Trump’s tariff thunderbolt strikes a world with proven resilience 

The WTO may be weakened, but a pragmatic resistance to protectionism among other nations could save world trade 

 Donald Trump’s disdain for the WTO and the system it represents are dramatic, but the US’s attachment to it was always somewhat transactional .

 It is tempting to see Donald Trump and his wrecking policies on trade as a destructive thunderbolt from a clear blue sky. Certainly many of his domestic policies, even compared with his first term, have taken a sharper and more definitive turn towards the extreme. 

 In the case of trade and globalisation, however, there is perhaps a little more continuity, not just with his first time in office but with previous US administrations. Regardless of whether it was actually reflected in broad US public opinion, there were clear strands of thought in US politics which had already begun to treat trade deals and often trade itself as toxic. 

 Trump’s tariffs are the most extraordinary act of far-reaching protectionism since at least the Great Depression, but there has been a latent inclination in US politics towards blaming trade for everything that has gone wrong with the US economy and society.  The effect of Trump on the global trading system and particularly multilateral institutions like the World Trade Organization is likely to be profound. The US was instrumental in setting up that system and was traditionally one of its most active users. Its departure from rule-setting, and even more the direct effect of its tariffs and other interventions on world trade, are the system’s biggest test since the Depression.

There are, however, several causes for optimism that Trump’s measures will not prove anything like as destructive as the high US tariffs of the early 1930s which set off a spiral of protectionism. 

Firstly, no other major economy, including the US’s great commercial rival China, has the same huge political aversion to globalisation. Unlike the 1930s, other economic policy institutions, particularly central banks, have tools to cushion the impact of a trade shock and prevent it from deepening a global recession. And the lesson of the 35 years since the post-cold war wave of globalisation took off is that actual trade — not just cross-border movement of goods, but also of services, foreign direct investment, capital, people and data — has proved resilient to a whole variety of shocks. 

 While Trump’s disdain for the WTO and the system it represents are dramatic, it also remains the case that the US’s attachment to it was always somewhat transactional. When the WTO was created in 1995 out of the more informal General Agreement on Tariffs and Trade (Gatt), there was suspicion in Washington right from the beginning that it was creating a system of supranational law which would reduce the US’s sovereignty.  

 In particular, although the US was an active user of the WTO’s dispute resolution system and won many cases, there was resentment particularly on Capitol Hill over rulings that seemed to interfere with the US’s right to tax and its ability to deal with unfair trade practices as it saw fit. Once the negotiating function of the WTO seized up in the 2000s — it has never completed a broad and deep multilateral agreement — the US became increasingly disillusioned. 

 It was Trump’s first administration that froze the dispute resolution system by refusing to approve new judges. But his successor Joe Biden thereafter continued the same policy, his administration insisting that it would be willing to unfreeze the mechanism only if the rest of the WTO’s membership would agree to changes that other countries said it never properly got around to articulating. 

 Today, the WTO still struggles to conclude large-scale binding agreements, even among a subset of membership — in part due to India’s obstructionism, driven by its own institutional grievances and political calculus. 

Still, a coalition including the EU, China and Japan has created a workaround dispute mechanism to keep things moving. The same kind of pragmatism might well save global trade itself as well as its formal mechanisms of governance. Doomsters have been talking for a long time about the global trading system splitting into geopolitical blocs, perhaps two centred on the US and China or three if there is also a grouping led by the EU. There has certainly been some movement in that direction, according to studies by the WTO and the IMF. 

 The first Trump administration put hefty tariffs on China, which certainly diminished bilateral trade between the two. But the IMF has also talked about the emergence of “connector countries”, especially emerging markets such as Vietnam and Mexico, which managed to trade with both the US and China. 

 The Biden administration made more subtle and targeted attempts to pull other economies, particularly its foreign policy allies, out of China’s economic and technological orbit, especially in areas like electric vehicles. But even its supposed close allies such as the EU preferred to operate in both the US and Chinese orbits. 

The Trump administration’s attempts to force countries to cut China off as the price of reducing threatened tariffs is similarly unlikely to work. The threat from Trump to world trade is undoubtedly the greatest since the second world war. But assuming that the US’s tariff pathology is also infecting the rest of the world looks like a mistake.

