But demonising everything it does simply opens up the path from a trade war to something much rougher. What the two nations need above all are common rules of the road to avoid escalation. Otherwise we are heading towards an altogether hotter war.” Financial Times (16/05//2019)
The clash between the US and China lays bare the different strategic objectives of these rival super powers. Threats and mutual distrust characterise the current relationship. This new era of cold conflict see both protagonists contemptuously side-line the World Trade Organisation, hitherto regarded in previous decades as the arbiter in disputes of this character.
China has immediately responded to Trump’s provocations by declaring new tariffs on $60 billion worth of US imports beginning on 1 June. New regulatory hurdles could face US companies seeking to operate in China. US agricultural produce, such as soya beans, cars, luggage, electronics, housewares and foods, have already been threatened with $110 billion-worth of tariffs due to commence at the end of this month.
There have been hints too from Beijing that if pushed into a corner, it could also respond by beginning to sell some of its vast US Treasury Bond hoard. This would cause panic in an already internationally weakened bond market. Recent fluctuations have led some economists to state that after the threat of protectionism, a potential meltdown in the US bond market is feared to be the second most likely trigger for the next crash.
According to Trump, the dispute is rooted in China’s deeply unfair trading practice of seeing the US as an easy dumping ground for its commodities. He cites the US Census Bureau’s data for 2018, which revealed a $419.2 billion trade deficit between the two countries.
The impact upon the wider world economy and the financial markets has been to induce fears of a greater likelihood of a deep downturn. On 7 May, the Dow Jones lost 471 points and the S&P and Nasdaq indices opened with similar sharp falls. Those US firms like Caterpillar and Apple, which have significant sales volumes in China, were particularly badly hit and remain vulnerable.
A US trade delegation is due in Beijing shortly to seek to revive trade negotiations and Trump and Chinese President Xi Jinping are expected to talk at the G20 summit in Japan at the end of June. These diplomatic exchanges may result in some secondary points of apparent agreement, but the essential rivalry will not be resolved through diplomatic tête-à-têtes.
There is no doubt that Trump is playing for very high stakes in his confrontation with China. Protectionism hurts both economies. A deep recession there in China would have a huge impact on the US and the entire global economy.
An escalating trade war can quickly result in higher prices for US consumers faced with having to pay the price of increased tariffs on foreign-made goods. 11 million US workers currently work in industries that produce goods which have been or will be targeted for reprisal by China. 59% of US manufacturers have already complained of rising production costs as a result of tariff hikes.
Many of the targeted industries are in already run-down rural parts of the country where Trump performed well in 2016 and needs to do so again in 2020. Already living through the worst economic crisis in 30 years, driven by low commodity prices, trade war pressures and record flooding, farmers are particularly vulnerable. In Wisconsin alone, 2 dairy farms closed every day in 2018, unable to carry on despite being eligible to share in an $8.52 billion direct payment national subsidy set up by the Department of Agriculture to cushion the impact of tariff war.
Wall Street has been sceptical about whether Trump would take on China in the manner he has apparently now threatened to do. The chief market strategist with JonesTrading reflects the new anxiety of the financial markets: “The challenge for investors is deciphering whether this is another bluff by the president, an attempt to lower expectations in order to provide an upside surprise or actually a potential breakdown of the trade negotiations and an escalation of the trade war.”
With the impact of 2017’s tax cuts waning and unmistakeable signs that the American economy is beginning to run out of steam, the 2020 Presidential election presents a challenge for Trump. China bashing plays well with the Republican right and many Democrats, seeking to shore up their electoral bases. The Democrats have also demanded firm sanctions against Beijing, accusing the White House of ignoring China’s economic threat and enjoying growth at America’s expense. Earning less than 5% of their profits in China, those big US firms that do not have substantial trade links have also supported a tough line against Beijing.
The wider narrative is that America feels threatened by the rise of the Chinese powerhouse economy and its concomitant growing military strength. Right wing Republicans, like Ted Cruz, Marco Rubio and Newt Gingrich, have given their endorsements to a new anti-Beijing lobby group – The Committee on the Present Danger (CPD) – which is warning of an existential military threat posed by China. They claim China has “mounted a rapid military modernisation campaign designed to limit US access to the Indo-Pacific region and provide China a freer hand there.”
Yet consumer and industrial activity in both the US and China slowed in April. Market analysts at Morgan Stanley, Bank of America-Merrill Lynch and Blackrock, the world’s largest fund manager, have correctly warned that a prolonged trade war is now the most likely trigger for an impending global recession.
