If a trade war were to escalate, the fragile balance in the Chinese economy could be tipped, and we may very well experience a second Asian crisis.
If a trade war were to escalate, the fragile balance in the Chinese economy could be tipped and we may very well experience a second Asian crisis, which ironically, was also driven by rampant dollar borrowing. The important difference here would be that China’s GDP is many times larger than the total GDP of all countries involved in the first Asian crisis in 1997-1998 (when China’s GDP was barely above $1 trillion).
While the sell-off in the Turkish lira and Argentine peso is generating headlines at the moment, it is hard for the Chinese yuan to get the same attention as there are still plenty of forex reserves to stop the yuan from depreciating further. One could say that because of the bigger war chest of the People’s Bank of China, the yuan is not necessarily a similar market indicator to other emerging markets currencies whose central banks are in considerably less fortunate positions.
The key here remains forex reserve outflows, in which a pickup similar to what we saw in 2015 after the crash of the Shanghai Composite (and faster than the present pace) would be the major red flag.
Today, it is precisely the U.S.-China relationship—now in turmoil—that could turn a low-level trade war into a full-blown international crisis, leading to another recession or worse, some observers say. Earlier this month, U.S. President Donald Trump announced he’s planning tariffs that would apply to nearly all of the more than $500 billion in China trade. The Chinese, while still cautious, can also be expected to max out their tariffs. But since U.S. exports to China are much smaller, their revenues won’t amount to anything close to America’s, leaving Beijing free to choose other forms of payback.
So how does China now take the conflict to the next level? “They’re going to retaliate in some other domain,” said Princeton University professor Alan Blinder, a former vice chairman of the Federal Reserve and the author of Advice and Dissent: Why America Suffers When Economics and Politics Collide. “One way would be to start doing what I’ve been assuring people for years they wouldn’t do: dumping Treasury bills. Or it could be nothing to do with economics: mischief in the South China Sea, or [something] having to do with North Korea.”
And of course, such moves could swiftly have economic impact, leading once again to a breakdown in trade, turmoil in U.S. financial markets, and possibly a recession.
It is just possible, of course, that if the trade war ends soon and the Chinese make concessions over long-simmering issues like market entry and intellectual property rights protections, Trump’s aggressive gambit could work.
But if the trade standoff lingers on, the law of unintended consequences could come into play. Another little-understood dimension of the growing trade war is the disruption of global supply chains. These have become vastly more complex since Trump first developed his enthusiasm for deploying tariffs as a negotiating tactic some three decades ago (when he was focused on punishing a protectionist Japan). Because the Trump administration wanted to avoid a direct hit on consumers, most of the tariff-targeted products are classified as either “capital goods” or “intermediate items”—in other words, parts or components rather than finished products in stores. The goal is apparently to pressure companies to shift their supply chains away from China.
What happens when the world’s two biggest economies go to war?
Ok, so it’s not a real war – but the US and China are at the beginning of a trade war – and no-one knows just how bad it could get.
So here’s how a US-China trade war could hurt us.
A list of Chinese products will be hit with a 25% tariff from Friday – effectively making them 25% more expensive for US consumers.
- Technology goods like semiconductor chips assembled in China. They’re found in consumer products used in everyday life such as televisions, personal computers, smartphones, and cars
- A wide variety of products ranging from plastics, nuclear reactors and dairy-making equipment
- According to the Petersen Institute of International Economics more than 90% of the products on the US tariffs list are made up of intermediate inputs or capital equipment. That means stuff that you need as raw material to make other products – so it could have a knock-on effect on many other goods too.
What the US really wants to target though are things produced under China’s Made in China 2025 policy.
In retaliation to the US moves, China has hit these sectors:
- American agriculture – hitting at American farmers and ranchers, a political vote bank that US President Trump relies on. Some 91% of the 545 products China is placing a tariff on are from the agriculture sector
- The car sector – companies such as Tesla and Chrysler manufacture in the US and their products going into China would be affected
- Medical products; coal; petroleum (but only marginally).
