As Beijing went back to work on Wednesday after a week off for Chinese New Year, a cold wind began to cut through the capital, picking up speed as the weekend approached. The streets began to empty on Thursday afternoon with pedestrians hurrying into the warmth of shops and subway stations, windblown and shivering.
The gathering storm was an unwelcome start to the Year of the Snake, which is associated in the Chinese zodiac with resilience and shedding bad energy. The new year began with a surge of bad international energy in the form of a trade war triggered on Tuesday by Donald Trump’s imposition of an extra 10 per cent tariff on all imports from China.
Beijing responded within minutes by announcing tariffs on US oil, coal and gas, as well as agricultural equipment and pickup trucks. China also introduced export controls on key minerals used in manufacturing, launched an antitrust investigation into Google and put the company behind Calvin Klein and Tommy Hilfiger on a national security watchlist.
Trump said the tariffs were on account of China’s failure to halt the export to the US of precursor chemicals used to make the drug fentanyl. He threatened to impose tariffs on Canada and Mexico over fentanyl too but postponed them for a month after receiving promises of tougher policing of the borders.
Beijing has been preparing for months for a trade war with Washington which will escalate if Trump makes good on his threat to slap a 60 per cent tariff on all Chinese imports. It took 18 months to end the tariff war between Washington and Beijing the last time Trump was in office and he appears to have lost none of his zest for using import taxes as a negotiating instrument.
Most economists warn that tariffs will drive up inflation in the US and that the dollar will appreciate against other currencies, blunting the impact on exporting countries such as China. But within Trump’s inner circle, tariffs are just the first step in an audacious plan to reshape the global economic order to America’s advantage.
Ursula von der Leyen has adopted a warmer tone towards China in recent days, fuelling speculation that Brussels might revisit the Comprehensive Agreement on Investment with China that was put on ice around 2020
Stephen Miran, Trump’s nominee to chair the Council of Economic Advisers, explained the plan last November in a 40-page paper called A User’s Guide to Restructuring the Global Trading System, which has been read widely in Beijing. He argues that the dollar’s status as the world’s reserve currency gives the US immense power over the global financial system, which it can deploy coercively through sanctions against adversaries such as Russia and Iran but at the cost of an overvalued currency that makes American exports less competitive.
“The trade-off is thus between export competitiveness and financial power projection. Because power projection is inextricable from the global security order America underwrites, we need to understand the question of reserve status as intertwined with national security,” he writes.
“America provides a global defence shield to liberal democracies and in exchange America receives the benefits of reserve status – and as we are grappling with today, the burdens. This connection helps explain why President Trump views other nations as taking advantage of America in both defence and trade simultaneously: the defence umbrella and our trade deficits are linked, through the currency.”
Trump has spoken of tariffs as a source of revenue for the US and as a way of boosting American manufacturers by making imports more expensive. But for Miran, their primary purpose is as a negotiating instrument to persuade trade partners to sign up to a reform of the Bretton Woods system similar to the 1985 Plaza Accords that saw the US, Japan, Germany, France and Britain agree to a devaluation of the dollar.
The Mar-a-Lago Accord, as Miran calls it, would be unilateral rather than multilateral, with Washington using tariffs and security agreements to pressure partners into agreement. The deal would also oblige foreign central banks to replace short-term US treasury bills with long-term bonds of up to 100 years, easing the US’s government debt burden.
Miran’s blueprint requires the careful sequencing of gradually increasing tariffs and a broader currency alignment and he acknowledges that the path is a narrow one. It also offers Washington’s trade partners an incentive to strike back hard early in the process in the hope of derailing it.
Trump’s return to the White House has coincided with a flurry of trade negotiations between Washington’s trading partners that don’t involve the US. The European Union reached agreement with the South American trading bloc Mercosur in December after 25 years of negotiations and has expanded trade deals with Switzerland and Mexico.
Ursula von der Leyen has adopted a warmer tone towards China in recent days, fuelling speculation that Brussels might revisit the Comprehensive Agreement on Investment (CAI) with China that was put on ice around 2020. Trump’s tariffs could indeed generate a reshaping of the global economic order – but not necessarily in the way he wishes for.
