Opinion: How China could wrest global leadership from U.S. at the G-20

[bostonangler]

Let’s go out on a limb here to talk about a potential dollar shock coming out of the G-20 Summit in Osaka this weekend. We step into this conversation admitting that economic models do a lousy job forecasting currency movements. That said, good analysis can still yield insights into fluctuations in the volatile world of exchange rates.

Students of “The Art Of War” will understand our concerns about the dollar after Presidents Donald Trump and Xi Jinping meet at the Osaka G-20 Summit.

We believe Trump has set himself up for a nasty outcome with Xi.

Specifically, the U.S. president has called a meeting where the outcome is beyond his control. We expect Xi to exercise his unilateral power to refuse any concessions to the United States, to decline to advance talks until and unless China’s three red-line conditions are respected.

Trump in a corner

There is nothing Trump can do to avert this outcome. Xi’s refusal to back down will set Trump back on a major promise to his political base to “bring China to its knees with tariffs.” However, that is only the beginning of the trouble.

 

Now read this: Kyle Bass says investors should ignore G-20 and brace for a fresh round of tariffs

China’s position, reiterated daily in official media like the People’s Daily and Xinhua, is that it does not want a trade war with the United States but that it is not afraid to fight one to defend its interests. Editorials in all media talk about “fighting to the death” to defend principles of free trade and development.

China’s position is laid out in an editorial in People’s Daily a few days ago:

“Lying behind the trade feud is America’s intention to stifle China’s development. The U.S. wants to be a permanent leader in the world, and there is no way for China to avoid the ‘storm’ through compromise.

“History proves that compromise only leads to further dilemmas. During previous trade tensions between the U.S. and Japan, Japan made concessions. As a result, its political stability and economic development were adversely affected, with structural reform being suspended and hi-tech companies being severely damaged.

“China, with a population of 1.4 billion, is the world’s largest manufacturing base. Industrial upgrading and hi-tech innovation are crucial to China’s economic development. China needs to leave more resources to its descendants by protecting the environment, and reaping the dividends of further opening-up. These are the core interests of China, and it will never give them up.

“The only way for a country to win a war is through development, not compromise. To achieve development, China will open its door wider to the world and fight to the end.”

These are Xi Jinping’s mandates, dictated directly from his party, for the meeting with the United States president in Osaka.

The only possible outcome is for Xi to reject U.S. demands in Osaka.

Tax or back down

That will leave Trump the choice of either raising tariffs on $250 billion worth of consumer goods—a tax on U.S. voters in an election season—or backing down in front of his base.

If this “forced Summit” happens early on in the course of the G-20 Summit, we expect Xi to take U.S. tariffs and trade policies to the G-20 table; to excoriate the United States for violations of WTO rules; and to accuse it of bullying, environmental disrespect and anti-globalism. Europe will be pressured to pivot away from the United States in favor of stronger trade and economic and environmental support with China… and it might.

China must be expected to take countermeasures, and not just tariffs that tax its own companies and citizens.

Probably, the harshest responses will be in the form of harassing, sanctioning, boycotting or just shutting down U.S. businesses operating in China. That may have impacts on sales and profits of the largest U.S. companies and exporters, possibly affecting their share prices. The balance of payment consequences will be complex, but mostly bad for the dollar DXY, -0.11% BUXX, -0.12%

The end of the dollar

Our biggest fear is that China may begin to decline dollars in payment for its exports. That would deal the greenback a serious setback. This is the undiscussed ultimate weapon China has in its arsenal in any real trade war. A bone to throw to the Europeans for support in its conflict with the United States might be to insist on euros EURUSD, +0.1583%  rather than dollars for its exports.

Puff! The end of the dollar!

Of course, China already has industrial development plans to build technologies currently monopolized by the United States. That transition may take a while, but the plans are already in motion.

In a shutdown of trade flows with the United States, China’s economy will suffer initial setbacks for sure, although nothing like the kind endured by Chinese people over the last century.

Eventually, China will emerge as the world’s industrial leader. It will sell almost all of what it sells to the United States to rest of the world, which already takes 85% of its exports. It will import technologies from other countries to fill the gap until it builds its own resources.

U.S. companies will lose access to the biggest and fastest-growing economy on earth.

The future swings on a single meeting

Thus, the balance of power in the world swings on a single meeting, on a single day—maybe this week.

We do not understand why Trump’s handlers have allowed him to be exposed in this way. This is a meeting whose outcome he cannot control, with a lot at stake.

Xi has an opportunity in Osaka to wrest global leadership from the United States. We expect he will exploit it.

This is “The Art Of The Deal” versus “The Art Of War.” One is a former best-seller in the U.S. popular press. The other is the centuries-old blueprint for victory in battle that is used universally in real and business conflict.

Place your bets, but watch out for a loss of confidence as the outcome, despite support from favorable interest rate spreads, decent economic growth and a strong stock market SPX, +0.38%  .

Carl Weinberg is chief international economist and managing director at High Frequency Economics in White Plains, N.Y.

https://www.marketwatch.com/story/why-the-global-balance-of-power-could-hinge-on-the-trump-xi-meeting-2019-06-27?siteid=yhoof2&yptr=yahoo

 

 

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