Consider Case No.
1: the U.S.-China relationship. Ten years ago, as the financial crisis exploded after the Lehman collapse, the U.S.-China relationship was a bulwark of stability. Despite an overture from Russia to dump billions of dollars in Fannie Mae and Freddie Mac bonds, Beijing largely held on to them and to its vast holdings in U.S. Treasurys. It was one of many moves by the international system—including crucial coordination between Bernanke and the European Central Bank, as documented in Adam Tooze’s new book, Crashed—that prevented the Great Recession from becoming another Great Depression.
Six Reasons Why the Depression Could Reoccur
Stock market crashes can cause depressions by wiping out investor’s life savings. If people have borrowed money to invest, then they will be forced to sell all they have to pay back the loans. Derivatives make any crash even worse through this leveraging. Crashes also make it difficult for companies to raise the needed funds to grow. Finally, a stock market crash can destroy the confidence required to get the economy going again.
Lower housing prices and resultant foreclosures totaled at least $1 trillion in losses to banks, hedge funds, and other owners of subprime mortgages on the secondary market. Banks continue to hoard cash even though housing prices have increased. They are still digesting the losses from one million foreclosures.
Business credit is needed for businesses so they can continue to run on a daily basis. Without credit, small businesses can’t grow, stifling the 65 percent of all new jobs that they provide.
Bank near-failures frightened depositors into taking out their cash. Although the Federal Deposit Insurance Corporation insures these deposits, some became concerned that this agency would also run out of money. Commercial banks depend on consumer deposits to fund their day-to-day business, as well as make loans.
High oil prices could return once U.S. shale producers are forced out of business. Millions of jobs were lost when oil prices plummeted. At the same time, many consumers bought new cars and SUVs when gas prices were low. They will be pinched when prices rise again.
Deflation is an even bigger threat. One reason the Fed doesn’t want to raise rates is that inflation has yet to reach its goal of 2 percent annual price increase. Low oil and gas prices have had a deflationary impact. So has a 25 percent increase in the U.S. dollar. That depresses import prices. These deflationary pressures seem like a boon to consumers. But they make it difficult for businesses to raise wages. The result could be a downward spiral. That’s similar to what happened during the Great Depression.
Preparing for the Depression
Have an emergency food kit
An emergency food kit kit might sound a little over-the-top. They are kind of pricy, after all. But really, anyone could be in a situation where they need food, but they’re trapped at home. The east coast gets hurricanes and crazy snowstorms. Currently, a massive snowstorm with frigid temperatures has settled over the east coast. I would not want to leave the house, if I were there! An emergency food supply could definitely come in handy. And if a natural disaster doesn’t strike, you’d have some meals if the grocery budget gets extremely small.
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8. Learn a skill
During the last recession, architecture took a huge hit. People weren’t asking for buildings to be built during a time of less. If your family relies on an income from a non-necessary skill, then you might want to learn a trade that could always be useful. For example, if you do know how to sew but not many other people do, you can help others and help support your family with your sewing skills. My super handy husband could work as a handyman. What skills do you have now, or could you learn, that would help you in the event of an economic downfall?
9. Get resourceful
When we live in a season of plenty, it’s easy to forget that we can get creative with what we have. During the Great Depression, people often replaced the worn soles of their shoes with rubber from tires. I’d love to see the DIY blog post for that! You don’t have to hang onto every plastic baggie you’ve ever bought (which is what my depression-survivor grandparents did), but learning how to reuse or repurpose everyday items can help you spend less now and be prepared for the future. Also, part of resourcefulness is buying quality products that last longer rather than throwing out something cheap in a few months.
10. Invest your money
With all the money you’ll be saving by gardening, making things from scratch, and living mortgage free (I dream big!) you have some room to invest. Investing instead of just saving money is a better way to prepare for an economic downturn because the value of a dollar will decrease in the future.