A trade war between the USA and China: could it be a return to protectionism and a prelude to yet a new global economic crisis horizon 2020/2022?

Return to Protectionism and a new Global Economic Crisis ?

The Chinese president, Xi Jinping, at the World Economic Forum, on January 17, 2017, said addressing the new U.S. President Donald Trump: “There is no point in blaming the globalisation. Any attempt to stop the exchange of capital, technologies and products between countries is impossible and backward in history.  We must remain committed to the development of free trade and investment [transnational], and say no to protectionism.  We need to rebalance globalisation, and make it stronger, more inclusive, more sustainable”.  In a statement dated September 29, 2018, reported by the Chinese official agency (Xinhua), Xi Jinping has clearly stated that “China would not close its doors to the world but would rather widen their openness”.  Citing as an example the openness of China in the service sector: The World Trade Organization (WTO) has put in place more than 160 sub-sectors that need to be opened.  All developed countries have opened an average of 108, while China on its own has opened 100, far exceeding the average of 54 of the developing countries.  In this context, it is useful to recall the fundamentals of the crisis of 1929 and that of 2008 to draw lessons for the future of the global economy.

The crash of 1929 is a consequence of a speculative bubble, the genesis of which dates back to 1927. The bubble was amplified by the new stock-credit purchasing system, with investors able to buy securities with only 10% coverage.  The rate of borrowing depends on the short-term interest rate.  The continuity of this system depends therefore on the difference between the rate of appreciation of the shares and the rate of borrowing.

The foundations of the crisis of October 2008

There are many similarities between the crisis of October 1929 and that of October 2008.  The economic boom was preceding the crisis, increasing indebtedness and divorce between the real and financial spheres, impact on the real sphere with the fall of technological values.  However, unlike in 1929, there was a more critical interconnection of economies with a stronger global regulation.

Moreover, the economies of the developed countries are in deflation (low inflation, unemployment and negative growth) and not in stagflation (inflation and unemployment decreasing).  As evidenced by the socialisation of the losses of some banks, the speed of the interventions of the central banks such as the American FED, the European Central Bank, the Bank of England and their Japanese, Russian, Chinese and even their Indian counterparts coordinated to break the vicious circle of lack of trust.  They did unblock all interbank lending that constitutes the vital element of operation of the global economy.  With repeated bankruptcies, the interbank credit source of the expansion of the world economy has tended to dry up especially at the level of the business banks that have experienced an unparalleled expansion during the contemporary period. Unlike a universal bank, a business bank does not have the opportunity, in the event of challenging market conditions, to rely on individual deposits to raise funds for the short term, although they continue to issue debts In the short term to finance their business. However, increasingly the financial institutions with which the banks of business refinance refused in a period of crisis to lend because of lack of confidence in the repayment capacity of these banks. The essence of the crisis of both 1929 and 2008 is a denaturation of the foundation of capitalism as described by the founders of the political economy based on enterprising creators of wealth, Karl Marx had not written Socialism but Capital.  This crisis is therefore related to the increased financialisation in disconnection with the real sphere and the non-symbiosis of economic dynamics and social dynamics forgetting that work is undoubtedly a price but creator of value and growth vector.  In fact, with this growing financialisation, we have two types of stock ownership.  Direct detention (those who hold them in their own right) and lengthy detention (those who hold them through an intermediary: management bodies, life insurance companies, pension funds, etc.). The new fact is the rapid and significant change in the type of actions held by households. The direct holding of shares becomes a minority, while the lengthy detention has highly developed.  Pension funds control Wall Street, managing more than a third of the US market capitalisation. These dysfunctions have been concretised through the mortgage crisis (Subprime) In August 2007, a crisis that has spread to all the world’s stock exchanges with losses estimated at several hundred billion Dollars that I summarise in five steps.

a-    Banks have made real estate loans to poor or low-collateral households at high-interest rates.

b-    Distribution of bad debts in the market: to evacuate risks, banks “sent their receivables, that is, they cut their debt into financial products to sell on the market. Globalisation has done the rest, by disseminating these risk securities in the portfolios of investors of the whole planet. Hedge funds (Hedge Funds) were of Wholesale buyers of Subprime, often on credit to boost their Yields (up to 30% per annum), and to play the leverage effect, the Hedge Funds Borrowing up to 90% of the sums required.

c-    Reversal of the U.S. real estate market: Towards the end of 2005, U.S. interest rates began to rise as the financial market sputtering. Thousands of households were unable to honour their repayments resulting in losses for banks and investors who bought the bonds have seen their value collapse.

d-    Crisis of confidence: the banks have found themselves in a situation or as in a poker game, they know what they have in their balance sheet, but not what is in that of others because these bad mortgages were bought all over the world, and the distribution of the risk was not known.  This situation has caused the stock markets to fall and paralyse the market Inter-bank, banks no longer or very little afraid that their counterparts would be in a red line.

e-    Intervention by central banks: in the face of market paralysis, the banks massively intervened in early August 2007 by injecting several hundred billion dollars and euros of liquidity.

