Economic wars are the new norm The Excelsior 27 May 2020

Economic wars are the new norm The Excelsior 27 May 2020

Economic wars are the new norm

Economic wars are the new norm 27 May 2020

          Economic actions are currently preferred options for powerful nations to display their disapproval and impose punishment on adversaries. Wars involving the military are costly in political, human and economic cost, punishing economic actions are not, especially for the nation imposing it. On the contrary, the nation hit by imposition of additional tariff or economic sanctions, the results can be financially devastating.

Economic pressure has, on occasions, changed government thinking, compelling them to toe desired lines. It has broken alliances and regional grouping. There are also instances of the nation standing as one against economic pressure from a known adversary or bully, Australia being a recent example. Economic actions range from enhanced tariffs to economic sanctions. The effectiveness of economic sanctions increases when it is backed by military force.

          President Donald Trump prefers employing economic measures against adversaries, rather than military force. Sanctions against Russia, Iran and Venezuela, in most cases even without UN approval, bear merit. To enforce its writ, the US unilaterally threatened nations which sought to bypass its sanctions. The power of US sanctions flows from the centrality of its financial system in the global economy, and the dollar’s status as the world’s dominant reserve currency. Iran and Venezuela are currently facing internal dissent with a dwindling economy, especially with the Coronavirus spreading unabated.

          International commerce is two sides of the same coin. It is dependent on demand within the recipient nation and the ability to produce with the seller. Multiple nations produce similar products, the difference between them lies is quality and price. It may not be possible to alter prices but easy to reject on grounds of quality. Such rejection is also a form of economic actions.

The US trade war with China, commencing with placement of additional tariffs on Chinese goods, impacted the Chinese economy. China always banked on the US market for demands. With enhanced tariffs, demands dropped. This began destabilizing the Chinese economy and it sought to move for a trade deal, after fake initial posturing. It was aware that it would be the ultimate loser. An adhoc trade deal was signed in Jan this year. providing some relief to China.

With the spreading pandemic, Trump’s rhetoric against China is rising by the day. The trade deal is all but off with possibly additional tariffs being imposed. The added threat of moving US manufacturing out from China, partially back within the US and balance in friendly nations, would hurt China as never before. It is being forced to rebound and attack nations which would gain from China’s loss.

Major Chinese companies bank on the US market for funding and hence prefer to register themselves on US stock exchanges. The US Senate decision, last week, to de-list Chinese companies from US stock exchanges would hit these companies hard. China has no retaliation to this unilateral US action.

Added to this is loss of China’s global credibility, with nations demanding a probe into the origins of the virus and subsequent handling by China. Display of anger against China implies growing proximity to Taiwan and demands for its readmission into the World Health Assembly. China responded with vigour employing two strategies. Nations located in proximity faced military threats, while nations located at a distance faced economic actions.

          Australia was the first nation to be economically targeted by China. China was employing the strength of its large market to hit Australia economically. China turned down Australian beef for Russian, claiming it did not meet Chinese standards. This was the first time in decades that China took such an action. It also refused to procure Australian barley and iron ore. The reasons were flimsy, but intention was evident. It was to compel the Australian government from backing US criticism against China. China visualized that this would lead to internal pressures on the Australian government compelling it to back down.

The Chinese government, adding insult, refused to take a call from the Australian Trade Minister and termed Australia as the ‘most loyal US attack dog.’ For Australia, it was a battle of economy versus principles. Australia struck to principles, backed by its public.

China also broke European Union unity in taking a joint stand against it by enticing Hungary. Hungary refused to join the EU in backing for observer status for Taiwan and has also permitted Huawei to establish 5G networks within the country, as it is dependent on Chinese funding.

With the world economy in recession, nations feared Chinese government owned entities taking over key sectors and companies surreptitiously. Thus, countries including India, have passed laws against it, angering China, which has realised that its global economic influence would be impacted.

The decision being taken by multiple governments, including from Europe, Japan and the US of moving manufacturing units out from China has led to panic within the CCP. It has begun countering this move by challenging possible recipient nations including India, Vietnam, Indonesia and Malaysia.

Its proximity to these nations enables it to display increased aggression against ASEAN nations in the South China Sea and Indian along its borders. China has begun questioning India’s economic rise and Indo-China economic competition. Its Global Times stated in an editorial on 05 May, ‘intensified Sino-Indian (economic) competition lies ahead.’

With the ongoing pandemic, Chinese firms have almost stopped production as global orders have reduced. Internal reports indicate workers protesting lack of salaries while demanding reduced rents. Chinese investments in its signature Belt Road Initiative is also impacted. Recipient nations are unable to repay Chinese loans, seeking extensions, while the contracting Chinese economy places restrictions on future Chinese investments. Hence, in the ongoing economic war, currently, China is the loser.   

Economic wars are on, despite nations moving into recession. China adopting the economic option of targeting adversaries, is almost alone. Ultimately, it is China which would face economic downslide, loss of credibility and markets. Its offensive economic and military actions are making it lose allies. At some stage, it may be compelled to rethink.