By Alasdair Macleod – Re-Blogged From Goldmoney
This weekend, the G20 nations meet at Buenos Aires. The most important issue will be America’s use of trade policy, ostensibly to bring an end to China’s unfair trade practices. Rather, it could mark a significant milestone in the cold war against China and drive the global economy into a slump.
President Trump initiated the trade war with China. There is a widespread assumption he is pursuing his “art of the deal”, coming into negotiations aggressively to get a satisfactory compromise. Therefore, the script goes, China will be forced to climb down on its restrictive practices, technology and patent theft, and modify its Made in China 2025 (MiC2025) initiative to open it to American corporations. Trade negotiators from both sides have been working in the background to achieve some sort of progress before Presidents Trump and Xi meet at the G20 this weekend, which buoys up hopes of a positive outcome.
If so, it will be the start of a more public process, perhaps with threatened trade tariffs deferred. Meanwhile, the rhetoric on tariffs has escalated in recent weeks, as is often the case in negotiations when President Trump is involved, and particularly when deadlines loom. But there are concerns the situation is more serious than this optimistic version of events would have us believe.
This article briefs readers about the bigger picture behind this trade spat, which is just one battle in an ongoing financial conflict between China and America. Worryingly, it takes place against a deteriorating economic outlook for the world’s largest trading bloc, the EU.
The trade tariff position
American sources have been upping the rhetoric against China’s trade ahead of the G20 both generally and specifically. For example, the US has accused China’s Huawei of planting spyware in electronic equipment. Huawei is a major global telecoms manufacturer and a leader in the development of 5G mobile technology, set to become more important to data transfer technology than broadband, and the Americans obviously want to shut them out of this market.
It was widely believed the Trump administration pursued a tough stance against China’s unfair trade practices to maximise the Republican’s success in the mid-term elections. If so, it was a policy that failed, with the Democrats gaining 38 seats in Congress. In any event, the mid-terms are no longer relevant to American trade policy, if they ever were.
The wider trade concerns expressed by America are over access to China’s markets for American corporations, the protection of intellectual property, and exclusion from MiC2025. But with MiC2025, it is a case of the American pot calling the Chinese kettle black, because America is also increasingly protectionist. However, there are small adjustments China can make to seek a trade resolution, for example modifying or dropping clauses limiting foreign involvement in key industries. Furthermore, there are pressures on the American side to seek an accommodation with China from both American-based multinationals with cost-effective supply chains in China, and from financial markets which have nose-dived in recent weeks. Add to that the soya farmers in the US, and resolving trade disputes should be a no-brainer.
Assuming a positive outcome, we can then expect that China’s economy, which has become a material driver for global economic growth, will have significant negative pressures lifted from it. The yuan will then rally, and with it a decent recovery in US stockmarkets will surely follow. US stockmarkets are important to Trump, having hitched his wagon to them. Surely, he would like to see higher stock prices. China would also welcome a trade deal. In China, the uncertainty is affecting the availability of bank finance for private sector manufacturers and undermining consumer sentiment.
With MiC2025, China wants to catch up with the West when it comes to manufacturing technologically-advanced products. Its objective is reasonable. MiC2025 has singled out ten sectors for government support, from robotics to transport, to new-generation IT, to bio-pharma. By encouraging development in industrial sectors, China is doing what all other governments do, including the US, and the US surely knows it.
Therefore, if trade is the genuine concern, all reason suggests a positive outcome from this weekend’s G20 will occur, the yuan will rally as will Wall Street. And President Trump will be praised by American industry and financial markets for his successful negotiating strategy.
There is a deep problem with this analysis, which was exposed at the Asia-Pacific Economic Cooperation summit in Port Moresby, capital of Papua New Guinea two weeks ago. For the first time ever, APEC broke up without a joint communiqué. It was also reported that the police were called after Chinese diplomats tried to force their way into PNG’s foreign ministry. Geopolitics overshadowed trade issues with tensions boiling to the surface. US Vice-President Mike Pence accused China of debt diplomacy, whereby China was creating debt slaves of the smaller nations.
It was in short, a diplomatic disaster. It was also a timely reminder that there is a bigger picture, with America determined to limit Chinese expansion. The politics included criticism of China’s annexation of reefs in the South China Sea as well as the “debt slave” issue. The US, in conjunction with Australia, promised to develop a naval base at Lombrum on Manus Island, about 350 km north of PNG. Furthermore, the US has agreed with Australia and Japan to spend some $2bn improving PNG’s infrastructure, including electricity.