US economy stutters and slows
With all the world’s major economic blocs already performing sluggishly, it will be difficult for the US to maintain annual GDP growth above 2% through the rest of Trump’s term of office. Interest rates were raised in December for possibly the last time this decade. With economic growth beginning to slow at the end of 2018, the US Federal Reserve has had to formally abandon any more planned three-quarter point interest rate rises this year. It has moreover had to continue the quantitative easing (QE) programme it introduced in the wake of the 2008 banking crisis, in order to keep the economy from having a sudden financial seizure.
The risks to the US housing market are currently similar to the levels seen in 2002-2003, before the onset of the sub-prime mortgage crisis according to an IMF Global Financial Stability Report published in January 2019. Years of ultra-low interest rates and loose lending by financial institutions have, once again, created a toxic mix that potentially increases the risk of a housing price collapse.
More evidence of the sclerotic state of the US economy came in April with an unexpected slide in retail sales, reflecting a fall in consumer confidence, which accounts for 70% of GDP. There were falls also in both overall industrial production and in the manufacturing sector.
Debt (sovereign, corporate and consumer) is an ever-present threat to the stability of the world economy. Rising levels of corporate debt mean that around the world companies need to repay or refinance as much as $4 trillion over the next three years, according to the OECD. Company borrowing has ballooned since 2008, and standing at $13 trillion, is more than double the level before the 2008 crash.
In the US alone, retail investors own $2 trillion of corporate debt. Falling profit margins, caused by, albeit uneven, rising US wage pressures and a world economy that is growing more slowly, is causing the most indebted businesses to run into trouble.
The pool of more risky debt is growing fastest of all, trebling in size since 2012. Such debts are now roughly equal to the sub-prime mortgage debt figure in 2007, the financial detonator for the crash which was to follow a year later. There are some other eerie similarities too, in the rapid growth of corporate debt leveraged loans, bundled up into packages by banks who sell them on to investors, who in turn subsequently engage in secondary market trading with little or no robust regulatory oversight.
China facing economic challenges
China’s entire economy is worth $14 trillion, making it the largest competitor to the US. It has grown at a 10% compound annual rate since 1980 when Deng Xiaopeng opened the door to rural businesses (township and village enterprises) and foreign firms (mainly in the coastal zones, to begin with). It is now the biggest manufacturing nation on the globe.
Clearly the transition from a fully nationalised, planned economy towards capitalism has gone a long way and can appear complete at first sight. But the rule of the Communist Party elite prevails, with substantial elements of state banks and industries remaining intact. Many of these strategically important state-owned enterprises, mostly in heavy manufacturing or energy production, have been kept alive since 2008 through heavy doses of central bank borrowing.
The state remains firmly in charge of economic management. The overall approach is top-down, authoritarian and target driven.
The CWI has described China as a unique form of ‘state capitalism’. The state’s primary concern is to maintain the economic reins and not to unleash those economic liberalising forces that precipitated the collapse of the planned economy in the Soviet Union in 1991, leading to the restoration of capitalism. Provinces like Guangdong have become the motors for developing Chinese capitalism, but the continued existence of powerful state monopolies and the control of the Party ensure that no threats to social stability will be tolerated.
The Great Recession in 2008, caused by the wild excesses of the western neo-liberal model with its largely unfettered dependence upon financialisation, was a sober warning to China, rudely curtailing those domestic voices which had sought to go further down this road.
An unprecedentedly large stimulus programme launched by Beijing both largely inoculated China from the worst effects of western contagion. It also threw an economic lifeline to the rest of the world, without which the recession may have developed into a full-blown 1930s style Depression.
Even without the dangers of tariff war with the US, China has to confront many economic challenges. The most pressing is the slowdown in its growth rate, which at 6.6% last year was the lowest since 1990. Stripped of the creative accounting that accompanies Chinese statistics for growth, it is believed the economy’s underlining trend growth rate is now just around 3%. The IMF has forecast that lower year-on-year growth will follow until 2021, the impact of which will be felt adversely both in the west and in developing economies.
Beijing has sought to reverse this dangerous trajectory in a number of ways. A new stimulus programme totalling $477 billion of loans was hurriedly brought forward in January. Alongside of this, the Central Bank cut the amount of cash that banks have to hold in reserves for the fifth time in a year, thus freeing up more liquidity. Borrowing rates for small businesses have been cut and in February interest rates were surreptitiously cut by the use of complex financial instruments.
A further economic package of stimulus measures aimed at the private sector to cushion the blow from American tariffs now seems likely, particularly in the light of April’s retail sales figure, which records a 16-year low.
