“Here is a story that should seem familiar. A great power, unsurpassed in military might and technological prowess, exports its free-trade economic model throughout the globe. Borders collapse, distance shrinks and the world seems smaller. But [then] another power rises — one whose dominance is built on a system of economic nationalism and [a state-directed] industrial policy. As [the latter] flourishes, the first stagnates, sparking a conflict that leads not only to war, but to a decade-long decline in global trade and financial assets. I’m referring of course, to the last wave of globalisation involving Great Britain and Germany, which eventually died with the first world war and the Great Depression. It was a boom that lasted nearly eight decades, during which global trade and financial openness nearly doubled. Yet as the Bank for International Settlements put it in their 2017 annual report, “the collapse of the first wave was as remarkable as its build-up”, resulting in “an almost complete unwinding” of cross-border trade and financial flows.”
So writes Rana Foroohar in the FT, adding, “Markets did not see it coming. And at the risk of being a Cassandra, I wonder if they aren’t just as oblivious to what is happening today with the US and China. The conflict between these great powers has obvious similarities to the earlier story, not just in terms of opposing economic models and rising nationalism, but also in the boom-bust timeline”. She makes a good point.
Of course, today’s US determination to cut China down to size is mostly one being played out in terms of a ‘grand teasing apart’ of the global sphere – out into a US one, and separately, to an ostracised, Russo-Chinese economic space. And it is accompanied by a radical hugging-close of technology, of a widely-defined national-security industrial sphere – with all its parts bound together, under America’s dollar, energy and military hegemony.
Yes, it can be called ‘de-globalisation’, but it is becoming more than that: It is an ‘extrication’ from something that was hitherto fused together – a complex rhizome structure. A pulling apart of a knotted, tangled economic and political root system. Whatever one’s attitude towards globalization – good or bad – America’s way of waging its MAGA war on China likely will have unintended sequelae that may well lead to some last century style pain and disruption.
This is the point. It is not that Britain and Germany ended at war with each other – and to suggest that the US–China tensions it will end similarly. No. Neither is it that a long period of global trade expansion seems today suddenly to be coming to an end (“borders collapse, distance shrinks and the world seems smaller”).
That might be so: but rather, it is that the hugely disruptive economic consequences described in the FT article flowed from a clear pattern of events: In the first case, Britain was determined to stop the rise of a powerful Germany (firstly, by squeezing her hard in a vice of hostile alliances; and then ultimately, crushing her, with the combined military might of Britain, Russia and the United States). In the present case, the US is wholly determined to cut China down to size: firstly, by putting China under technological and IP boycott; and secondly, by the US re-arming massively.
We can recall that much of the disaster that was the German economic situation after WW1 flowed from the printing of money in Germany in order to rearm in an arms race, ahead of WW2.
Secretary Pompeo, in his recent European tour, came close to giving Europeans an ultimatum: ‘Include Chinese 5G technology in your state infrastructure – and you will lose having any American technology alongside it’ – With us (against China), or (with China) against ‘us’. Revised US foreign investment screening and export control laws, especially as applied to ‘emerging and foundational technologies’, ultimately will break significant linkages between the United States and China.
Europe is being pressed to side with the US in this Cold Economic War against Russia and China. And in order to compel Europe in this direction, the US is prepared to split the EU, taking the East into its anti-Russia, anti-China polarization, in order to get its way.
Ian Bremmer and Cliff Kupchan of Eurasia Group argue that the first consequences of this new ‘war’ polarisation already are being felt:
“Tariffs are already forcing US firms to shift portions of their supply chains out of China—to Southeast Asia, Latin America, and in some cases back to the US. The decoupling will accelerate as political and financial pressures drive more US production, including potentially complex final assembly, to politically safer markets.
“The countries [US and China] are parting ways. Equally important, US efforts to increase scrutiny of Chinese STEM students and workers, and to limit or reject their US visa terms and applications, will reduce the flow of creative talent into the US. Likewise, it will limit the flow back to China of engineers and entrepreneurs with US experience. This trend will disrupt the innovation talent pipeline, with unforeseen ripple effects in key technology sectors.
“Then there's the “tech-lash”: Digital regulation is mushrooming around the world as governments—facing a public backlash over privacy and concerned about foreign influence operations waged over social media—slap taxes on Big Tech and restrict the flow of sensitive information across borders. Brazil, India, and even California have all adopted or are considering legislation that draws on, or in some cases goes beyond, Europe's tough data protection rules.
The point here is that US and Chinese supply chains and technology cooperation will continue to fragment and pull apart from each other’s sphere – even were US tariff threats to recede. Tariffs are but one dimension of the American campaign to block ultimate Chinese ‘primacy’.
