Hewson's View: At the mercy of Trump (and his tweets)

Currency woes: A bank employee counts US dollar banknotes next to stack of 100 Chinese yuan notes at a bank outlet in Hai'an in eastern China. China's yuan fell further this week against the US dollar, fuelling fears of increasing global damage from Beijing's trade war with Donald Trump. Photo: AP
Currency woes: A bank employee counts US dollar banknotes next to stack of 100 Chinese yuan notes at a bank outlet in Hai'an in eastern China. China's yuan fell further this week against the US dollar, fuelling fears of increasing global damage from Beijing's trade war with Donald Trump. Photo: AP

Two things are clear in what is happening between the US and China. First, the US is really struggling to come to grips with the rising (risen) China. Second, Donald Trump, contrary to his self-assessment, is not a negotiator's bootlace.

Trump's so called "trade war" is totally ill-conceived and counterproductive to both sides and to the world economy. What, realistically, can he hope to achieve by way of a "deal"?

It is hard to believe that this will "fix" the US trading deficit with China - there's virtually no effect so far. Sure, it is having an impact on China's growth rate, but in the context of a broader collapse in world trade that is affecting all trading nations.

Trump has completely failed to recognise, indeed has underestimated, China's capacity to respond to his tariff increases. China's initial response was very clever, to announce counter tariff increases on significant, iconic, US products - Kentucky bourbon, Harley-Davidson motorbikes and mid-western farm products such as soybeans.

Then, this week, devaluing the yuan, only a little, but it made the point about just how easy it would be to broaden Trump's trade war to a currency war.

Moreover, China is a Communist country, with unusual capacity to "control" its citizens. It has very large international reserves, and it's the world's largest creditor to the US.

In this respect, it only has to stop buying new US securities and it could have a very significant impact on an already skitsy US bond market, at a time when the US budget deficit is about US$1 trillion, with debt well over 100 per cent of GDP, and Trump's tax cuts still to be financed.

The fallout is already hitting US industry, with significant increases in the costs of "inputs" - Chinese imports on which Trump has increased tariffs. Trump is already having to subsidise soybean farmers, the cost of which exceeds the revenues he raises from his tariffs, thereby further compounding his budget difficulties.

It should also be recognised that China is playing a much longer-term game than is the US, thinking and planning in terms of generations. At best Trump is only thinking through to his possible re-election November next year. To the Chinese, Trumps will come and go.

It should be recognised that China is playing a much longer-term game than is the US ...

It is concerning that Trump may not want to actually "claim" or "announce" a deal until much closer to the next election. Even if not really much of a deal, he would claim it as a major victory, in his usual "bullshit" and bluster.

This is concerning, because Trump seems to ignore the almost day-to-day impact of his trade/China related tweets on financial markets, as we've seen this week with stock markets collapsing and then recovering somewhat, only to sit and wait for his next "insane" tweet. Now that all the "adults" seem to have left the US Administration, we can only fear the worst in this respect.

China is, of course, facing many difficulties of its own, with its economy slowing much more than they will admit, and grappling with a host of domestic challenges including inequality, ageing, pollution, corruption, huge debt, and then there is Hong Kong.

One of the Chinese government's greatest fears is widespread civil unrest and discontent.

While they are blocking/filtering/distorting the news of the Hong Kong riots to the mainland, this may only be for a time, and they may have to risk moving their military into Hong Kong. This would be a huge risk for them, bringing echoes of Tiananmen Square.

The combination of the global economic slowdown, the collapse of world trade and falling commodity prices, is all "bad news" for us.

However, the Morrison government just continues with its slogans that "Our Economy is Strong", and "Our Economic Fundamentals are Good".

Morrison's almost exclusive focus has just been on passing his tax cuts, even if they prove unaffordable in the early 2020s, and to achieve a budget surplus this year, even if that may prove to be poor economic management in what are rapidly deteriorating global economic and geo-political circumstances.

Unfortunately, we may have to wait for a major global economic crisis before we see a realistic assessment and response from our government, but the probability of that seems to be increasing almost daily.

John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.