Warring Trade for Trading-Off?

For the U.S., a trade war will lead to loss of cheap imports from China and replace them with relatively higher price imports for other countries. This is called trade diversification in economics and this can also lead to more trade deficit for the U.S. Thus, the U.S. would not gain much from the trade war. The only way US production can be competitive is by devaluing US Dollar for which it needs to disengage geopolitically.

The other side of US production becoming competitive is that US finance will become less profitable. Trump trying to compensate this by allowing Wall Street players more room in Chinese fledging finance.

Only Two Pillars Remain

Out of five pillars of the empire, Trump is trying to deal with two: US security apparatus, and US bankers-corporates. The internal Bible belt views imperial engagements as the liability, neoliberals have been proven to be ineffective and free riders are being criticized for free-riding by Trump. The US external military engagements are closely associated with the survival of the free riders.

So Trump is gradually putting the onus of US military presence on free riders. He knew Saudi, India, and Japan need US military presence in Syria-Iraq-Gulf, Afghanistan, and Japan-South Korea respectively. So Trump asking Saudi to pay rent for US army presence in Syria-Gulf, India to deeply engage in Afghanistan-Indian Ocean and Japan-South Korea to reduce trade deficits with the U.S. Since China would be the benefactor if US army is pulled out, the former was asked to allow more room for US financial players inside Chinese economy.

In November 2017 Trump visit to China ensured that China will gradually open its finance in next three years while Trump tacitly allowed BRI by upholding Goldman Sachs investment in Silk Road Fund. Since then, China had made bold moves in Zimbabwe, Sri Lanka, Rohingya crisis, Nepal and also launched the oil-gold-yuan scheme. Trump asked South Korea to pay for THAAD missiles, but Mattis denied. Trump promised Erdogan of getting out of Syria but US army did not. Even Trump’s actions against Pakistan not entirely carried out.

So it is clear that even if Trump wants to give Wall Street say in Chinese blooming finance with gradual disengagement, Pentagon, and US Security not ready to move out. If US military and other security were completely under Trump’s control, he would be ready to settle with China by debunking free riders. But Pentagon is not ready to forgo the old arrangements.

Taming Pentagon

Estimated U.S. military spending is $886 billion. That’s from President Trump’s budget for Fiscal Year 2019 submitted to Congress. It covers the period October 1, 2018, through September 30, 2019. There are four components. First is the Department of Defence. Second is the Overseas Contingency Operations (OCO) for DoD to fight the Islamic State group. The third is the total of other agencies that protect our nation. They include the Department of Veterans Affairs, the State Department, Homeland Security, FBI and Cybersecurity in the Department of Justice and the National Nuclear Security Administration in the Department of Energy. The last component is $18.7 billion in OCO funds for the State Department and Homeland Security to fight ISIS.

So it seems clear from the expenditure on US military that disengagement would imply severe cut down in the defence budget. Thus Pentagon will try to avoid any arrangements that would result in reduction of such a huge largesse.

Now North Korea is a nuclear power and is ready to denuclearize itself if guaranteed non-invasion from the U.S. South Korean leadership is also proven to have liked the proposal. China will be happy and Japan is too weak to protest. Now Trump can pull out of South Korea and give world non-nuclear North Korea in return. Similarly, with Turkey getting more engaged in Syria and Iraq, Trump can pull out of Syria. He can also make Saudi pay for US army presence there which will not go into contradiction with Russia, Iran or Turkey. Saudi Prince Salman has till now agreed with Trump by going into direct contradiction with Qatar and allowing oil price to rise which saved US shale oil production and US self-sufficiency in oil.

Japan and Saudi will have US army protection in their countries only. Trump knew North Korean nukes and Turkish military engagement in Syria-Iraq has added his quiver with more arrows while dealing with Saudi and Japan. Now he has to deal with Pentagon. US defense and security is an enormous apparatus with 900 global bases and almost US Dollar 874 billion expenditure per year. But 67% of the expenditure goes as salaries to military and non-military staffs. Moreover, its external bases’ assets have 19% excess capacity according to Mattis.

So drastic pulling out may result in rebel by the huge number of unemployed staffs when brought back home from external bases. Thus Trump came up with the idea of using US army in guarding US-Mexico border and building the border wall. Thus he is trying to ensure employment of the staffs inside the country. If protecting the country from aliens and securing employment of security staffs is done simultaneously, Trump will gain both mass supports as well as reduce chances of retaliation by pro-empire leaders against him.

Trade War or Trade-Off

What will a real trade war result in? China will loss export market in the U.S. and so have to create more demand through state-led spending. This will only force China to make more government-led demand creation both in the home and abroad. In the U.S., the trade war will lead to loss of cheap imports from China and replace them with relatively higher price imports for other countries. This is called trade diversification in economics and this can also lead to more trade deficit for the U.S.

Thus, the U.S. would not gain much from the trade war. The only way US production can be competitive is by devaluing US Dollar for which it needs to disengage geopolitically. The other side of US production becoming competitive is that US finance will become less profitable. Trump trying to compensate this by allowing Wall Street players more room in Chinese fledging finance.

