More on the coming trade war with China

On Monday, I wrote a piece outlining how the US has pivoted away from China toward Russia. And the conclusion I drew from the circumstances was that this pivot will create a lot of geopolitical and economic uncertainty depending on both the importance of the actors on the world stage and the violence of the pivot. As US President Obama is constantly at pains to stress, Russia is not a major player economically. So the pivot toward Russia is one of geo-strategic importance. But the pivot away from China has economic implications. And China-hater Peter Navarro as Trump’s new trade czar is telling us the pivot will be violent.

Yesterday, the Trump transition team announced that Peter Navarro, a professor of economics and public policy at UC-Irvine would head up a new White House department created just for him called the White House National Trade Council. I look at this position as the ideological equivalent to the position of Secretary of State for International Trade created specifically for Liam Fox in the Theresa May cabinet in the UK. In both cases, the purpose is to signal the importance of the trade issue, the sincerity of the threats and positions associated with that, and the ability to execute on those positions.

What Theresa May is saying with Liam Fox’s position is that Britain is serious about Brexit and plans to make a success of it. Verbally, that’s been her mantra. Liam Fox’s presence in her cabinet puts paid to that mantra. Donald Trump has been saying for years that China is a currency manipulator who has cost Americans millions of jobs through unfair trade practices. And if you listen to each and everyone of his economic advisors — from Mnuchin to Ross to Kudlow to Navarro and on down the line — they all say Trump supports fair trade, not free trade. What that means is that a Trump Administration will definitely act to correct perceived trade injustices. The only question is how it will act.

Picking Navarro to a new trade czar role makes it much more likely that Trump’s actions will be punitive in nature – and therefore lead to a trade war with China. Navarro has written a number of books about China that tell us this. For example, his 2008 book, “The Coming China Wars,” is described by many as basically a litany of grievances about China on multiple fronts – from militarization to human rights abuses to currency manipulation. In Peter Navarro’s depiction, China is now the new Evil Empire for America that Russia once was. Here’s what the most liked favourable review says of the book:

He says China’s miracle depends – to a greater degree than many experts and observers have been willing to acknowledge – on theft of intellectual property, ruthless exploitation of labor, drug trafficking and violation of the norms of diplomatic good conduct (for example, supplying dictators with weapons of mass destruction). However, take everything with a measure of salt. The author faced a reporting challenge and acknowledges that his sources include unverifiable Web content and anti-China propaganda organs.

Navarro’s other anti-China books are equally polemical. His most recent one “Crouching Tiger: What China’s Militarism Means for the World”, talks about the militarization of China and the danger they pose to the world as a result. His most famous book is “Death by China: Confronting the Dragon – A Global Call to Action” which outlines the stances the US should take to defeat China on trade.

Given what Trump’s other economic advisers have been saying, I believe this is why the US will not sign on to TPP under Trump. The part from Navarro about China stealing intellectual property is a major reason here. The Trump view is that multilateral trade agreements are least common denominator approaches that water down intellectual property protections and other matters important to US business. And as a result, the first remedy, if there is to be any, will be to push for so-called fair trade bilateral agreements. What this means for NAFTA, I don’t know.

Another corollary of this view about intellectual property goes to anti-trust, where I think the Trump Administration will block Chinese deals, first because of intellectual property concerns, and second to potentially send a signal to China about US intentions. The response by China could be to hold up regulatory approval of international trade deals. At this point, I am just speculating. But it is something to consider regarding policy actions that lie short of outright tariffs or penalties and punishment.

Ultimately though, there is a non-zero chance that this goes to the penalties and punishment stage with China and that a trade war develops as a result. Navarro’s rhetoric about China is so confrontational and acerbic, that it is only the presence of other moderating voices which say we won’t see punishment.

What is Gary Cohn’s role going to be here? I think that’s crucial since he will sit closest to the President. And Gary Cohn was saying at the start of the year that China would have to devalue their currency to deal with slowing growth. The logic there is still true today, even more so with a strong dollar as the backdrop. So it is not at all clear that Navarro’s world view will win out.

The word is that Trump is already considering an across-the-board tariff of 5% on all imports. That sets China up for an even worse position. In the end, I see the Navarro choice as flashing red warning sign that confrontation with China is on the cards and that a trade war could be coming.

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