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DAVID KRUSE

Trade wars unify opposition against US

May 4, 2018
Farm News

French President Macron wraps up a visit with Trump in Washington D.C. and then German Chancellor Merkel follows with a separate visit. Trump likes a very personal connection to foreign leaders that he deals with, thinking if he can get them in a room with him he will win them over.

The French are liberal enough to accept Trump for what he is, but not the Germans. They adhere to organization and discipline, which Merkel exemplifies, and Trump and Merkel repel each other magnetically. They have had difficulty faking it to give appearances that there is any warmth between them. Macron's more personal relationship with Trump really hasn't gotten him anything. The EU was given a temporary stay from the steel and aluminum tariffs until May Day. Japanese Prime Minister Abe also lobbied Trump hard at Mara-Lago to have those same trade sanctions removed on Japan and had no luck. Abe has spent a lot of time playing golf with Trump and has nothing really to show for it either.

Some thought that if the U.S. was going to take on China in a trade war that we would have secured some allies first. Instead it appears that the U.S. has gone to war over trade deficits with everyone all at once. What this has done is drive the rest of the world together, unifying opposition to the U.S. trade-wise for their own self-defense. China has been diversifying their economy both toward domestic consumption as well as diversifying their foreign trade to reduce dependence on the U.S. They think that they can stand up to us. They know that comes at a cost, but that they can handle it. China is finding allies around the world. They are talking with the EU partly to make sure that the EU doesn't ally with us. The EU has reached an agreement in principle with Mexico on updating their trade pact as Mexico seeks allies to help buffer the downside if they fail to reach an agreement in principle with the U.S. over NAFTA.

While the U.S. is pulling back from its traditional leadership role in the world focusing domestically, China is making a major strategic investment in the world. They call it the Belt and Road infrastructure investment. China's development bank is spending $900 bln on roughly 900 road, pipeline, railway and port infrastructure investments in 65 countries covering 70 percent of the world's population. Trump talks about his $1 trillion domestic infrastructure plan and it isn't going anywhere. It remains to be seen whether it would even extend to modernize outdated locks and dams on heartland rivers.

Belt and Roads would connect China southward to Indonesia and northward though Russia all the way to the UK. It is a 7000-mile trek connecting 27 Chinese manufacturing hubs to 11 cities in Europe. A parallel route runs from India through the mid-east though former Soviet republics to Eastern Europe. It goes both ways as a Turkmenistan pipeline will bring 15 billion cubic meters of gas back to China, annually. They are also building ports and roads in Africa where the major population growth will surge in the next century. I would be surprised if Belt and Road projects were not extended to Brazil in order to advance their strategic interest in protecting their food security. Chinese retaliation against Trump tariffs placed on them, works to the enormous benefit of every other Ag export nation that we compete with, "Making Them Great" at our expense.

It is both commercial and strategic. China's buildup in the South China Sea in the Spratly Islands was to protect their sea lanes. 15.2 million barrels/day of the world's oil flows though the Indonesian Strait of Malacca and 17 million barrels/day flows through the Strait of Hormuz daily. This is China's, Japan's and Korea's lifeline to oil. Korea and Japan have little other cost effective alternative sources other than the US and Canada. China is building ports in Sri Lanka for commercial purposes but which also could become naval bases in order to extend their protection of their oil pipeline to the Persian Gulf.

If China controls the waters between Sri Lanka though the South China Sea, then South Korea and Japan both have a problem. Japan has the world's second largest and most modern deep-water navy and can circumvent the need to operate in the South China Sea or use the Strait of Malacca. Japanese tankers can operate outside the Chinese protected zone taking a longer route to the Persian Gulf and they have the deep-water navy to protect them.

We need to circle back here. The Eurozone runs a $132 bln current account balance with the US which is not going to get them off the hook with Trump. The EU, not the US, is China's largest trading partner, something that will become more tightly connected by Belt and Road. By the end of 2015 the EU had invested $207 bln in China while the US had invested $84 bln. The EU is actually afraid of the Belt and Road believing that "it pushes the balance of power in China's direction." So in this trade war are we going to have allies or cede them all to China?

The U.S. now accounts for about 25 percent of the world's GDP. That is a shrinking percentage as the rest of the world has grown around us. If we act in a manner in which the other 75 percent of the world economy consolidates to confront us economically, what kind of a "win" are we expecting from this?

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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