China is already ready with IPS and oil-gold-yuan scheme for oil sellers. Trump has more than ever chances to deal with Pentagon and free riders. Consequently, the tariff on Chinese goods and desire to pull out off Syria to rebuild nation were announced simultaneously. China will want US disengagement from the South China Sea and East Asia first. Less engagement in West Asia next so that China can push Saudi to agree with oil-gold-yuan. And finally pull out from Afghanistan so that China can bring in Talebans, Kabul, and Islamabad to some terms.

Trump will seek opening of Chinese financial market first. Allowing more US exports to China next. Finally, push for more Chinese investment in US infrastructure. In this bargaining, the most likely outcome is the US pullout from South Korea and Syria and Wall Street wolves having more access to Chinese financial market. This will lead to an appreciation of yuan leading China to export less and import more. It remains to be seen if the U.S. can lobby for the share in rising Chinese imports.

More countries will be allowed to use oil-gold-yuan scheme and more international settlements will be made in yuan. US Dollar will devalue and it remains to be seen if that is effective enough to make US production competitive. In one sentence, China will take part of the financial burden of the U.S. while it will partly disengage geopolitically. But there is still a missing link. Will China engage geopolitically as the U.S. partly leaves?

Temporary Settlement

If Trump can achieve maximum, still this marriage between CPC and Wall Street will be temporary. China has fledging finance. So it will be benefitted from financial opening without the doubt. It would add to convenience of liquidity, help China to finance its BRI projects abroad more effectively. But how far can Chinese finance grow? Due to lack of geopolitical engagements across the globe China cannot have continuous credit channel like US financial markets have. So sudden rise in Chinese finance can end up in a single cycle of boom-bust leading to devaluation of yuan and back to pre-marriage situation. Moreover, CPC has consolidated its position in the Chinese economy in the 19^th party congress.

The CPC and Chinese state had become more intertwined and Chinese leadership has shown more inclination to create demand by government expenditure and thus can endure too long gestation period and even non-profitable investments. But as Chinese finance will grow resources will be allocated there for short-term profits through asset trading. So how much CPC can tame in short-term profit motivation as yuan gains status in international market remains to be seen.

After one burst, CPC may intervene legally forcing private investors not to sell cheap in the financial market and this will result in the renewed contradiction between CPC and Wall Street players. If after this contradiction, the U.S. did not pressurize China enough, CPC will win. If Wall Street makes the U.S. pressurize China with renewed vigour, CPC may give in and Wall Street wins. Since China has still 300 million rural people who will migrate to cities, China will continue to grow. So Wall Street players can also plan to settle in Shanghai as the new global financial centre.

Available Choices

Wall Street players will try to settle in China and make Shanghai new global financial centre. They can go for three options:

1. Force China to accept liberal democracy which will allow them to use short-term money-making motives of common mass and build an unbridled financial market that will gradually de-industrialize China and make it indebted just like the U.S. today.

2. Adapt to Chinese political and social system and hence accept CPC leadership. Consequently, they have to check their appetite for chasing profits relentlessly.

3. Accept CPC leadership now and wait in the long run to take the upper hand.

Since neoliberals are losing at the moment inside the U.S., it is difficult to push for the first option at least for next few years. The second option is too bitter to accept. The third option will be most ideal. Wall Street bargaining strength with CPC depends on how much it can make the U.S. disengage geopolitically. But this is the only first step. In the next step, Wall Street will try to offer some pro-China geopolitical arrangements to CPC and its military wing People’s Liberation Army (PLA). If the U.S. starts disengaging and China starts to get engaged militarily in external affairs, Wall Street wolves can dream of restoring the empire from Shanghai.

Till now Russia, Iran, Turkey, and Pakistan have got engaged militarily that has been directly or indirectly helping China against the empire. But China till now has not engaged itself militarily. As China is moving to build up its own finance it needs more favourable geopolitical arrangements. It cannot rely on external forces once the U.S. starts disengaging. The momentum supports Chinese engagements externally. Here, anti-empire forces must not act against the natural momentum. Rather they must join the Chinese external engagement so that Wall Street wolves do not have the benefit of being sole candidate to offer help to China in its outward engagement.

Conclusion

Trump China trade war at most can disengage Pentagon from South Korea and Syria-Iraq. Pentagon’s presence in Gulf and Japan cannot be challenged at the moment. In return, China has to open its finance to the US bankers. This arrangement is unsustainable since after one financial boom-bust cycle, CPC will have to tame in private profiteers and Wall Street will have to retaliate. If this time Wall Street makes the U.S. move against China with renewed vigour, CPC can lose.

To ensure the USA remains inactive at that time, China needs to strengthen its position geopolitically. This move would also keep bankers think they can restore empire from Shanghai. Disengaging Pentagon partially is quite difficult and even if possible is a minor step towards ending the empire. Bankers still can make the U.S. bounce back against China or can try to restore empire from Shanghai in the long run. Fight with short-term thinking liberal democracy and finance will move to ideological level once US military starts receding.

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy and position of Regional Rapport.