Can anyone stop the Chinese Giant?
Attorney Esther Koren, Head of Mergers & Acquisitions at GKH in an article for Globes | August 2019
In the backdrop of the upcoming presidential election, President Trump is threatening to increase tariffs, which is starting early fearful rumblings of market chaos.
The risings tensions in the US-China trade war in recent months, through the use of China’s aggressive currency depreciation, and the fall of the yuan to its lowest level in more than a decade has caused a stir in global markets, especially in the US capital market. Over the past few days, the NASDAQ 100 has plunged 3.5% and the S&P 500 (which include shares of 500 large US publicly traded companies) has fallen 3% – the largest decline since the beginning of the year.
The trade war began with Trump’s entry into office in January 2017 with his stated goal of increasing US exports and reducing imports. This was at cross-purposes with China’s response, which was to adopt a similar policy. Import quotas and waterfall tariffs heavily influenced this policy. China’s has taken another bold move in the Customs War over the last few days- a further devaluation of the yuan currency, which in the last decade has maintained a rate of no more than 7 yuan to the dollar.
The US responded with a statement saying, “China manipulates currency”. As mentioned above, the advantage for China in the devaluation of the yuan is to make Chinese exports more attractive and to deepen trade deficit in the US. However, the move also has a negative effect on China – impairing the strength and stability of the yuan over time. The cumulative effect of this is that it may, in the long run, reduce the “trade cake” and collapse the global economy.
This is not just about economics: history has proven that a powerful trade war is often accompanied by politics and a political campaign. In other words, there are other underlying motives extraneous to the ground-level economic policy concerns.
For China, the “conflict” may have started with a transition from a global village policy but it may well lead to economic isolation. What seems to be emerging is an internal conflict resulting from nationalistic impulses. In recent days, as we view China’s response to Hong Kong protests- we can interpret this as “Whoever plays with fire – will catch fire” – ultra-nationalism that could cause China’s political and economic isolation.
With the US presidential campaign approaching, President Trump is flexing his muscles and threatening to increase sanctions, for him – this is a key tactical issue. However, the fact that there is a deterioration in the markets, with predictions and indications of a potential recession, will cause those to become a political liability. In the US arms industry, there is no doubt that among the countries’ suspicions, US regulation will block such purchases and investments that could benefit China. The capital tycoons discourage investment in China for fear of being portrayed as harming the American workforce.
At the same time, the Chinese are not waiting for anyone and are making great progress in exporting their infrastructure and increasing trade potential. In recent years, China has adopted a number of revolutionary long-term programs and is working hard to implement them. The “made in China 2025” program aims to create a Chinese Silicon Valley. Yesterday’s war was about washing machines, steel, and cellular panels. Today – it focuses on global technology.
The gamble that China has taken in entering this showdown is the long term effect of the significant reduction in the workforce and aging population that are expected in the coming years: A recently repealed child policy and improved living conditions are to result in a reduction in the labor force ratio of about six workers for each pensioner, to roughly two employees for each pensioner by 2050. These statistics mean that there will be a need to import food products from foreign countries, including the United States, China imports beef and soybeans on a large scale, and this trend in imports of American agricultural products is expected to grow significantly over the years. In other words: a prolonged conflict may force China to rely on the West.
As a result of the trade war, companies are likely to “flee” from China due to a fall in demand for their products or due to sensitive relationships with American customers or suppliers. The American side of the war is less threatened by a long term conflict: the hegemony of the dollar and the continued dependence of the world countries on the dollar as a safe currency means that conducting international transactions, gives the United States stability, enabling it to continue to pursue an aggressive policy vis-à-vis the Chinese.
The author is the Executive Chairman and Head of Corporate, Mergers and Acquisitions at the Gross GKH office. She represented “ChemChina” in the acquisition of “Makhteshim Agan”, is one of the leading of Chinese investment sectors in Israel; lecturer on China-Israel trade relations.