Quite surprised so many countries peg their currencies:

 And I'm not sure about all the conclusions herein, but some of it is very interesting:

Dollarization: Do Stats Reveal a Threat from BRICS Economies?

The US dollar is losing its influence. Many countries are ready to embrace a multi-currency global future.

Zviad Khorguashvili

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November 13, 2024

In recent years, global politics have undergone considerable shifts. The COVID-19 pandemic, coupled with Russia’s war in Ukraine, has intensified the polarization of nations across the globe. Once seen by Western countries as a difficult yet possible partner, Russia’s standing drastically changed after Putin’s decision to invade a sovereign nation—first Georgia in 2008, then the annexation of Ukraine’s Crimea in 2014, and finally the full-scale invasion of Ukraine in 2022, which continues to this day. The last invasion marked the boldest attempt to alter European borders since World War II, cementing Russia, alongside China, as a principal and immediate geopolitical adversary to the West.

This growing polarization, worsened by mismanaged Western sanctions and delayed aid to Ukraine, has prolonged the conflict. Meanwhile, BRICS and potential members, many of whom are authoritarian regimes, have been strengthening alliances between each other. While Egypt and the UAE are US allies, most BRICS members see Western nations as adversaries.

What is going on global market:

Currently, the US dollar makes up 58 percent of global currency reserves and 54 percent of export invoicing. Together, the US and EU dominate over 80 percent of global reserves. Since the war in Ukraine, however, the renminbi has overtaken the dollar as Russia’s most traded currency, and Russia now holds renminbi and gold as its primary reserve assets. In the past two years, China and Russia have expanded currency swaps to boost trade, and Russia increasingly relies on CIPS (China’s Cross-Border Interbank System) after being cut off from SWIFT.

US dollar and Euro Share of Global Foreign Exchange Reserves, %. 2016-2024

(Source: International Monetary Fund)

Since the 1990s, China’s economic expansion has been nothing short of extraordinary. By 2001, it had overtaken Japan, which had long held the position of the second-largest economy. China’s growth didn’t stop there; in 2017, it surpassed the United States when measured by purchasing power parity (PPP), a significant milestone that underscored its rapid rise on the global stage. Although the US economy is still 54 percent larger when measured in nominal terms, evaluating economies through the lens of PPP also provides a good comparison of their size and standard of living for the population. This method adjusts for differences in price levels between countries, offering a more realistic perspective on what the two economies can produce and afford. Consequently, while the US maintains its nominal lead, China’s position in terms of PPP highlights its significant global influence and the shifting balance of economic power.  

China – new global power?  

GDP of China, United States, European Union, Russian Federation and Japan. PPP (Constant International $), billions. 1990-2023

(Source: World Bank)

It is true that nominal GDP reflects a country’s ability to buy goods internationally and we should also look at those GDP statistics. But it also shows that if the current trend continues, the US will lose the first place to China in the near future.

GDP of China, United States, European Union, Russian Federation and Japan (Current US$), billions. 1990-2023

Recent sanctions from The United States and western allies highlighted the vital role of gold as the most secure and stable asset a country can maintain in its reserves. When Western nations imposed sanctions on Russia, freezing assets like foreign currency reserves and restricting access to global financial systems, gold emerged as the one resource they couldn’t confiscate or block Russia from using. This emphasized gold’s unique position as a safeguard against sanctions and geopolitical uncertainty, offering protection in times of increased global tension.

As a result, many authoritarian regimes, particularly within BRICS nations, have been boosting their gold reserves as part of a broader effort to shield their economies from potential external threats. This trend reflects the growing understanding that, in an era where economic sanctions are frequently employed as geopolitical leverage, holding large gold reserves ensures a degree of economic independence. Consequently, these countries are focusing on gold as a way to reduce their reliance on the US dollar-based financial system and secure their financial resilience against future sanctions or global market upheavals.

Does the future lie in gold?