Doubtless, the US feels it has now bought PNG’s cooperation in its cold war against China and prevented China’s exploitation of PNG’s resource potential. It hopes to have called a halt to China’s economic expansion into the South Pacific. Australia will also have greater security from her largest customer, if it is needed in future.
Another delicate issue is Taiwan, with America sending two warships through the Taiwan Strait in a move seemingly designed to provoke China. So those hoping for a positive outcome from the G20 might like to note that it is at odds with the way America is moving on the Pacific chessboard.
The world is changing
In any attempt to divine the economic future, it is a mistake to think only in terms of China and America. The largest economic bloc by GDP is the EU, and it has also been cast into a trade and political never-never land by President Trump. The EU is losing its security blanket, which has always been provided by the US through NATO. It is now planning its own army, which will almost certainly take over from NATO in the longer term. Trade differences with the US have been put on ice but are still there.
The EU’s approach to trade is deeply protectionist, having imposed over 12,500 tariffs on imports into the EU. Additionally, Brussels regulates to the micro level what products can be sold within the EU. So, in the case of Huawei’s 5G technology referred to above, the battle in Europe is less about security issues (though they are always there) but more about influencing or responding to the regulatory regime, which is effectively controlled by its European competitors based in the EU.
In this context, Britain losing all her power to restrain protectionist instincts in the EU is crucial. The UK has been the driving force in supporting liberal trade policies against protectionist France and Germany, and following Brexit that is now no longer the case. The EU is bound to become increasingly inward-looking as a consequence of Brexit, increasing both tariffs and regulations. Add to this a developing euro crisis, with interest rates stuck below the zero bound, and it is hard to see how the EU will not resort to increasing state control of both money and trade.
From China’s point of view, the time when her export business drove her economy must be in its sunset phase. Even if a trade agreement with the US is achieved in the coming months, there’s no guarantee Trump will not renege on a deal. China’s leadership had planned for this some time ago, with a state-induced shift of economic emphasis away from export dependency. Instead, there is a strategic move towards a more service-oriented economy, with better infrastructure and improved living standards for a rapidly growing middle class. But the pace of this strategic change is being swiftly overtaken by events. Therefore, China’s leadership needs to accelerate its plans in the light of both President Trump’s trade and security policies, and the knock-on effects of Brexit on EU trade policy.
The implications for global growth are undoubtedly negative, even dire. If China accelerates her plans towards a service and technologically driven economy, it is bound to lead to a temporary rise in unemployment from its redundant export industries before labour is transitioned to the new. The social consequences could become destabilising.
In the US, the problem is a potentially stagnating economy coupled with rising prices, fuelled in part by tariffs on imported goods. Only this week, Trump made it clear not only is he prepared to increase tariffs from 10% to 25% on $200bn of Chinese imports from 1 January but is prepared to extend tariffs to all Chinese imports. The walking shadows of Smoot and Hawley once more strut and fret upon the global stage.
It may be the art of the deal, and President Trump displays the bravado of someone who has his opponent on the run. If so, he risks the enjoyment of the chase while ignoring the collateral damage. But the threat of tariff-inflated prices cannot be ignored by the Fed. If President Trump refuses to find a means whereby China can save face, which is rapidly becoming the single most important issue this coming weekend, the prospects for not only China’s economy, but that of the US and the EU as well, will rapidly deteriorate.
Brexit – where to from here?
The deal has been agreed, subject to Parliament. Mrs May now has the uphill task of selling the deal to MPs. The overwhelming majority who have expressed an opinion including both Remainers and Brexiteers have condemned it. As has President Trump. She will be praying for no further asides from him at the G20 in Buenos Aires.
The vote is scheduled for 11 December, after a five-day debate. The Government’s tactic is to rely on Mrs May’s deal being the only one on offer, the alternative being the supposed abyss of a no-deal. The risk to this strategy is that Brexiteers expose the choice as being false and that Mrs May should go back to Brussels and renegotiate. The EU stands ready to reaffirm they will not accept any other deal to cut off this option.
The Treasury and the Bank of England have cranked up their economic and financial models again to forecast maximum disruption in the event Parliament fails to support Mrs May’s deal. However, in the Commons, the Treasury backed off from its responsibility for its post-Brexit forecasts, saying it was based on analysis involving a wide range of government departments. One is left wondering why the Treasury Secretary felt unable to give it his wholehearted support.
