The tensions building between China and the US is another chapter in President Donald Trump’s ill-judged trade policy. There are real issues with respect to China’s trade and economic policy, but the US approach is unlikely to be effective.
Indeed, US tariffs are undermining relations with partners who would have been likely to engage on China: the European Union and Japan. The EU (among others) was given a reprieve on tariffs, but last week Trump administration went ahead with levies on steel and aluminium from the bloc. Japan was hit by steel tariffs in March, despite Prime Minister Shinzo Abe’s personal diplomacy with Trump (as was New Zealand, hardly a strategic threat to the US steel industry).
These actions are eroding the rules-based foundation of the international trading system. I have previously described the weaponisation of international trade, such as China imposing restrictions on Norwegian salmon imports, as well as South Korean tourism and companies such as Lotte, the retailer, and Hyundai, the carmaker, after bilateral political disputes.
Sanctions can be effective, although variably so. The tight economic restrictions China is imposing on North Korea are probably a significant factor in the country’s change of approach. China’s North Korean imports slumped to $9m in February and $12m in March, down from a monthly average of around $100m over the past few years.
But recent unilateral actions, notably by the Trump administration, take sanctions into new territory, such as those on companies linked to Russian oligarchs close to President Vladimir Putin. Companies in which Oleg Deripaska is involved were slapped with sweeping sanctions, despite limited direct exposure to the US. The share prices of Rusal, the aluminium producer, and EN+, its parent company, declined by more than 50%. Deripaska has resigned from the Rusal and EN+ boards to try and convince the US Treasury to lift the sanctions.
Trump has pulled the US out of the nuclear deal with Iran, re-imposing sanctions on the country as well as companies that do business with it. Non-US companies with US operations, or those backed by institutions with a US presence, will be greatly constrained in doing business with Iran. This is a particular problem for Europe. As the new US ambassador to Germany bluntly tweeted, ‘US sanctions will target critical sectors of Iran’s economy. German companies doing business in Iran should wind down operations immediately.’
Unsurprisingly perhaps, this action will have a limited effect on US companies. US goods exports to Iran were worth just $150m in the year to February, whereas the combined value of French, German and Italian exports was about $7bn. China may emerge as a winner; its exports to Iran are worth about $16b, and it takes about 15% of Iran’s oil.
Bruno Le Maire, the French finance minister, noted, ‘The international reach of US sanctions makes the US the economic policeman of the planet, and that is not acceptable’. At a time when the US seems less interested in remaining the world’s reserve currency issuer, these sanctions could be a new version of the ‘exorbitant privilege’ Valéry Giscard d’Estaing, a previous French finance minister, warned of in the 1960s. The centrality of the dollar in the global system gives the US options other countries don’t have.
Economic sanctions are preferable to military conflict, but their unilateral application puts further pressure on an international system already stressed by protectionism and mercantilism. Large powers, particularly the US and China, are using economic instruments to advance geopolitical and strategic interests. Companies from competitor countries are being targeted outside the constraints of a rules-based structure.
This may accelerate the fragmentation of the economic system, in which China and Russia increasingly engage with each other, and Europe and the US drift apart. Some countries may weigh the costs and benefits of transacting in dollars or with US banks if that exposes them to sanctions. The behaviour of large countries may cause companies to think hard about their global footprint.
What starts with specific, targeted sanctions may lead to structural change in the functioning of the global system, and the emergence of a multipolar global economy.
David Skilling is Director of the Landfall Strategy Group, a Singapore-based economic advisory firm.