Gold Holdings. 2018=100
(Source: Atlantic Council, World Gold Council)

The shift toward gold and de-dollarization appears more plausible if we exclude countries that lack independent monetary policies and are interested in joining BRICS. Currently, only 35 percent of countries have an autonomous monetary policy. Most other nations have currencies that are either fully pegged to, or managed in relation to, major global currencies like the US dollar, euro, or Swiss franc. This indicates that many countries might be inclined to peg their currency to the renminbi, gold, or even adopt a new BRICS single currency if they aim to join BRICS and reduce their economic dependence on Western nations. Currency pegging though, has several advantages. It gives a country an exchange rate stability, that reduces currency fluctuation and is good for international trade and investment. Second, inflation is much lower, because developed countries and strong currency in general have much less inflation than developing countries who have independent monetary policy. The third benefit of the currency peg is investor confidence, because it excludes uncertainty factors in economy and business.  

Currency Regimes for BRICS members and countries that expressed interest or officially applied for joining the Alliance.  

(Source: International Monetary Fund. (2023). Annual Report on Exchange Arrangements and Exchange Restrictions)

BRICS and its potential size:

So, who are the countries who expressed their interest or officially applied to join BRICS? There are 43 countries from the Middle East, Asia, Africa and South America 

To see this chart properly click on the article heading (in blue) to go to the website

Countries that expressed interest or officially applied for joining into BRICS

#	Expressed Interest	Region	#	Officially Applied	Region
1	Angola	Africa	25	Algeria	Africa
2	Cameroon	Africa	26	Senegal	Africa
3	Central African Republic	Africa	27	Zimbabwe	Africa
4	Congo	Africa	28	Bolivia	Americas
5	DR Congo	Africa	29	Cuba	Americas
6	Ghana	Africa	30	Venezuela	Americas
7	Libya	Africa	31	Azerbaijan	Asia
8	Nigeria	Africa	32	Bahrain	Asia
9	South Sudan	Africa	33	Bangladesh	Asia
10	Sudan	Africa	34	Kazakhstan	Asia
11	Tunisia	Africa	35	Kuwait	Asia
12	Uganda	Africa	36	Malaysia	Asia
13	Colombia	Americas	37	Pakistan	Asia
14	El Salvador	Americas	38	Palestine	Asia
15	Nicaragua	Americas	39	Saudi Arabia	Asia
16	Peru	Americas	40	Turkey	Asia
17	Afghanistan	Asia	41	Thailand	Asia
18	Indonesia	Asia	42	Yemen	Asia
19	Iraq	Asia	43	Belarus	Europe
20	Laos	Asia
21	Myanmar	Asia
22	Sri Lanka	Asia
23	Syria	Asia
24	Vietnam	Asia

(Source: European Parliament. (2024). Briefing. Expansion of BRICS: A quest for greater global influence?) 

How large are the current and potential BRICS? If all the proposed nations were to join BRICS today, it would become the largest political and economic bloc globally. This expanded BRICS group would account for over 50 percent of global GDP based on purchasing power parity (PPP, International $) and represent roughly 71 percent of the world’s population.

GDP Current US dollars and GDP PPP Current International dollars, Trillion. BRICS, US & Allies (Canada, UK, EU, Japan, Korea Rep., Australia), Potential BRICS (Countries that expressed interest or officially applied for joining into BRICS). 2023.
(Source: World Bank. (2024). World Bank Data)

What kind of future does the world have?

Are advanced democratic nations losing their global influence? Could this decline be attributed to years of accommodating authoritarian regimes, coupled with domestic welfare and monetary policies that have stifled wealth creation? Are demographic challenges, such as falling birth rates, aging populations, and growing migration issues, further exacerbating this shift? Is the world, as a result, moving toward a new bipolar dynamic — not between capitalism and socialism, but democracies and authoritarian governments or their semi-democratic allies. One we know for sure, is that US dollar is losing its influence, and this is aligned with US global political power also. The data indicate that while the US dollar faces challenges, countries not typically aligned with Western allies are actively contributing not only to de-dollarization but also to expanding their influence in the global economic and political arena. Will a multipolar future emerge soon?  