The Bank of England has been less delicate in its approach, by claiming we are all doomed. The result after only one day of airing its forecast is a loss of public credibility for the Bank and particularly for Mark Carney, its Governor.
The frighteners extend to a hodgepodge of claims of many things vital to life and employment, put together by government quangos[i]. Shortages of medicines, transport disruption, chemicals for water purification and many more are all documented in eighty different official papers. The deceit is to assume these supplies are provided at an inter-governmental level, and not by profit-seeking businesses, which would surely do everything in their power to secure continuing sales. The Port of Calais is expected to cut off its nose despite its face and turn away traffic.
This line of propaganda seems to be an irresistible line of attack for the Government, accustomed to frightening the populous into a preferred course of action. This is despite the failure of this tactic ahead of the Brexit referendum, when the public decided it was a stinking rat.
What is the deal, and why the fuss?
Britain leaves the EU on 29 March next year and under Mrs May’s plan enters an implementation period when there is no change in current trade arrangements, until at least 1 January 2020. After that, if the trade agreement is not in place (highly unlikely – it takes years to get the EU to agree to trade deals), Britain can either extend the implementation period for a time, or the backstop on the Irish border will be implemented.
The backstop ensures the Irish border would remain open to EU trade, as it is today, until a trade agreement is finally agreed and implemented. Until then, either the whole of the UK continues to be in the customs union, or Northern Ireland alone remains in it, effectively putting a border down the Irish Sea. The backstop, if it is implemented, can only be turned off “when we have fulfilled our commitments on the Irish Border.”[i]
The agreement states that both the EU and the UK will use best endeavours to reach a trade agreement. But given it can be blocked by EU member countries which are not a party to the agreement, this reassurance must be worthless. Even before the ink was dry, Spain forced concessions on Gibraltar, and President Macron of France made it clear France would withhold its consent to a trade agreement if French fishing vessels were denied fishing rights in British waters.
The problem with the agreement is that by not agreeing, EU member states can ensure, in the words of Boris Johnson, Britain remains a vassal state. Worse than that, with this agreement it is a zombie state, a walking-dead captive of the customs union.
Even the Remainers don’t like it, because it is as plain as a pikestaff that Britain is in a far worse position with this agreement than it would be remaining in the EU. It is chained to the customs union with no influence over the regulations imposed upon it. Accordingly, Remainers of all parties are united in the call for a second referendum, which they hope will reverse the first, allowing Britain to remain as a full member of the EU. But to concede a second referendum would be unprecedented, and also an admission of failure by the government. Furthermore, it would take months to go through Parliament, time which it does not have. With no practical alternative, many prominent Remainers are expected to vote against the agreement.
For the Brexiteers, it is already an admission of failure, particularly since the Prime Minister always refused to consider a Plan B. Britain has agreed unconditionally to pay the EU £39bn as the divorce settlement and will continue to pay into Brussels the annual tribute of roughly £9bn until the new trade terms are agreed and implemented (which could be never). While the agreement generally limits the European Court of Justice’s powers to adjudicate on trade and related matters, it means Britain does not have control over future trade arrangements during implementation and backstop periods, and it will be impossible for Britain to strike her own trade deals until that time has passed. Hence President Trump’s remarks.
We have confirmation it is Hotel California: you can check out but never leave. The deal is so unpopular that already the media are saying it will never get through Parliament. The Daily Telegraph has aggregated various sources of information to estimate 221 MPs will vote for it and 418 against.[i] But much can change in a short fortnight.
Let us look at it from Downing Street’s point of view, to try to understand the Government’s strategy. 96 Conservative MPs have said they will vote against, out of a parliamentary party of 314 (excluding Speaker Bercow). The Democratic Unionist Party, with ten MPs who provide the Conservatives with their slim Commons majority, have also vowed to vote against it. The Labour Party with 257 MPs have said they will vote against it, but there are perhaps 60 Labour rebels. The Scottish National Party has 35 MPs, who will also vote against it. Liberal Democrats, with 12 are probably against it, but may not be united on the threat of no deal.
That leaves 216 Conservatives likely to support the Government (including 94 Ministers), perhaps 240 after the whips have done their work. 74 MPs from the other parties are then required, at least 60 of which must be Labour MPs. It is worth recalling that 64 Labour MPs defied the Labour whip over an amendment tabled to remain in the customs union last December, close to the number of Labour MPs required to rebel this time for Mrs May to win the vote. And that’s assuming Labour isn’t persuaded to abstain, which would guarantee Mrs May gets it passed by a comfortable margin.
