China’s strict trade policies – to enforce foreign companies to set up factories in and transfer technology in China – is the real point of tiff between the largest developed and largest developing countries of the world.
Trump administration accuses these China’s acts as theft of American intellectual property and forced transfer of American technology – hence it oozed several punitive steps that cuff additional tariffs on imports from China.
In a White House statement, Trump warned China if it takes retaliatory actions against our farmers and other industries, we shall immediately pursue Phase-III, which to tariff on approximately $267 of additional imports.
But China didn’t dither to hit back and enacted tariffs on goods imports from the United States.
For the first seven months of 2018, the United States trade deficit in goods with China averaged $31.8 billion per month to $222.6 billion, largest-ever as compared to per monthly trade deficit of $31.3 billion in 2017, to $375.6 billion.
The trade war between the two economic powerhouses is getting stiffer and trickier after the imposition of US sanctions on China over purchase of Russia Su-35 fighter jets and S-400 air missile defense systems.
United States plugged the sanctions on the Equipment Development Department of the Central Military Commission of China in violation to ‘Countering America’s Adversaries Through Sanctions Act (CAATSA).
Chinese military intoned its ‘strong indignation and resolute opposition’ on sanctions and demanded the United States ‘to immediately correct its wrongdoing and withdraw the so-called sanctions’ or ‘must bear the consequences’.
The burly China’s response is unusual. It normally circumvents using such a rude tongue on international diplomatic forums or even to its contenders. So, the Chinese tough-tone is clearly an indication that it is prepared for trade war escalation.
On the other hand, the United States has entirely or partially sanctioned a number of economic or military giants such as China, Russia, Turkey, Iran, Pakistan, and North Korea. It is also threatening to impose sanctions on oil-rich Venezuela.
This unprecedented American global supremacy is driven by its enormous economic and military strength and most importantly by the broad acceptance of its currency – US dollar – as world’s leading reserve currency.
For many years, the US dollar is shouldering the largest share in IMF’s international currency basket – COFER. It currently forms 62.48% or about $6.5 trillion of the allocated global official foreign exchange reserves.
Nevertheless, the share of US dollar has slid to four-year low, from peak 65.97% in 2015. At the same time, the other major currencies such as euro, Japanese yen, pound sterling, and Chinese renminbi/yuan have bettered their shares.
While the economic US ‘titanic’ is also holed by massive military spending and overseas operations in Afghanistan, Iraq, and Syria – the ‘victimized’ countries are targeting the trademark US$ currency.
In order to end their reliance and end the global supremacy of US dollar, the aggrieved countries are now running anti-dollar campaign, encouraging the use of local currencies in international trade.
Russian Direct Investment Fund (RDIF) and China Development Bank (CDB) are closely coordinating to increase the ruble-yuan trade between the two countries, in defiance to hegemony of US dollar.
The first deals (in national currencies) will transpire in the start of the next year in Chinese yuan worth $10 billion. The initiative would be milestone in $100 billion bilateral trade – potential to reach $200 billion – between the two countries.
China is the world’s largest oil importer and also is the largest Russia’s oil buyer. Russia has agreed to accept Chinese yuan against oil supply instead of petrodollar. So, both China and Russia are set to disrupt the $1.7 trillion petrodollar market.
Furthermore, China is pushing its other oil trade partners – Saudi Arabia, Angola, and Iran – to trade oil for yuan. The ‘petroyuan’ contracts are expected to surge as soon as American sanctions continue to take effect on China.
Turkey too is aggressively pursuing for non-dollar transactions in trade and investment with Russia and other countries after Turkish lira shed by 40% in this year over strenuous Turkey-US relations.
The ties between the United States and Turkey hit all-time low, following Trump imposed extortionate sanctions on Turkish steel and aluminum over detention of an American pastor on terrorism charges.
US Senate showed great resentments against Turkey and passed a bill to stop the supply of F-25 jets on the Turkish announcement of purchasing S-400 anti-aircraft missile systems from Russia.
Erdogan responded averring that Turkey does not need permission from anyone to guard its territory.
He further said that the United States was behaving like ‘wild wolves’ and urged the need to gradually end the monopoly of American dollars once for all. Turkey is now in negotiations with Russia to layover the use of US dollar in bilateral trade.
In addition to these local currency swaps, China might consider to pull out its substantial holdings in the US treasury. As of July, China retains roughly 20 percent of the total US foreign debt of $6.251 trillion.
It has not made any new purchases for some years now, instead China holdings in US treasury have plunged to six-month low of $1.17 trillion. The occasional rise in China holding is due to interest payments, it has accumulated over the years.
If China decides to sell off its holdings, it would make an impact on interest rates and bond prices. The US government will be forced to issue bonds on higher interest rates to borrowers to meet the dearth that would eventually slowdown the US economy.
Till December 2017, Russia also was one of the top foreign investors in US treasury with $102.2 billion. As its tussle grew with the United States, it sold out its most of its treasuries and now maintains only $14.9 billion in US treasury.
The economies, which are subject to shakeup on US sanctions, are developing their own payment system, as an alternative to SWIFT.
Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the world’s largest interbank communication network that enables financial institutions to send and receive reliable, safe, and quick information about financial transactions.
As SWIFT is controlled by the United States, the countries such as China, Russia, France, and Germany are evolving their own international payments system to ensure their autonomy and sovereignty in trade, beyond US control.
China introduced its indigenous international payment system, Cross-border Inter-bank Payment System (CIPS), in October 2015 to provide safe, easy, and efficient settlement services to international financial institutions doing transactions in yuan.
The second phase of CIPS became fully operation in May 2018 and its actual business scope was extended to 148 countries and regions. According to central bank of China, RMB CIPS handled 89.4 billion yuan in the first quarter of 2018.
Russia is toiling on its domestic interbank payment system too – System for Transfer of Financial Messages (SPFS) – smelling the potential shutdown of SWIFT from tougher US sanctions. It may consider euro-yuan based alternatives to SWIFT as well.
Earlier this month, France and Germany announced their own international payment system. French finance minister said ‘with Germany, we are determined to work on an independent European or Franco-German financing tool which would allow us to avoid being the collateral victims of US extra-territorial sanction’.
The United Kingdom, Germany, France, China, and Russia have lately agreed on special payment system on Trump’s unilateral withdrawal from Iran nuclear deal. The payment channel would be analogue to SWIFT for making oil payments to Iran.
All these episodes are ensuing on fast-track and are in retaliation to Trump’s cursory measures to ditch every country to ‘Make America Great Again’ but the in doing so, he could very well ‘Make America Trail Again’.