(Map created by the author)

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Zviad Khorguashvili

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Article on Belt & Road - failings of:

 

Kenyan train to nowhere reveals China’s debt trap diplomacy

Work has long since stopped on a Belt and Road project to connect Kenya and Uganda Jane Flanagan

,

Great Rift Valley

Goats are free to graze at the end of the unfinished railway line in Suswa

NATALIA JIDOVANU FOR THE TIMES

Since Chinese engineers routed a $4.7 billion railway through the Kenyan village of Emurutoto, residents no longer worry about being cut off by flooding. Or being hit by a train.

After soaring over their valley on vast concrete pillars, the tracks stop dead in a maize field. Goats graze on weeds between the concrete sleepers, and the railway bridge has become a multimillion-dollar walkway.

Emurutoto has done well out of China’s African investment project, which promised to connect the Kenyan port in Mombasa to neighbouring Uganda, and far beyond.

Local incomes had relied on small-scale farming or the nearby town of Duka Moja (which means “one shop” in Swahili) before the Chinese arrived in 2016, and set up camp.

Samuel Kiseentu, who at the time was a goatherd, was taken on as a labourer. “After some months I had savings for this,” he said, patting the motorbike beneath him.

There were hundreds of jobs for locals who benefited from a new dirt road and extended water pipes. Farmers with land along the route were given three million Kenyan shillings ($18,114) per acre in compulsory purchase agreements.

“Life became better here,” said Isaac Shonke, 30, who was trained as a steel fixer and made enough money to have his children to schooled privately.

Isaac Shonke did well — for a time — from the construction project

NATALIA JIDOVANU FOR THE TIMES

By 2017, the first half of the Kenya-Uganda line was operational, though losing money. In April 2019, work in the Great Rift Valley stopped. As alarms were raised about the mounting costs of the line, and secrecy around borrowing terms between Beijing’s banks and other African countries struggling to repay debts, China balked at financing the final 200-mile stretch linking Nairobi to the border with Uganda.

The single most expensive infrastructure project in Africa had become a case study in China swamping poorer nations with colossal debt. “The managers told us there was no more money to finish, and they went,” Shonke said.

The Times’s arrival in the village drew a small crowd asking for news that work would start again. A watchman living in rusting tin huts with his family had stuck around since the Chinese departed. The spoils of a three-year building flurry that had sucked investment away from basic services were dwindling.

Most of those gathered said they had never seen a train, let alone the huge, pristine station 15 miles up the tracks at Suswa, where rolling stock is plastered with slogans boasting prematurely: “Connecting Nations. Prospering People.”

Passengers on the 55-mile journey back to Nairobi were in festive mood. It was the last day of term and children on primary school outings were crammed into seats that cost 150 Kenyan shillings (91p) for a child’s day return.

The Nairobi to Suswa train was intended to continue on to Uganda but work has stopped

NATALIA JIDOVANU FOR THE TIMES

For a few miles near Mai Mahiu station, the train runs parallel to the century-old line built by the British, which was known as the Lunatic Express for its huge cost to both the Westminster government and a workforce preyed upon by disease and lions.

Kenya had deliberated for years on whether to renovate the old railway or invest in a new one. A report by the World Bank was among many that said the route chosen in the 1890s was still the best and recommended upgrading the existing network. But a new one with a wider gauge was settled on, designed, funded and built by China with no competitive tendering. A stretch of the old line is now being untangled from the bush to get cargo, offloaded on to older rolling stock, to the Ugandan border.

Children on a train from Nairobi to Suswa

NATALIA JIDOVANU FOR THE TIMES

The Chinese train leaves the Great Rift Valley through the Ngong Hills. East Africa’s newest and longest tunnel helps to explain why the line runs at such a great loss. The darkened windows draw alarmed wailing and prayers before the carriage emerges, its inhabitants cheering and blinking, on the other side. In another engineering phenomenon, the train is soon soaring over Nairobi National Park along a four-mile bridge high enough for a giraffe to comfortably pass underneath.

As the sun lowers on the capital’s skyline, someone shouts: “Elephant!” It is not clear whether they mean a white one.