Lessons to meditate

As noted in the Echos.fr in its edition of March 5, 2018, “As in the 1930s, populism and protectionism were gaining ground, today’s Americans are sinking into protectionism and the Europeans voting for the closing of doors.

These events give off as an already-seen impression.  So, they have already taken place in the years 1930, followed by other disasters, even more deadly. However, the political crisis is taking place this time in slow motion. Europe in a meeting in Brussels on September 16, 2018, created a commission to circumvent the embargo on Iran and payment in Dollars, putting in wanting to place barter mechanisms.

Since March 8, 2018, the US president has decided to introduce 25% tariffs on US imports of steel and 10% on aluminium, further threatening to impose customs duties on some 50 billion from 22 May, Chinese goods exported to the United States. On 06 July 2018 the United States planned to implement taxes on 34 billion of products imported from China, the first tranche of the 50 billion blocks, China has decided to retaliate with similar taxes, which will hit notably soybean and cars from the United States. According to the Figaro.fr in its edition of September 26, 2018, the USA would have threatened in order to counter the trade imbalance vis-à-vis China of $375 billion in 2017 (source US Treasury) and in the case of Chinese retaliation, to go even further in this way : taxes could increase from 10% to 25%, and 267 billion of additional Dollars could be affected, almost all Chinese imports. According to the agency (Xinhua) as of September 29, 2018, in 2017, every American farmer exported on average more than 10,000 Dollars of agricultural products to China, the company General Motors sells 4 million vehicles each year in China, surpassing its sales in the United States during the same period and in 2016, U.S. companies made sales of over $600 billion in the Chinese market.  While not forgetting the important assets in US Treasury bonds that are part of the quotation of the Dollar.  In April and March 2018, China was a net seller of U.S. state bonds that was a concern for the financing of the United States.  The stock of U.S. state borrowings in the foreign exchange reserves of the PBoC approximately $1.2 trillion, or nearly one-third of the foreign exchange reserves from the middle, or about 20% of the total sums held by foreign entities in the US.   It was within this framework of economic warfare between the two largest global economies that 1140 economists, together with former councillors and budget director of past Republican presidents Harvey Rosen and Wendy Gramm in a letter to the US President on May 3, 2018.  They “exhorted him not to repeat the mistakes of the past and renounce all protectionist measures so as not to repeat the same mistakes that could lead to a crisis equivalent to that of 1930”.  For these economists, Trumpian protectionism will hardly reduce this deficit, for some obvious reason: it generally concerns products that the United States no longer manufactures and that it would be too complex and too costly to develop again under the aegis of “Made In USA ». Taxes would, therefore, have the sole consequence, deleterious, or raise prices for American consumers. Even sound of Bell on 02 July 2018, where the International Monetary Fund “while saluting the performance of the American economy, urged Washington to renounce its protectionist measures that threaten the economic health of the United States and the rest of the world.  It is that from 2008 to 2018 a new paradigm: one went from the banking crisis to a crisis of indebtedness of States hence the importance of acting on six interdependent levers because, in September 2018, the world economy is still characterised by turbulence which may repeat the scenario of the years 1929/1930 and the crisis of 2008.

  • First, it is a question of identifying a typical response to the financial crisis, all measures projectionists that must be temporary and targeted, but durable and generalised slow the growth of the world economy.
  • Second, open the door to an in-depth reform of the international financial system.
  • Third, take new initiatives to counter possible bank bankruptcies and impose new accounting standards on banks.
  • Fourth, introduce stricter rules on rating agencies, securitisation and golden parachutes.
  • Fifth, public expenditure must be achieved through coordinated budget deficits of energy savings for Building & Infrastructure and clean technologies for the automotive sector,
  • Sixth, rethinking the current global economic system that promotes North/south Bipolarization, poverty detrimental to the future of humankind, accelerated by the most debatable governances of most southern leaders.