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Trade war and more

May 09,2019 - Last updated at May 09,2019

US President Donald Trump is playing hardball with China over trade, and the worry-warts are fretting that he is going to start a real trade war by accident. The bigger threat, however, is that he will push first China, and then the whole world, into a deep recession.

It has 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 US-China trade deal was almost done, but then, according to Washington, China started to “renege” on parts of the deal they had earlier agreed to. Washington is probably telling the truth about that: it is 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. On Friday, according to his twitter-storm last Sunday, 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. 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 Donald Trump to recognise the smell of fear, and he is right: the Chinese are terrified. But he knows nothing about trade or the Chinese economy, so he does not 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.


All four corners of almost every major intersection in the hundred 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 whatsoever to sell off the currently unsold housing stock.

And the building is still going on, albeit at a somewhat slower pace. The vaunted 6 per cent annual growth in the Chinese economy is just creative accounting. At least half of that is actually spending on white elephant projects, like the dark towers that create employment, but will never produce an adequate return on investment.

Meanwhile, the real Chinese economy, annual growth rate between 2 per cent and 3 per cent, is slowing to a near-stall. Last year, for the first time in a quarter-century, new car sales in China actually fell by almost 6 per cent. A big hit to its exports to the US, its biggest single customer, could tip it over the edge.

China is now such a big player that the rest of the world economy would probably follow it into a recession, and it would be much worse than the usual couple of years of slow or no growth, because none of major players has really recovered from the last recession yet.



So 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?


And something else might happen too. 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?


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