Trump's China bashing

By Mahmood Elahi

On Aug. 23, U.S. President Donald Trump sounded like a despot when he tweeted: "Our great American companies are hereby ordered to immediately start looking for an alternative to China." He must have been insane to think that he has such an authority to order private companies to follow his commands.

But GM, America's biggest carmaker, was not insane to move some of its production to China. It sold 3.6 million vehicles in China last year, a third more than it sold in the United States. China is the world's largest auto market and GM made a sound business decision by moving a large part of its production there.

GM did not comment directly on Trump's tweet. "GM's China operations are not a threat to U.S. jobs," the company said in a fact sheet, noting that its joint ventures in China have sent $16 billion in equity incomes to GM America since 2010 and that it has invested $23 billion in U.S. operations since 2009.

Trump's frustration is evident because he cannot impose tariffs on GM's cars made in China for the Chinese market. So GM can easily defy Trump.

Trump may be reminded that China saved the U.S. and the world during the Great Recession in the wake of the mortgage crisis. During the major recession in 2008, China was able and willing to boost global investment. As a result of this, Sino-American ties improved and the U.S. even advocated giving China a greater voice in international bodies, such as the International Monetary Fund (IMF) and the World Bank.

The massive $86 billion stimulus package introduced by China created a huge increase in global demand for capital goods. China built its vast networks of high-speed trains, superhighways and building projects, using German, Japanese and American construction equipment and components. It was also a period of massive expansion of China's car industry. GM arrived in China around this time and never left. Within two years, China overtook the U.S. as the world's biggest market for cars.

Now, partly because of Trump's trade war with China, the United States and the world are facing an economic downturn and China may be needed to stimulate the global economy. Facing a trillion dollar deficit due to his deep tax cuts, Trump is not in a position to introduce any package to stimulate the economy. Only China can do it.

Two factors could derail this possibility. First, China may be unable or unwilling to provide an economic stimulus. The Chinese government debt-to-GDP ratio is higher today than it was a decade ago, when the authorities rolled out an aggressive stimulus package to offset weakening demand. Today, China is not in the same position.

Even so, China's debt-to-GDP ratio is still much lower than that of most other large economies, giving the government some room for additional fiscal stimulus in an economic emergency. Moreover, although the People's Bank of China (PBOC) is more cautious about injecting liquidity at will, the relatively high reserve ratio the PBOC imposes on commercial banks suggests that it would have significant firepower should the need arise.

The second risk factor is the 2017 U.S. corporate tax cut, which enlarged the U.S. trade deficit with China, further damaging bilateral relations. If the world's two largest economies could get along better, businesses and investors everywhere will breathe a sigh of relief.

Donald Trump is a political hack who achieved political success by railing against China because of its trade surplus with America. He used this as a political and a propaganda tool to rally his base and win the election. As such, he needs an enemy to blame for America's problems, and if the trade disputes with China are resolved, he will be left without his propaganda tool. No new dish of outrage from China means lean days or bad home-cooking for Trump. So, he will double down on his attacks on China for its trade surplus with the United States. And China will retaliate imposing its own tariffs on U.S. agricultural products.

But this is also affecting other countries not involved in the U.S.-China trade war. A day after the U.S. and China put more tariffs on each other in August, key gauges for industrial activities across Asia and Europe confirmed the trade war's deepening bite.

Manufacturing indexes for Japan, South Korea and Taiwan remained in the negative territory. India's factory gauge slid to its weakest in more than a year. Looking ahead, the trade war between the world's two biggest economies looks to make matters worse.

So what can be done? Given Trump's vested interest to keep the tension with China alive, all hopes lie in American voters to boot Trump out of the Oval Office. Their own financial losses stemming from tariffs on Chinese goods should be enough to throw a political hack like Trump out of power. They should do this for America and the world.

Mahmood Elahi (omega51@sympatico.ca) is a freelance writer in Ottawa, Canada.