Although company debt is 395% higher than a decade ago and low quality bonds now accounts for over half the total owned and traded, political fears have become paramount. The overheating of the property market in 2018 created steep price rises in the big cities, prompting concern about social unrest. Curbs on borrowing were quickly introduced to dampen the market and measures were taken to introduce additional controls over over-heating shadow banking system. But now with wages rising by only about 2% last year and sales of mobile phones static, the government is wrestling with and seeking to neutralise the rising political temperature, reflected in a growing number of bitter strikes, largely unreported but a source of great fear for the elite.
The monetary stimulus provided in 2018 appears to have had a very limited effect and export growth is being badly affected by increasingly bellicose measures launched in Washington. This is crucial for China, where trade with the US is running at around $2 billion a day.
The state has responded by tightening its grip. Government-owned firms’ share of new bank loans has risen from 30% to 70%. The private sector is being increasingly stifled. Its share of output has stagnated and rules have been enforced that insist companies must establish party cells which may then have a say over hiring and firing and key investment decisions.
The Chinese leadership is well aware that a slowing growth rate creates a perilous position for its continual rule. A senior strategist at the Chinese Academy of Social Sciences stresses that, “Without a certain level of economic growth speed, structural adjustments or economic system reform will be baseless.”
Xi Jinping will seek to steer the economy away from its dependency on investment and exports, but the dizzying growth rates over the last 40 years were initially based upon moving the population out of low-productivity jobs in agriculture into higher productivity jobs in manufacturing. That has now happened in key areas of the country. Despite spectacular infrastructural projects, cutting edge robotic and AI technologies and massive advances in science and technique, the necessary transition to a consumer-led, service-driven economy is akin to undoing a Gordian knot, given the present geo-political situation and the emergence of an America which no longer sees China as a potential international partner, but as an economic and military rival that has to be curbed.
On the international stage, Chinese influence and prestige has been massively bolstered through the multibillion-dollar ‘Belt and Road’ Initiative. This is a state-backed campaign that seeks to promote its influence around the world, whilst benefiting its economy. Huge new infrastructural links between Asia, Europe and Africa have been undertaken, all with the aim of increasing China’s levels of global trade.
In this sphere too, the US is attempting to limit Chinese expansionism. The US warns the UK of serious security consequences if it allows Huawei to have a role in participating in the 5G technology roll-out. The White House also seeks to place restrictions on the EU’s interactions with Chinese firms.
Post-2008 the world economy and inter-imperialist relations are hugely more complex than the evangels of neo-liberalism and globalisation proclaimed at the turn of the 21st century. There has been a perceptible deterioration in cross-border investment, while in both Asia and Europe the majority of trade is already intra-regional.
Relative to world GDP, trade, bank loans and supply chains have all stagnated. There is a growing contradiction between this trend and the current composition of the global financial system in which the US remains the principal banker and the principal financier. A retreat into partial regional or even national spheres of influence is one more indication of capitalism’s present cul-de-sac.
Imperialism cannot resolve its own contradictions. The period of super-charged globalisation that developed after the collapse of the Soviet Union has been partially derailed by the 2007-2008 recession. It bequeathed in its wake a new era of palsied growth rates, more open clashes between capitalist nation states, the weakening and splintering of regional trade blocs along national lines and the emergence of right populist movements. These movements demand restrictions on free movement of labour and trade and temporarily appear, to many people, to fill the void left by the abandonment of former social democratic parties.
It is not clear how far the present threats of full-blown trade war will go; whether Trump will fully deliver on his ultimatums and how China will respond. But rooted in this conflict is an ideological rivalry expressed through economics, territorial spheres of influence and military/technical imperatives. The unipolar world proclaimed by George Bush in 1990 is now a fiction and instability and competing interests between the Imperialist powers is here to stay.
What is apparent however is that only the working class internationally can bring an end to this system. It is vital in China, in the USA and everywhere else, the struggle is stepped up to confront, expose and overthrow this system. The international waves of protest around climate change show the desire and determination of millions, especially young people, to fight for something better.
Rising numbers of strikes in the US, including among workers who voted for Trump, show the potential power of the organised working class, learning to rearm itself in this new era. Socialist ideas are eagerly taken up as young people search for alternatives to capitalism. In China too, despite the totalitarian state seeking to imprison and eradicate all dissent, a rash of heroic industrial disputes, strikes and protests show that the struggle to change society can never disappear.
The 21st century does not belong to bourgeois demagogues like Trump and dictators like Xi Jinping whose decisions and threats pose such menace to billions of people. The struggle for socialism remains the key to building the new world.