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Geopolitical Update: Trade Frictions, Reckoning for big firms and Managed Trade

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By Christian Takushi, Macro Economist & Geopolitical Strategist, 22 Mar 2018 – Switzerland (Public release was delayed 72 hours)

Today the US Government announced steep tariffs on China. China has been getting away with every behaviour and trade tactic over the past 30 years, but Western governments looked always away in order to secure the interests of our biggest corporations and their own. Why?  Trade boosts both GDP and big firms’ profits; and GDP is how the success of established parties is measured. Even if GDP has become a misleading parameter that has long ago disconnected itself from the reality of most households in the West.

Time to rethink our current Economic System?

Allow me to state the question: Are all Trade Frictions bad? Not necessarily. Many institutions and media are pounding vehemently against any challenge to the current “so called” Free Trade system. Not surprisingly: The interests of many Western governments, big corporations, universities, stock investors and financial media are aligned – they are sitting on the same boat; a boat that tremendously benefitted from the current system. But our current system is not one of Free Trade, rather one that enables massive Trade Volumes. The era of massive growth in Trade Volumes led to an explosion of big firm’s profits and to higher GDP figures. But all this was accompanied by a decline in salaries, job security and quality of life for many. Many millennials in Europe never had a proper job contract. Research shows that a skilled person that cannot fully exercise his of her profession in his twenties and thirties seldom fully recovers from it in his or later life. The explosive trade growth has damaged our environment,  and it is strange few want to acknowledge it.

Higher trade and GDP figures have been used by established political parties and media to convince voters that any disruption to the current system is bad for them. Really? Most of what they say is correct, except for what they leave out.

US politics drives world closer to a Trade War

I have been highlighting this risk since 2015: that the new US Administration may sacrifice big US Multinationals’ profits to fulfil the campaign promise of 2016 and to stand up to China. This risk could flare up – so our rationale – if the Republican Party would be at risk of losing both the House and Senate to the Democrats in November 2018. Many financial experts told me he’d never dare to do it. I agree with my peers, other macro economists: Trade wars are surely painful,  … but the current system is flawed too. My calling as a Macro Economist obliges me to look at all angles of a complex issue, no matter how unpopular it may be. In an era of insecurity and overwhelming direct & indirect state control of media (across Europe, China and many other countries), there is less and less truly independent news and analysis. It is sad to see that most news channels – on the left and the right – have a clear agenda and an interest in shaping public opinion, rather than informing the public. Their intentions are often good. But as I have said before, biased mainstream media are far more dangerous than fake news. Why? What they produce is highly professional, and most of what they tell us is true. The problem lies in the systematic suppression of that which doesn’t fit their agenda. Even if that is only 2%, once it is systematic it can have a big impact long term. Let a pilot deviate only 2 degrees off his course on a long haul flight. Even state-sponsored media in Europe calls itself independent: an oxymoron.

The fallacy of Free Trade

The uncomfortable truth is there is no real Free Trade, not in China, not in Japan, not in Europe, .. not even the USA practices free or fair trade as Mr. Trump has hinted at. Real free trade would also imply that we treat all trading partners equally. The EU uses coercion & intimidation in grand scale. Smaller nations are forced to join a block or lose out. Even ailing Mercosur uses all tools at its disposal to slow down the rise of its more competitive rival, the Pacific Alliance. What we have in our world is Managed Trade. Now, as an economist I am to some extent a realist, I don’t mind Managed Trade. My concern is, why do so many insist it is Free Trade? And why do they throw hundreds of millions of dollars to convince people we have Free Trade? Don’t take me wrong, I don’t believe in Conspiracy Theories. I believe most governments try their best and do this out of good intentions. The problem may in part lie in our political system, the rise of the older generation as biggest voting block and the “echo chambers” of our elites: you advance as you get quoted and accepted by your peers.

Truth is .. Competition, Free Trade and Democracy are all fading away under the current system. Do all benefit from trade. But I also think that Europe and China need the USA more than the USA needs Europe and China. So, maybe a certain shake up to our world trade system may not be only bad news, it may also hold some opportunities to fix flaws in a system that has been running for 4.5 decades roughly. Look at the way our governments are helping our big firms become giant oligopolies, choking small firms and free competition on the way. Our so called Free Trade has ruined the health of the oceans. It is all interconnected. Let me say this for now: Although there will be companies and people in the USA that will be negatively affected, the biggest losers from a major disruption of World Trade are likely to be the EU and China, followed by the Middle East and Mexico. A Trade War is to some extent similar to the disruption of the most vulnerable trading routes (one of the risks monitor). US consumers may have to pay a bit more for consumer products, but that will greatly benefit the health of our oceans and the environment in general. It may also inject new life to regional supply chains and US suburbs. By the way, we believe the suburbs are the battleground of the coming Mid Terms Elections. This is theory, it may not end up in Trade War wit China, for my analysis leads me to believe: all this is to test the EU not China (see more below). In a worse case we will have all converging in a super crisis. The EU and China are retaliating by trying to hit swing states that swung for Trump in 2016. Thus, everybody plays politics. If we read the details of planned tariffs on US goods, the European Union and China are trying to meddle in the US Mid Term Elections of 2018. Clear case. So much to the fallacy of Free Trade. Our world trade is rather characterised by oligopolies, memberships & exclusions, mercantilism, block competition and exploitation of the oceans and airspace.

