As trade war threatens to crush Asian supply chains, can a solution be found at the G20?


NOVEMBER 29, 2018

As Donald Trump dusts off his knuckle duster before confronting Xi Jinping at the G20 in Buenos Aires, it’s hard not to picture a “Godzilla” movie.

The China-US trade brawl is the economic equivalent of giant monsters clashing and laying waste to entire cities – or nations. Asian neighbors find themselves cast in the role of unwitting bystanders, praying they don’t get trampled on as the presidents of China and the US lock talons and turn on the death rays.

All other Group of 20 leaders assembled in the Argentine capital can do is hope for a happy ending. The most satisfying conclusion would be a ceasefire in the tariff arms race Trump launched earlier this year. The first shots came in the form of levies on steel (25%) and aluminum (10%). Then came 25% taxes on US$250 billion of Chinese goods, followed by Beijing’s own tit-for-tat tariffs.

Escalation likelier than ceasefire

What comes next is anyone’s guess: Trump doubling the amount of Chinese goods he’s targeting; 25% taxes on cars and auto parts; 10% levies on iPhones; China threating to dump its $1.2 trillion of US Treasury debt; any number of yet-to-be-floated non-tariff barriers. Hence the importance of Trump and Xi making the most of their dinner date and agreeing to a truce.

Sadly, the odds of such an outcome aren’t great. In the days before the Xi summit, Trump signaled he’s still keen to tax every good China sends to America. Hold your breath now: That amounts to products worth $505 billion – the amount China shipped to the US in 2017.

The no-quarter trade war laying waste to Asian supply chains is, for better or worse, in Trump’s DNA.

In the 1980s, when the real estate mogul built his brand, Japan was the ravenous monster consuming American jobs. Today, Xi’s China is cast as Trump’s villain. If we know anything about this mercurial US president it’s that he needs a foe – a foil on which to blame his every challenge. Xi’s China is that and more.

Trump’s Vice-President Mike Pence also made clear in recent speeches that tackling China was a key pillar of the administration’s 2020 re-election campaign. Xi, in the meantime, can hardly afford to be seen kowtowing to a US leader who attacks Beijing on Twitter on a semi-daily basis.

So, even if we see a diplomatic tango in Argentina and the specter of détente, it’s unlikely to hold once Trump returns to his scandal-plagued lair in Washington.

If – a massive “if” – Trump and Xi want to cheer investors, they will agree to begin bilateral trade negotiations. Even better: They could both swallow some pride and join the Tokyo-sponsored Trans-Pacific Partnership.

Again, though, all that matters is what Trump and Xi do in the weeks and months after Buenos Aires.

American bully vs Asian bully

The best-case scenario may be a vague joint statement agreeing to talk more. Yet there’s likely to be little comfort here for Japan or South Korea, the two most obvious examples of collateral damage as the world’s two economic giants collide.

Even so, color Japan’s Shinzo Abe and Korea’s Moon Jae-in fascinated by the spectacle. With exports and asset markets in Asia’s No 2 and No 4 economies taking hits, Prime Minister Abe and President Moon are bracing for the worst. The supply chains on which their economies rely are increasingly in harm’s way.

Ambivalence reigns, though. Secretly, both Abe and Moon are keen to see Trump get into the ring with Xi’s government – the American bully taking on the Asia bully. One of Trump’s top goals is scuttling Xi’s “Made in China 2025” program, one promising to lavish trillions of dollars on high-tech industries that employ tens of millions of Japanese and Koreans.

A recent New York Times cartoon perfectly captures the monster-versus-monster dynamic in Buenos Aires. It depicts Trump and Xi standing atop the globe – Trump wearing a “US Bully” sweatshirt, Xi donning a “Chinese Bully” one. They’re staring down at much smaller human forms representing neighboring Asians confronted with the caption: “Pick a side!”

Trump is right on one thing, though: China is an unfair trader.

It runs circles around World Trade Organization norms, steals technology, flouts intellectual property rights, aggressively subsidizes state enterprises and runs roughshod over the South China Sea.

Its “One Belt, One Road” initiative can seem, in the words of Malaysian Prime Minister Mahathir Mohamad, like a “new version of colonialism.” Trump’s disillusionment with China is shared by many Americans, Japanese and Koreans.

The problem is Trump’s remedy. Browbeating a proud nationalist on the path to rule long after Trump returns to reality television won’t work. Yet Xi also is miscalculating if he thinks Trump will give in.

The only way out is a face-saving deal that both Trump and Xi can spin in their favor. One is surely possible in Buenos Aires – but it is not likely.

Among the many hurdles is a sliding Chinese yuan, which is down nearly 7% versus the dollar this year. Might Trump read that as a provocation and up the ante?

This week’s giant lay-offs at General Motors, a blow to Trump’s pledge to make American manufacturing great again, is another wildcard. So far, Trump has blamed Federal Reserve rate hikes for the GM challenges that his tariffs helped create.

It won’t take long for Trump to lash out at Asia, his favorite boogeyman. That should have Tokyo and Seoul fearing the next round of hate tweets from @realdonaldtrump.

Abe, Moon cower in shadows

All this leaves Abe and Moon in precarious positions. Abe has positioned himself as Trump’s best pal among world leaders. In return, Abe has received mostly grief as the trade war scuttles his six-year effort to reflate the economy.

The 1.2% growth contraction in the third quarter – and data on exports and production since – augurs poorly for the year ahead.

Moon’s own gamble on Trump is going awry, too. Though never as sycophantic as Abe, Moon wagered that Trump’s bluster could help him achieve peace with North Korea. Yet Moon’s good cop to Trump’s bad hasn’t seemed to slow Pyongyang’s nuclear program.

Moon may have assumed, too, that prioritizing North Korea over economic retooling would serve his legacy well, but as the economy slows, that bet may prove to be a loser.

Whatever the outcome of his China battle, Trump’s efforts to re-industrialize the US are an intensifying risk for Korea and Japan.

That leaves Abe and Moon with an unappetizing choice between two mercantilist giants with whom they harbor trust issues. Complicating the choice: No one can say how long Trump will be around – either two or four more years.

Xi looks set to be in place for far longer: Earlier this year, the Communist Party effectively named him president for life.

One thing that is not on the cards is any kind of joint strategy: Tokyo and Seoul are – yet again – at each others’ throats over historical issues. So expect lots of geopolitical contortions in Buenos Aires as Tokyo and Seoul mull how to pull off a balancing act for the ages – and to avoid getting trampled by the feet of the battling monsters.

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