Clearly, the key to success is Labour’s intentions, which is why Downing Street is wooing their MPs. However, two weeks ahead of the vote, talk of a heavy defeat for the government looks, on Downing Street’s likely assessment, wide of the mark.
All this assumes Labour will resist the temptation to topple Mrs May and create havoc for the Tories. That is a big assumption, because it is definitely in Labour’s interest to defeat the government to see what opportunities might arise. Consequently, while the Downing Street assessment may turn out to be too optimistic, the Brexit camp cannot afford to be complacent.
The Brexiteers will concentrate on mustering as much support as possible to reject the proposed agreement. They already have the ten DUP members on side, and 96 Conservatives who have said they will vote against. They need to work on the other 218 Conservative MPs, of which 94 are ministers, leaving a pool of 124 possible votes.
It would help their case enormously if more Brexit-supporting ministers resigned from the government ahead of the vote, so they are likely to be privately encouraged to do so. This would benefit the Brexit cause by fatally undermining the Government’s claim that the agreement is in the spirit of Brexit.
Brexiteers will also have to build cross-party alliances. Above all, they must come up with an alternative strategy acceptable to both Brexiteers and Remainers to force the Government to return to Brussels for better terms, despite Brussels saying the only alternative is no deal.
To achieve the necessary parliamentary support, Brexiteers are likely to focus on the least contentious issue, being the failure to achieve total parliamentary sovereignty in the draft agreement. Even Jeremy Corbin and others on the far left of the Labour Party can agree on this, because they want to be free from all Brussels regulations so that they can nationalise and subsidise unionised industries.
Sovereignty is the one issue the Government cannot argue convincingly, which is why it deflects the issue into one of taking control of immigration. The economic effects, which are a transitional problem, are less important to the bigger picture, but are more immediate to the electorate. For these reasons the Government is focusing on the economic effects, promoting hypothetical problems that grab the headlines and divert attention from the sovereignty issue.
The scope for half-truths and downright deception is enormous and is being exploited by both the Government and allegedly independent analysts. In the last few days, we have been told that stockpiling food has left Amazon short of warehouse space. This follows earlier assertions from Barclays Bank research that extra tariffs on food and drink imports could cost £9.3bn per annum, leading to higher food prices.[i]
This must assume the Chancellor imposes, Trump-like, yet higher import tariffs on food than the ones being dropped on a no-deal Brexit. It might assume sterling will crash (we’ve heard that one before) but ignores the possibility the euro will fall even more. These scare stories are easy to counter and should be given no credence, but the media is always more likely to take as gospel truth the information spoon-fed to it by background government briefings, while questioning reasoned argument from Brexiteers with relative scepticism.
Mrs May’s future
Press reports suggest that Downing Street believes that if the vote is not passed, Mrs May could probably survive if it is rejected by less than a hundred votes. Any more than that, and she is toast.
This is probably too simplistic, and ignores the fact that David Cameron immediately resigned when he lost the Brexit referendum, irrespective of margins. It also relies on the ten DUP MPs continuing to give her a majority, which they have already withdrawn. If she relies on Labour votes, having failed to get sufficient support from her own party (which Downing Street is already doing), she will be ejected whatever the outcome. For the moment, everyone is being very polite, saying she has admirable qualities of perseverance and determination against all odds. And don’t we all love a fighter. This can rapidly elide into being pig-headed, domineering and deliberately misleading.
Act too early, and MPs who wish to ditch her will be accused of disloyalty and naked ambition. Furthermore, Brexiteers do not have control of the agenda. For these reasons, rival candidates for the leadership remain in the shadows. But they will be watching for that change of emphasis, which is likely to come in the wake of the Commons vote, if not before.
The only way Mrs May can save herself and the integrity of the Conservative Party is to cancel the debate and tell Brussels it simply won’t wash. She must remind them of the consequences of their rejection of David Cameron’s demands, and tell them they will have to come up with better terms, otherwise it is no deal.
Will she do it? We shall see. She has some leverage, if she can understand it. Brussels is bust and needs money urgently. The knock-on effects of a no deal might be unpredictable for the UK, but, and this is the point few have taken on board, it would be catastrophic for the EU.