Dyer: Trade war between U.S. and China would be bad far all

U.S. President Donald Trump is playing hard-ball with China over trade and the worrywarts are concerned he is going to start a real trade war by accident.

The bigger threat, however, is that he will push first China, then the whole world, into a deep recession.

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It’s been 10 years since the last recession (2008-2009) and that one was a doozy.

Recessions tend to come around once a decade, so one is due about now anyway — and the Chinese economy is so shaky that almost any serious shock could topple it into the pit.

The rest of the world would follow.

A week ago, according to both sides, the U.S.-China trade deal was almost done, but (according to Washington) China then started to “renege” on parts of the deal to which it had earlier agreed. Washington is probably telling the truth about that as it’s practically standard in the closing stages of any negotiation with the Chinese government.

So, Trump responded by imposing heavy new tariffs on Chinese exports, to come into effect in less than a week’s time unless they back off.

According to his Twitter storm last weekend, the existing tariff of 10 per cent on $200 billion of Chinese exports to the United States will more than double to 25 per cent.

Trump said another $325 billion of currently untaxed Chinese exports to the US will face 25 per cent customs duties “shortly.”

Decades of experience in the Manhattan real estate market have taught Trump to recognize the smell of fear. He is right. The Chinese are terrified.

But Trump knows nothing about trade or the Chinese economy, so he doesn’t understand the implications of that.

(This is a guy who boasts that the Chinese are having to pay these new tariffs. It is, of course, the American importers who pay.)

Chinese leaders are terrified because their economy is already trembling on the brink of a major recession.

They dodged the last one in 2008 by flooding the economy with cheap credit and setting off an investment boom that kept employment high, especially in construction.

But that trick only works once.

All four corners of almost every major intersection in the 100 biggest Chinese cities are now occupied by dark towers, 40- or 50-storey apartment buildings with few or no occupants.

It would take an estimated four years with no new construction to sell off the currently unsold housing stock.

And construction continues, albeit at a somewhat slower pace.

China is now such a big player that the rest of the world economy would probably follow it into a recession.

It would be much worse than the usual couple of years of slow or no growth because none of the major players has really yet recovered from the last recession.

The main way governments fight recessions is by cutting the interest rate, but that rate is still near zero in most big economies from the drastic cuts in interest the last time.

Moreover, government debt is much higher than it was a decade ago and there would be no public support for bailing out the banks yet again with taxpayers’ money.

“We’re in much worse shape to deal with whatever shocks come along than we were 10 years ago,” Nobel Prize-winning economist Paul Krugman said in a recent Bloomberg interview.

China is in particularly bad shape. Its total debt, even according to the untrustworthy official figures, is nearing three times its GDP, which is when the alarm bells usually start ringing.

What happens if Trump’s huge tariff hikes do not force an immediate Chinese surrender on whatever issues remain in contention in the trade talks? What if Chinese president Xi Jinping and his people decide to tough it out rather than lose a lot of face?

What is quite likely to happen is that China slides into a huge recession, dragging the rest of the world behind it.

And something else might happen.

The Chinese version of the social contract is that the power and privileges of the post-Communist autocracy that runs the country will be tolerated as long as people’s living standards rise rapidly.

But they are already stagnating. How would the Chinese public react if living standards actually begin to fall?

Really badly, in all likelihood.

We live in interesting times.

© Kamloops This Week


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