Increasingly, this (albeit economic) ‘war’ is now being framed in terms of American military national security. And history tells us that when national security interests predominate, they consume more and more of the economy – and governments too, intervene and control more and more. A messy, contested tech divorce will create problems for tech companies; it will raise costs (finding and establishing replacement supply lines); and will incur a growing regulatory, security and privacy compliance oversight burden, to boot.
This might be manageable (just) if this war were confined to technology alone, but it is not. Trump’s aim here, simply, is to force US companies to switch away from China – and to curtail China’s economic prospects. The US will continue to use non-tariff barriers, investment restrictions, export ‘ring-fencing’, financial sanctions, and criminal indictments to achieve its aims. It will extend to energy and information too. It already has. (Recall that Britain initially tried to weaken Germany economically, by blockading food transiting through the North Sea. The US supported the blockade.)
But perhaps the worry most likely to arise from past precedent will be Trump’s insistence on full-spectrum, US military re-arming. He has promised to out-spend and out-innovate all rivals on a revamp of weapons systems, and is engaged in shaking the US free from all and any restrictions, stemming from earlier weapons limitation treaties.
In this connection – just last week – something most significant occurred. As Gillian Tett of the FT reports: “Beth Hammack, a senior Goldman Sachs banker, who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven Mnuchin, Treasury secretary – with a bombshell at the bottom”. She continues: “According to TBAC calculations, America will need to sell an eye-popping $12 Trillion of bonds in the coming decade. This will “pose a unique challenge for the Treasury”, Ms Hammack warned, even “without factoring in the possibility of a recession”. In plain English”, Tett continued, “the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries?”.
This – just to be clear – will be the US borrowing requirement, before even Trump raises a finger on his major upgrade of America’s weapons systems. The Advisory Committee further warned that deficits typically rise 2-5% of GDP in recessions, which would translate to additional deficits of $0.5-1trn at current GDP levels; and warned too that "these borrowing needs [would all] have to be financed in the context of already high global dollar debt exposure."
Lest the full gravity of this message is missed, Tett adds that “this week, one of America’s biggest hedge funds privately concluded that – in five years’ time – the Treasury will need to sell bonds equivalent to 25% of GDP, (up from 15 % now).” “This level of debt has occurred just twice in the past 120 years, first during the second world war and then again during the 2008 financial crisis. The first time, the US government forced private domestic savers to buy its debt via a patriotic propaganda campaign and financial controls. The second time it relied on its central bank’s balance sheet via quantitative easing [i.e. ‘printing’ money].”
“Because of the size of the US economy and markets … it will require about a 6 per cent shift in global asset allocations” to absorb the debt, this hedge fund warned …“What if investors don’t want to make that shift?”.
An important question. But Trump has taken up the major military revamp banner with characteristic MAGA nationalistic bravado. And now hardly a day passes without China being described to Congress as “the greatest long-term strategic threat” to US. The Military Industrial Complex, Congress and the Beltway – all of them have the bit between their teeth. The pork-barrel dollars will fertilise all fifty states, be sure of that, and Congressional ‘eyes’ are already fixed on that juicy prospect. No way this will be walked-back completely.
But, back to that ‘eye-popping’ TBAC bombshell, it must be understood against the backdrop of the dollar share in global foreign exchange reserves falling from 70% in 1999, to about 63% at the end of 2017 – and global trade, as a share of world GDP, seeming to have peaked.
China is now running a flat current account with the rest of the world.
Yes, that’s correct: in August, a historic event occurred: for the first time in its modern history, China's current account balance for the first half of the year, had turned into a deficit. And just to be very clear: no trade surplus – equals no Chinese financing of the US debt. They haven’t anyway – for some time now.
So, putting all this together: The US psychologically and politically cannot, or will not, walk-back the promised revamp of US weapons systems: “out-spending, out-innovating” all (though some of it, in the end, inevitably may be trimmed a bit) – the ‘threat’ has been hyped too far, now. The die is cast. But there are no foreigners buying US Treasury debt now – after seven decades in which they have funded US deficit spending. And what then does happen when, in a short period of time, the Treasury has to sell fiat debt equivalent to 25%–30% of US GDP (possibly in mid-recession, when government expenditure automatically rises)?
The US fiscal space will not just be crowded out; it will be overwhelmed. No money for the activist new intake of Democratic radicals, such as Ocasio-Cortez, to fund social projects. The strains on party unity will be obvious. But no money for ‘crumbling’ US domestic infrastructure, either. No money to fill the gap on under-funded pensions. Social stress will spike.
Inevitably, the US Treasury’s dollar printing presses will run red hot. And confidence in the dollar will sink. And it is not to be Foroohar’s “Casandra” to point to earlier experience of what may happen (did happen), when one erstwhile dominant state determines to stop the rise of a challenger – by all means available. Is it too late for Trump to pull-back, and settle just for selling China lots of Soya beans and some LNG? Probably.
Photo: Flickr