Reckoning for big firms with foreign earnings 

I am not sure President Trump is aware of all the possible complications a Trade War would unfold. He has delivered or tried to deliver on so many of his campaign promises regardless of the media backlash, that he is now under growing pressure to deliver also on China in 2018. He promised he would. The point I am raising in 2018 is this: This may help the GOP avert a total disaster in November. Who would pay the biggest price? Large multinationals and the top 10% of US earners. They are the ones investing and owning the lion share of the US stock market. These tend to support the DNC as well. Most other Americans are barely invested in stocks. Should the push really come to shove, the US Administration is likely to force the big firms to give back part of the Economic Rent they amassed in recent decades. Let us not forget that the US Administration has already passed the Tax Reform and this is already mobilising US profits and production back to the Home Land. While US Tax Reform will be able to alleviate the fallout from trade frictions for US firms, the US Tax Reform puts a huge pressure on a vulnerable Europe. Wrong-footed Europe was doing exactly the opposite: increasing taxation and regulation. Vibrant economies excessively built on Tax Havens – like Ireland – may be decimated. But others like Luxembourg and Lake Geneva may be severely impacted too. The combination of lower taxes and less regulation is already reenergising the US economy and is likely to attract many start-ups and manufacturing firms from Asia and Europe.

Winners & losers in a Trade War: USA, Russia among winners, Europe and China among worse losers – Possible impact on Currencies

One thing is likely in an all-out trade war: If the USA sneezes, Europe may catch a cold and China may face a crisis. This is the conclusion from our analysis spanning a large set of economic and geopolitical factors. Thus, I wouldn’t be surprised if China and Europe compromise to avert a trade war. And I wouldn’t be surprised if the UK or another European nation set Russia up (a trap?) to unite the whole West against a common enemy. There are already some signs of both.  But will the USA give in or play along this time? For years now I have had the lingering concern that Berlin and Brussels may have embraced China as their new protector, champion and strategic ally too early, and yet Europeans boldly expect the USA to provide for Europe’s unconditional protection in the meantime. Europe has been able to behave and contain her derision over the USA when a liberal President sat in the White House, but that is weak basis for a lasting partnership. These simmering tensions may play a role this year.

Do European leaders really believe no one in America has taken notice? The pervasive anti-American sentiment in Western Europe is not something that was born after Trump won the US Elections. Although many level-headed business leaders in Europe appreciate and support the USA in private, they are silent in public. The vast majority of European leaders frown upon America. They look with contempt upon Americans’ culture, Christianity and values. In formal public events though, political figures keep up the pretence of a strong friendship based on common values. America and Europe are not just different, they are diverging. Both the rise of Trump and the prevailing consensus that the USA was in irreversible decline, led Western Europe to publicly embrace US foes like China and Iran as their new trusted partners. But our independent geopolitical and macroeconomic analysis shows the USA is not out yet, far from it. Western Europe discounted the decline of the USA too early. Something that may help the rise of Poland and Turkey. This expectations of a decline of the USA and rise of China played a role in last years sell off of the greenback, and it is possible that collision of geopolitical and macroeconomic forces could lead to a re-rating of the USA. Having said that, neither the US Treasury nor the FED want too strong a Dollar in an election year. 

While I am convinced a somewhat scathed USA would emerge as the winner from a global trade war and that Western Europe and China would be worst hit, it is good to pose the question: Is there an unsuspected winner in a Trade War? I’d say yes, Russia. Not in absolute terms, but surely in relative ones. Although oil prices may fall, Russia is the least export-connected major power to the global trading system of merchandise. In a devastating global trade war, Russia would be the least affected big power. The West cut Russia off ..  Most Russian regions can cope with hardship and can cope with being cut off from the rest of the world. I have been critical of the West’s relentless sanctions on Russia. They are making a resourceful Russia only tougher and bolder, with less to lose in a global conflagration. Additionally, we also have “escalation” scenarios where the geopolitical fallout could trigger a higher oil price, more than compensating the overall decline in oil demand.

