The best way to view the global economy today is through the lens of those Transformers movies. Donald Trump going toe-to-toe with Xi Jinping is the geopolitical equivalent of Michael Bay’s franchise featuring giant toys laying waste to entire cities—and, potentially, nations.
Only, this clash isn’t between autobots mindlessly fighting to the death. It’s between two strongmen leaders running the two biggest economies. Their brawl could lay waste to stability in markets everywhere. It could also transform either one of these giants into something truly dangerous.
President Trump’s tariffs—first $50 billion, then another $100 billion—are the wrong answers to the right question. Yes, President Xi’s China is a bad actor on trade. It blocks foreign firms from competing there, subsidizes local players, contradicts World Trade Organization rules and cribs intellectual property. Absolutely, and everyone knows this.
But we need to keep two thoughts in our heads at the same time. As predatory as China is on trade, pushing its economy onto its back could be an even bigger global threat. Could Trump’s escalating trade war be the catalyst that delivers Beijing’s “Minsky moment," when a debt-fuelled boom ends badly?
Every industrializing nation crashes at some point. It happened in America, Europe, Japan, Russia, South Korea and countless other places. China will falter, too. Sure, Xi’s team is plenty smart and investors haven’t done well shorting Beijing.
But no nation beats the system, if you will, and neither will China. With public debt as high as 283% of gross domestic product (GDP), shadow banks churning out tens of trillions of dollars of credit and opaque state-owned enterprises still dominant, excesses are growing apace. In December, the International Monetary Fund raised warning flags about Xi’s off-the-charts credit-to-GDP ratio, one about 25% above average.
In recent weeks, we’ve seen a barrage of China-is-different stories. Xi, pundits claim, is now president for life and assembling a dream team of reformist heroes to modernize the economy (Xi’s “Avengers"?). Yet Trump’s trade war, coupled with a new weak-dollar policy, is a perilous plot twist.
To stay in power as long as he’d like, perhaps until death, Emperor Xi must maintain frenetic growth—6.5% or more. Since the 2008 global crisis, Beijing kept GDP aloft via epic borrowing and credit creation. Since then, synchronized global growth powered China’s export engine. That’s now at risk as Trump swings a wrecking ball at global trade flows.
To investment specialist Ivan Martchev of Nevada-based Navellier and Associates, Trump’s clash with China comes at precisely the wrong time—as an epic credit bubble is unraveling. Trump’s policies, Martchev adds, are “like kerosene thrown on an already burning economic fire in China".
Some of that kerosene is filtering back America’s way as Trump transforms the US into an economic villain. Along with savaging America’s soft power, Trump is hurting his own voters as tariffs kill jobs, boost consumer prices and devastate retirement accounts. If China, say, cancelled all mainland Boeing orders, that’s about 180,000 US jobs gone right there. Trump, says US Senator Ben Sasse, is “threatening to light American agriculture on fire". The flames could spread to one of Washington’s biggest vulnerabilities. China, remember, is the No. 1 holder of US Treasury debt. Recently, Cui Tiankai, China’s envoy to the US, raised the spectre of Beijing scaling back on Treasury debt purchases. China holds some $1.2 trillion of Washington’s IOUs. Any hint Beijing might dump dollars would send US yields skyward and send shock waves around the globe.
Trump’s Republican Party is depending on China, Japan, Taiwan and India to finance its recent $1.5 trillion tax cut. Yet, by declaring Washington’s 23-year-old strong-dollar policy dead, while spending with complete abandon, Trump is trolling credit-rating agencies. He’s also taking for granted Washington’s bankers in Asia. A wiser, more strategic White House would be bolstering trust in the dollar, not undermining fundamentals.
Nor should the White House be knocking China off-balance in ways that could boomerang back America’s way. When China does hit a wall, many observers expect an approximate replay of the 1997 Asian financial crisis. The difference, of course, is that trouble in the second biggest economy and largest trading nation would reverberate everywhere.
Such risks make Trump’s trade war an amateurish own goal. There’s a simpler and less destructive way to contain China. It’s called the Trans-Pacific Partnership (TPP), a deal Trump reneged on right after taking office. Sadly, Trump is using decades’ old tools—based on a 1985 mindset—to do by brute force what predecessor Barack Obama bequeathed him with TPP. All Trump had to do was nothing.
Giant invaders laying waste to cities might make for fun movie-watching. But life imitating Hollywood action films? Not so much. As Trump and Xi battle for supremacy, the global economy should expect anything but a happy ending.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.