Win-win? Xi’s project has had mixed results

If one policy is synonymous with President Xi’s China, it is the Belt and Road Initiative (Richard Spencer writes). Descriptions are awash with the Chinese Communist Party’s favourite slogans — “win-win co-operation” and “China meets the world” — but its underlying ideology is Xi’s.

The initiative poured huge sums of China’s surplus foreign exchange holdings into potential trade partners, particularly those in the global south. State-led by both Chinese and partner governments, it would also involve private enterprise and the market economy.

The “win-win” was obvious. Countries short of cash would receive an infusion of investment, while China would have faster access to natural resources and bigger potential markets for its manufacturing industries.

The side-effects would also, Xi hoped, be useful for China. It would show off Beijing as an alternative “hegemon” to the United States and its western allies — and one that did not ask questions about human rights. It would also confirm the potential of China’s state-led economic model, a more attractive proposition to many governments than the West’s present insistence on privatisation.

Belt and Road has undoubtedly had some successes. Chinese companies have built ports in Latin America and railways in Indonesia. Trade has flourished. Three quarters of Brazil’s soybeans, for example, are now exported to China, the quantity more than doubling in eight years.

However, just as the Chinese economy has had a poor few years — particularly since Covid-19 exposed flaws in Beijing’s “command, control and no questions asked” system of government — so Belt and Road has also had problems. Kenya’s financial crisis, in part owing to debts incurred on Belt and Road projects, is one example.

Other countries were also taken aback by the unsentimental approach of their Chinese partners. Loans were handed down with tough terms, often disguised from voters by secretive contracts.

In Sri Lanka, a port built with Chinese money could not repay the debt and was eventually leased to a Chinese company instead. As Sri Lanka fell into a broader debt crisis, China was blamed, though its loans were only a tiny fraction of the total.

With Chinese banks wondering how many projects would offer a return on their money, and governments growing wary of the leverage China now had over them, the scheme began to wind down, or at least focus on smaller projects.

As with much of Xi’s legacy, many Chinese people are proud of Belt and Road’s results, but it is not only the Chinese Communist Party’s western critics who have noticed cracks starting to appear.

Get on top of China, trade and tariffs:

 

Europe must defend itself or be crushed by China’s export tsunami

Other world powers are protecting their industrial cores – the Continent is a sitting duck

AMBROSE EVANS-PRITCHARD22 May 2024 • 8:00am

Related Topics

• Europe, 
• China, 
• Manufacturing industry, 
• Trade Deals

19

The EU will be forced to follow Joe Biden’s tariffs against China whether it likes it or not, otherwise Europe will alone face the concentrated trade shock from Xi Jinping’s predatory mercantilism.

It will become the primary dumping ground for China’s exorbitant overproduction of industrial goods, with a flood cars, batteries, and cleantech components together posing an existential threat to the European social market model.

Britain, too, will have to follow suit or become the market of last resort for over-indebted Chinese companies desperately seeking a foreign outlet for excess goods that they cannot sell into their own depressed economy, a fate that would annihilate the UK’s manufacturing base within a decade. We are beyond the point of theoretical discussions about the merits of free trade.

An open world economy cannot coexist under normal trade patterns with a deformed Chinese economy that accounts for 13pc of global consumption but produces 31pc of global manufactured goods. This imbalance is not the result of natural trade flows. Nor is it simply “a reflection of the vitality and creativity of China’s economy” as the People’s Daily told us last week.

It is the mechanical consequence of a hyper-investment strategy directed by the Communist Party. China’s trade surplus has ballooned to 5pc of GDP. Capital Economics estimates that it is twice as large a share of world output as it was before the Lehman crisis in 2008, when it was already causing trouble.

This excess capacity can be absorbed only by hollowing out the industrial cores of America, India, and Europe. The first two are defending themselves. India has just imposed a de facto ban on the use of Chinese-made solar panels in projects that receive public subsidies. Europe is the last big sitting duck.

The original “China Shock” hit the developed world in the 1990s and the early 2000s after China opened the door to offshore plants by Western multinationals. American and European companies could tap China’s vast reserve army of labour and play off Chinese wages against wages at home via “labour arbitrage”. The profit share of GDP in the US rose to extremes not seen since 1929. It was an era of collusion between Western capital and Chinese Communism. It was also an abject failure in the political management of globalisation.