Singling out Russia may be running its course – Europe a hostage of China?

(Russia needs to be monitored carefully, especially in the event of a Trade War, since she is a clear beneficiary – she might be tempted to strike)

Our independent analysis shows clearly that all powers are spying and surveilling even on their so-called partners. China and Russia have in recent years stepped up their cyber warfare attacks on the USA, and believe me Russia is not the only country that tried to influence the US elections in 2016. Endowed with a large cyber-budget, China is deploying and testing many more “raids” on US interests and installations than Russia. China is confident and bold, because she made the West’s supply chain and consumers dependant on her.  Given the West’s utter inability to stand up to China so far, it is understandable that the West focuses all her ire on Russia. Nevertheless, this “singling out and punishing” of Russia has side effects that could benefit Russia in several extreme scenarios going forward. Thus we are forcing Moscow to prefer extreme outcomes. Not good for the coming years.

We cannot understand Russia’s overreaction to the Ukraine change of power, without understanding the 25 years that preceded it. The West broke the spirit of the agreement leading to Germany’s reunification and the pullback of all Russian troops from Eastern Europe. The EU and the USA believed Russia was “finished” anyway. It is this sense of humiliation and encirclement by the EU & NATO that aided the rise of Vladimir Putin, steering Russia on a nationalistic rearmament course. This is a fact that Western leaders and media never acknowledged. Not happy with the encirclement of Russia the West meddled in both Georgia and Ukraine to support pro-Western forces and parties.

It is clear that Russia and China have become very aggressive in their “meddling” and “attacks” of US and Western assets, but it was probably the West that kicked off the era of heavy meddling we are in. It was the West that expanded into the Buffer Zone between NATO and Russia (i.e. Eastern Europe), subsequently supporting pro-Western political forces to topple the pro-Russian government of Ukraine. The intentions might have been good and understandable, but the resources and the assets deployed over several years (from intelligence to media coverage) showed to Russia, China, Iran, Turkey etc. that the “Hunting Season is On”. We see since the successful Western operation in Ukraine that around the globe, nations have become more aggressive in the way they meddle in other sovereign states’ affairs. We are monitoring uninvited meddling everywhere from South America .. all the way .. to East Asia. A sign of the time that could be a foreshadow of future wars.

Final conclusion: The USA is not really testing China, but Europe. Washington has de facto downgraded the EU within NATO

None of the above should be understood as Moscow being innocent and a victim of the West – my point is that all attack each other somehow: many nations are meddling, China is attacking US land- and space-based strategic facilities, yet all we see is the fury of the West against Russia. Thus, Moscow feels unjustly isolated and with less and less to lose from a conflagration. The game the West is playing – multiplied by our utter inability to stand up to China – is the bigger risk at hand. The West has been for two decades a hostage of China, something the USA is trying to break free from. Europe has instead de facto declared China as her new protector. Europe is thus a hostage of China, and it will be interesting to see how Europe would behave should the USA go to trade-war with China. We have already ascertained that the USA will demand similar behaviour from other trading partners versus China or face consequences. All this leads me to my final conclusion (at this stage of my research on March 23 2018), America’s threat of a Trade War with China is not so much aimed at China, but at Europe. The USA are increasingly out of patience with the EU’s double game of pretending to be a close ally while embracing America’s foes. Washington may thus force its way against China and other trading partners mainly to test Europe and to give Europe a chance to decide which way she wants to go. Either fall into the Transatlantic Alliance or side with China and other rising powers like Iran. I am monitoring this. We can’t rule out that the EU will see her premature error and stand up to China.

The truth be said: NATO exits at the moment more on paper than in reality. Conservative US military and strategic circles have serious doubts about the real allegiance of the EU, and think Europe is building a strategic alliance with China. President Trump agrees with that assessment and is keeping his ambivalent support for NATO. It is a smart strategy: give full official support, but retain a distrustful selective approach. The US allegiance to Europe has been de facto downgraded to selective case by case assessment and country by country status. Different levels of allegiance to the US have been identified among EU countries. Not surprising. All want to be defended, but few can and want to really defend the USA. The interesting thing is Russia has taken notice of this over the past 12 months. The West doesn’t understand Russia and may pay for it one day.

I hope this analysis is somewhat helpful for you. I focus on these issues, because all these trends are converging and I see consensus pinned on the surface of the usual narratives.

By Christian Takushi, Macro Economist & Geopolitical Strategist, 22 Mar 2018 – Switzerland

Note: None of our analyses should be interpreted or construed as an investment recommendation 

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Our broad approach to geopolitical research is distinct & independent

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

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(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

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