Bloomberg has good article today that I largely agree with:
In recent weeks, prominent academics have begun to question if China’s slowing, trade-dependent economy can withstand a sustained attack from Trump, which is already started to weigh on stock prices…Yu Zhi, an economic professor from Shanghai University of Finance and Economics, questioned the wisdom of a more assertive foreign policy in a recent article published in Singapore’s Lianhe Zaobao newspaper.
“Has China completed the task of ‘getting rich’? Has China completed the primary stage of socialism as Deng Xiaoping described? Can you begin to compete directly with the United States and other Western countries?” Yu wrote. “China should rethink its general strategic direction.”
…”If mismanaged and the China-US trade war is fully upgraded, it could expand into a financial war, an economic war, a resource war, and a geopolitical war,” Ren Zeping, chief economist at Founder Securities, wrote in one popular commentary published earlier this month.
“The US will use its hegemonic system established since World War II from trade, finance, currency, military and et cetera, to stop the rise of China,” said Ren, a high-profile economist who made headlines last year for earning a hefty paycheck.
It’s easy to underestimate Trump. He appears nothing more than a Realty TV buffoon. This is a mistake. He is operating out of the identifiable US political tradition of Jacksonianism, as I have written previously:
Through his work at The National Interest, it was Australia’s Owen Harries who did much to define the dominant and competing traditions of American foreign policy that offer better insights into the Trump phenomenon. Harries and his contributors identified two predominant schools of thought. The first was Wilsonianism, an idealistic ideology derived from President Woodrow Wilson that saw American ideals of democracy and capitalism as the best hope and future for the world. It is internationalist, interventionist and alliance-driven. The second school was Jacksonianism. Derived from President Andrew Jackson, it is a “realist” ideology that saw merit in domestic focus and the celebration of the common man. It is martial, honor-bound and rights-driven but is only dragged kicking and screaming into foreign wars (for more read Walter Russell Mead).
For the past century, Wilsonianism has dominated American foreign policy with only fits and starts of Jacksonian rebellion. Through two world wars and many regional skirmishes, America has remained largely committed to the creation of a global liberal order, (some might say empire), oscillating between bouts of fantastic idealism and realpolitik but by and large shaping the world in its image.
However, today that continuum has been disrupted. America has elected a thoroughly Jacksonian President in Donald Trump with his “America First” doctrine, and the cracks that that creates for the global order are widening fast.
The opening schism played out in the Middle East. There we saw Donald Trump throw aside the liberal order of his predecessor – that was dealing with the rise of Iran – in favour of a simplistic embrace of those nations that were prepared to buy American weapons. Saudi Arabia was first out with the credit card and we saw immediate fallout for US allies in the region as Saudi read the signal as a withdrawal of the US soft and hard power that gives meaning to the global liberal order. Qatar has been on the receiving end of that turn of events and must be wondering what is the upside in hosting a gigantic US base these days!
A second and much bigger crack in the global order is opening around North Korea. It, too, has noted the revival of the Jacksonian order, and has seized the opportunity to press outward its military sphere of influence.
Neither of these in themselves is anything much to worry about for investors. Both are small nations and neither has any great ambition beyond regional self-interests.
However, these are no more than the opening feints within a much larger game that the great powers will also play against a Jacksonian US. On that basis, the North Korean crisis especially has resonance with what is to come.
Donald Trump’s new world order began with classic Jacksonian hostility towards China as a rising commercial power weakening the lot of the US common man. China has played along, opting for dialogue over drama, allowing the US to make the running in whichever direction it sees fit. It has gone some way down the path of Korean de-nuclearisation too, imposing sanctions and pretending to some co-operation with the US as its withdrawal from North Asia throws up its first challenge.
But behind those gestures, the realpolitik of the DPRK as a Chinese strategic proxy remains. South Korea is a US ally and the north is it counterweight for China. So, as Trump’s Jacksonian withdrawal transpires, China is also asserting its power into the region by allowing the DPRK to run roughshod over the liberal order.
This is the key to the period ahead. Trump’s Jacksonian impulse is a paradox. It is not going to result in a smooth world of American first prosperity and power. On the contrary, it is going to egg-on every tin pot dictator and rising power to ever greater transgressions against the Wilsonian liberal order when in their interests to do so.
America First has no military way to counter this on a day-to-day basis. By definition, it aims to retreat from global responsibility even as its unintended consequences grow. This is a stunning and ongoing humiliation for the withdrawing Superpower. In effect, America now leads with its chin wherever it goes.
We can thus expect its rhetoric to mount ever higher to conceal crumbling imperial foundations. This will be amplified by the megaphone diplomacy of a clearly narcissistic president.
Thus for markets it will mean heightened anxiety, oddly amid less actual martial outcomes.
But this conclusion comes with one rather large asterisk. Jacksonian presidents do not willingly fight foreign wars but they do prize and build their militaries and, when finally stoked to action, use them more ruthlessly that other foreign policy schools. That makes flash points like the North Korean conflict deeply asymmetric. If it ultimately comes to blows it will be very ugly indeed.
That applies equally to trade wars. Even though the Jacksonian President does not want to be involved in foreign troubles at all, do not mistake that as leverage to manipulate his easy exit.
Trump appears weak because he wants to withdraw to a Fortress America, likes a strong stock market and runs a cacophonous democracy. But he’s not. He has called China out for cheating on trade, rightly. If China keeps pushing the US with a falling yuan, and starts to cause Trump domestic pain, he will double down his attacks. And keep doubling. Never push a Jacksonian President into a corner. He is a much more ruthless opponent than a Wilsonian counterpart if forced to be.
China is already playing with incendiary stuff by dropping the yuan. Not just as a provocation to Trump but in response to Fed tightening. If it continues then capital outflow will intensify and it risks setting alight its great pile of forex reserves. Trump could even weaponise the Fed. A few more tariffs and some infrastructure stimulus and he’ll entrench US inflation, driving US interest rates higher and blowing up the Chinese external account like some common emerging market. Financial crisis will ensue and China will be set back a decade or be pushed into a permanent Japanese-style stagnation and middle income trap.
China should quietly back down and take its medicine. It’s been caught with its hand in the cooky jar. It should delicately remove it and bide its time.