Threats against China could result in another Great Depression
US Treasury Secretary Steve Mnuchin’s threats of a trade war against China if it does not uphold sanctions against North Korea not only will not accomplish anything, they could trigger a global economic tsunami and further heighten tension in the Korean Peninsula if he follows through with the threat.
North Korea responded by firing an intermediate-range ballistic missile that traveled 3,700 kilometers over Japan and landed in the Pacific Ocean a few days after the United Nations Security Council unanimously passed harsh sanctions against the Democratic People’s Republic of Korea (DPRK). The “hermit” country promised more tests were on the way, prompting the US, South Korea and Japan to scramble for an emergency Security Council meeting to deal with the issue.
More threats from the US and its allies and sanctions are unlikely to deter the DPRK from holding more missile and nuclear-weapons tests. It considers a nuclear arsenal with the means to deliver the weapons necessary for its survival or to deter a regime change. That conclusion is probably based on what has happened in Iraq and Libya. The DPRK might also have taken a lesson from China and other nuclear powers.
The Iraqi and Libyan experience
It was in part George W Bush’s labeling Iran, Iraq and North Korea as the “axis of evil” in his 2002 State of Union address that prompted the DPRK to hasten nuclear-weapons development. Accusing these countries of either possessing or developing “weapons of mass destruction”, Bush categorized them as “sponsors of terror” who must be dealt with or destroyed.
Indeed, it was such allegations (later proved to be false) that led to his bombing of Iraq, killing thousands of Iraqis and American servicemen, turning it into a dysfunctional state, and costing the United States between US$3 trillion and $5 trillion (depending on whose figures one believes).
Bush might have invaded Iran and the DPRK as well had the US public not opposed the Iraq war, and fighting the other two “axis of evil” members would have cost considerably more. The thousands of artillery pieces in the North targeting Seoul could kill many of that city’s more than 10 million residents, not to mention the more than 25,000 US troops deployed nearby. There is speculation that it was the fear of wiping out millions of South Koreans that prevented the Bill Clinton administration from mounting an attack against the DPRK.
Meanwhile Iran had (and still has) a relatively large navy, air force and army. They could have posed a formidable military challenge to US and allied forces. Invading it could have been an even bigger blunder than the Iraq debacle, losing considerable human lives and risking a political backlash back home, like those from the Vietnam and Iraq wars.
Moreover, the DPRK has seen that China and other nations that managed to acquire a nuclear arsenal are immune to US-led attacks. The US and its allies may demonize those countries, but have fallen short of mounting military actions against them.
Then there is the Libyan experience. It was bombed “back to the stone age” after its leader Muammar Gaddafi abandoned his nuclear weapons program. What happened to Libya destroyed any trust that the DPRK (and many other nations) might have had in the US and its allies to live up to their promises.
Independent or unbiased historians will judge whether it is the US or DPRK that is the “aggressor” of “provocateur”.
An all-out trade war with China could push the global economy into an abyss like that of the 1930s-era Great Depression. At that time, inadequate domestic demand coupled with shutting out external markets plunged the world economies into disarray, closing massive numbers of factories, creating breadlines, and causing other economic malaise.
A similar scenario exists today, as developed nations continue to struggle to recover from the 2007 financial crisis because of insufficient domestic demand. Huge consumer indebtedness, marginal wage increases and a ratio of public debt to gross domestic product of more than 100% are largely responsible for capping economic growth at less than 2% in the developed economies.
Probable effects of a US-China trade war
China is the United States’ largest trading partner. It holds more than $1.3 trillion in US Treasuries. It is the world’s biggest consumer of natural resources and manufacturer, and is the largest trading partner to more than 120 countries. Many US states, such as Iowa and California, and cities such as Los Angeles are highly dependent on the Chinese market and investment.
The two economies are increasingly intertwined, with growing numbers of US firms producing in China and selling products there. Major US enterprises such as General Motors, Ford Motor, Boeing, Apple and others are highly dependent on the huge and increasingly affluent Chinese market. Retailers including Ivanka Trump, Walmart and Target have gotten rich by sourcing products from or outsourcing production to China.
Barring Chinese imports would trigger inflation and stifle exports. Inability to source products elsewhere in a timely manner and disrupting the international supply chain would spike prices in the US.
China was the third-largest market for US exports at more than $120 billion in 2016, giving Beijing huge potential retaliatory measures.
Banning China from accessing the US financial market would exacerbate the problems in America’s financial systems. Any attempts to freeze China’s $1.3 trillion US Treasury bill holdings would bring chaos in the US, sending the capital market into a tailspin and spiking interest rates. Foreign investors would quickly divest their US financial-asset holdings. China would retaliate by freezing US assets on its soil. The list of financial consequences goes on.
Because the world is more interconnected than at any time in history, trade and financial wars, particularly those between the two largest economies, would have enormous repercussions on other nations. Blocking exports from each other’s market, the US and China would cripple the economies of Japan, Australia, Canada and others that are integrated in the supply chain.
As indicated earlier, a financial-system disruption would distort not only trade but also investment and other financial flows. Barring China from accessing the US dollar could mean that China might not be able to buy oil because its trade is based on the petrodollar. What’s more, financial-system instability or uncertainty would raise interest rates and discourage investment, as happened in the 1980s.
Geopolitically, tensions among the powers would rise, making the world more dangerous. A trade or financial war would sink the already fragile US-China relationship lower, as has happened between the United States and Russia. The lack of common interests could turn the “New Cold War” into a hot one. It is the profits of trade and investment that are in part responsible for sustaining a manageable relationship between the US and China.
Whether it is the US or China that would lose the most in a trade war is a topic for another article. But suffice to suggest that threatening China and other countries doing business with China with sanctions would only exacerbate global economic and geopolitical instability.