China’s export tsunami was tolerated by Western governments but we now know the damage it did to the cohesion of the western democracies. The China Shock, published by the US National Bureau of Economic Research in 2016, concluded that the overall effect cost 2.4 million American jobs directly, lowered real wages, and devastated local communities in rust-bowl regions. The survivors were Donald Trump’s “deplorables”, to use the ill-judged term of Hillary Clinton.

Most economists assumed that this shock was a one-off episode: the world would rebalance as China progressed from export-led growth to a consumption economy in time-honoured fashion. It has not happened.

Professor Michael Pettis of Beijing University says investment has spiked back up to 42-44pc of GDP, far surpassing any level ever seen in any major country since the industrial revolution. Other Asian tigers peaked in the low-30s before dropping back as they became richer.

Xi Jinping has reverted to the worst pathologies of the old model, partly as a quick-fix to counter the property crash and secular debt-deflation, and partly because the Communist Party needs its instruments of political control.

What makes it intolerable this time is Xi’s bare-knuckled push for cleantech hegemony and his open attempt to overthrow the universalist liberal order – a broader grouping than the West since it includes Japan, Korea, and Taiwan.

Washington is not going to tolerate this second and even larger China Shock. “They’re driving manufacturing companies out of business in Europe. We won’t let that happen here in America,” said Joe Biden.

“We’re not going to let China flood our market. The future of EVs will be made in America by union workers. Period,” he said.

The tariffs announced last week are breathtaking: 100pc on EVs; 50pc on solar panels, semiconductors, and syringes; 25pc on steel, aluminium, lithium batteries, magnets, and so forth. There is much election theatre in this blitz, but it is not protectionist as such.

Adam Smith recognised the limits of free trade. He supported the Navigation Acts in order to sustain a dual purpose shipping fleet, deeming “absolute prohibitions” to be necessary when national security was at stake. Clearly you cannot conduct trade on normal terms with a hostile power infused with Leninist zero sum ideology and in league with Putin.

The Biden tariffs cover 4pc of America’s total imports from China. They are nothing like Trump’s plan for tariffs on everything and against everybody. Nor are they a Smoot-Hawley free-for-all. They are surgical.

Xi says “there is no such thing as ‘China’s overcapacity problem’”. Really? 

China’s output of solar cells was 310 gigawatts (GW) in 2022, 567 GW in 2023, and heading for 1,000 GW next year – five times the total installed capacity in the US to date.

Battery output capacity was 550 gigawatt hours (GWh) in 2022; 800 GWh in 2023, and will be 3,000 GWh in 2025, four times the current world market. China already has enough EV plants to meet global demand three times over. This surplus capacity has been promoted by state planners and it is coming Europe’s way.

The EV wave has barely begun. Capital Economics says three quarters of the 4.8 million cars exported by China last year – up from one million in 2021 – were petrol and diesel models. Old internal combustion engine (ICE) cars are becoming unsellable in China where the car market is shrinking and where over half of all car purchases in early April were EVs and hybrids. They are being diverted into the global market instead.

China has already wiped out the EU’s solar industry, first by copying the technology and then flooding the market. It is following the same script with wind turbines. Electrolysers are next. It will happen with EVs soon because Chinese carmakers can make a much fatter profit per car overseas.

Europe’s political economy is in no fit condition to weather this shock. Economic growth has been negligible for 15 years in the big mature economies. The post-Covid recovery is anaemic. Public debt ratios are badly stretched, and fiscal austerity is back. The political centre is crumbling almost everywhere.

Xi slapped Europe in the face earlier this month, visiting his groupies in Hungary and Serbia, with a brief stop in Paris. He needs to move with care. The further he goes in helping Putin to crush Ukraine, the harder it will be for Europe’s globalist camp to hold the line on free trade.

The Commission’s probe of Chinese EVs will conclude in early July. It does not take a crystal ball to see that a giant tariff wall is coming, and that it will spread to every area targeted in Xi’s bid for cleantech hegemony. 

The Europeans may wish to carve out a third way between the US in China. Reality will not let them.