Trade Wars (I)
Written by Alfonso Elizondo
Just like currency wars, in the long run the situation gets worse for all involved, even if one forms the impression that there are advantages in the short term. The real fact is that excessive debt and low growth never go away. And ultimately gangs are formed and rivals are created which leads to a bloody war.
At the beginning of the 20th century, the sequence of a currency war began in Weimar Germany with hyperinflation (1921 – 1923). Then there was a devaluation in France (1925), another in the UK in 1931, another in the US in 1933, and another in the United Kingdom and France in 1936. In addition, the US Hawley-Smoot Act (1930) and other similar laws and tariffs on the part of its economic partners marked the beginning of a global trade war.
All this happened until the bloody war finally began:
Japan invaded Manchuria in 1931, then Beijing and the rest of China in 1937; Germany invaded Poland in 1939 and Japan attacked Pearl Harbor in 1941. The whole world succumbed to the huge destruction of World War II and the international monetary system collapsed completely until the Bretton Woods Conference.
Similar to that time, the most recent currency war began in January 2010 with the administration of Obama who also tried to promote his country’s growth with a weak dollar. So by August 2011 the dollar reached an all-time low, according to data from the Federal Reserve.
Other nations responded to those policies and after 2012 came the eras of the ‘low euro’ and ‘low yuan,’ demonstrating once again that currency wars were a dead end. At present, trade wars began recently when, on July 27, the US Congress approved one of the strongest sanctions in its history which Trump signed even though he did not agree with it personally.
The US Congress and Senate approved sanctions that were mostly immune to veto. The new laws stipulated that no US company may join Russia’s efforts to drill in the Arctic in the search for oil and natural gas. The law also stipulates that any foreign company that negotiates with Russia for such a drilling project will be barred from US markets and contracts.
These new impositions by the US represent a great risk for Russia which depends heavily on oil and natural gas to drive its economy and to be able to feed its population. So Russia is trying to control the new hydrocarbon discoveries in the Arctic in order to maintain its quasi-monopoly position as supplier of energy to Europe. It requires American technology to be able to drill in the Arctic, so this new American law cripples the Russians in financial and technological terms.
Russia’s counterattack will not consist of reciprocal sanctions against the Americans, but it will use measures where it has more control, including cyber-attacks. Meanwhile, the trade war between China and the US has already begun. It is a confrontation which Trump threatened throughout his political campaign. However, when he was sworn in as President, he did nothing about China’s trade and monetary practices.
The reason Trump didn’t do anything about is because he wanted China’s support for the confrontation over the development of nuclear weapons and missiles in North Korea, so that the US did not go all out against China while that issue was being dealt with.
Trump has made clear his intentions to impose tariffs on cheap Chinese iron and aluminium and to punish China for the theft of US intellectual property. He then intends to take action to sanction Chinese banks that help North Korea finance its arms program.
The United States has the ability to prevent Chinese companies from buying its companies through screening by a group called the Committee on Foreign Investment in the United States (CFIUS). This committee has already blocked several Chinese negotiations and there are many more waiting their turn to be reviewed.
Addendum: In Part Two of this article we will see the degree of progress in the global trade war that is taking place right now.