When push comes to shove, who has most to lose in a US-China trade war?
 Open conflict between China and the United States is a growing possibility, according to Peter Pham, managing director of Cayman Islands-based Phoenix Capital, and author of "The Big Trade: Simple Strategies for Maximum Market Returns".
Writing in Forbes magazine, which half-jokingly calls itself the "capitalist conspiracy", Mr Pham writes: "Military spending is always high, but despite the possibility of armed conflict, countries strive to avoid it. But China has another capable weapon - capital and debt."
Continuing on in this way Mr Pham warns that few appreciate how vulnerable America is, and how its own behaviour has brought national debt to Himalayan levels.
"The US Government's US$20 trillion dollar debt is another matter entirely. That amount is so high that if you use that money to buy a Big Mac for each of the world's seven billion people, then you would have over $18 billion in change! It's that big," he said.
China's economic growth has been miraculous, he said. "For three whole decades up until 2015, China's annual GDP growth rate was 10 per cent. Although in 2016, growth slowed to 6.7 per cent, that still beats US GDP growth rate of 1.6 per cent."
A lot of that debt, he says - $1 trillion and change, belongs to China. China is the second largest holder of US debt, behind Japan. But since 2016, China's dollar reserves have quickly fallen. To maintain the value of the renminbi, China is getting rid of the dollar.
"What's worth noting is that keeping or getting rid of a lot of debt wouldn't provide leverage for China over the US. Nonetheless, Chinese generals continued to call for a fire sale of US securities, since the US decided to sell weapons to Taiwan.
"As mentioned, China is going to outpace the US soon. This is a part of China's intentional, state-funded scheme to grow its global influence and topple the dollar's role as the world's global reserve tender. That also changes the region's balance of power," he said.
As Mr Pham sees it, China's GDP growth rate was impressive and ensured goods and services were competitive. At the same time, China bought US Treasury Bills by the billions. "Not only does that keep US interest rates low, it helped China grow too," he said.
The renminbi's value was low for many decades. That was a big advantage for Wal-Mart and other US companies, since they could move their factories and production plants to China, thanks to its low-cost labour and resources. So, the cost of production there was significantly lower. As a result, those companies were more profitable, while US shoppers could pay less money on consumer goods.
Companies taking advantage of China's low labour cost need to be paid in renminbi, in which case the amount of dollars sold will increase to satisfy the rising demand for renminbi. As a result the renminbi becomes stronger while the dollar weakens.
But this is bad news for Beijing, as Mr Pham sees it, because Chinese goods and services would then become less competitive. Beijing wants international consumers to find Chinese businesses more attractive, so it tries to keep the renminbi low.
"To undercut international competitors, China prints out a lot more renminbi so that the currency value becomes cheaper," Mr Pham said.
And that's what happened from 2001 to 2010, he said. Back then, the People's Bank of China altered the renminbi's value, making it cheaper. This helped cause a massive trade imbalance between China and the US, and the latter lost nearly three million jobs.
While China is on the rise, the US isn't in good shape. The former can maintain the global competitiveness of its goods and services, specifically by using US debt to keep the renminbi's value low.
Moreover, China's booming consumer market is drawing in large foreign companies. However, to enter, there are many strings attached. If tech companies want to gain access and sell to Chinese consumers, they will have to collaborate with local companies, in addition to handing in their technologies and patents.
So, China is using its growing consumer market as bait to lure in large American corporations, demanding them to trade their secrets for low prices. From there, China can start flooding the market with inexpensive goods and services. This is reminiscent to how China drowned the international market with its cheap steel. Through subsidies and cheap loans, this steel was sold at rock bottom prices, and many in the developed world lost their jobs.
If verbal conflict in the South China Sea becomes a trade war rather than an actual war, then what will happen? Can President Donald Trump compete in a trade war that he regularly suggested during his election campaign?
It must remembered that the US owes over US$1 trillion to China. If the latter suddenly calls in that debt, then America's interest rate will increase, big time, and the rest of the world will fall into a recession. Even China cannot escape that phenomenon unscathed. If the dollar weakens and interest rate increases, then fewer Americans can afford Chinese products.
The most plausible outcome is "an eye for an eye" against certain sectors, such as Chinese steel. In which case, China can implement tariffs or impose sanctions on American products or even on vital US sectors.
As these two try to blockade each other, businesses and consumers all over the South China Sea will suffer and tensions will rise even higher. |
