China Macro Reporter
1. Roubini – ‘Dr. Doom’ - on the U.S.-China trade war

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">Project Syndicate</p><p><strong>On June 14</strong>, Nouriel Roubini &ndash; &lsquo;Dr. Doom&rsquo; &ndash; published an essay, <a href="" target="_blank">&lsquo;The Growing Risk of a 2020 Recession and Crisis,&rsquo;</a> (included here last) that received immediate and widespread attention.</p><ul><li><strong>In it he writes</strong>, &lsquo;Among the risks that could trigger a recession in 2020, the Sino-American trade and technology war deserves&nbsp;<a href="" target="_blank">special attention</a>.&rsquo;</li></ul><p><strong>Stemming from that essay</strong> is a June 20 <em>Financial Times</em> podcast: <a href="" target="_blank">&lsquo;Nouriel Roubini on the US-China Thucydides Trap.&rsquo;</a></p><ul><li>&lsquo;<strong>A number of geopolitical</strong> and financial risks are stalking the global economy, pointing to a possible recession in 2020.&rsquo;</li><li>&lsquo;<strong>According to Nouriel Roubini</strong>, what is key among these risks is the US-China trade war and general protectionism in the global market.&rsquo;</li></ul><iframe style="margin-top:1em;" src="" height="420px" width="100%" scrolling="no"></iframe><p class="caption"><a href="" target="_blank">FT</a></><p><strong>Nouriel Roubini</strong><strong>is</strong> a professor of economics at New York University&rsquo;s Stern School of Business and CEO of Roubini Macro Associates, LLC. And, he his analyses are worth considering.</p><ul><li>&lsquo;<strong>Roubini is one of few</strong> economists who predicted the housing bubble crash of 2007-2008.&rsquo;</li><li>&lsquo;<strong>He warned</strong> about the crisis in an IMF position paper in 2006.&rsquo;</li><li>&lsquo;<strong>Roubini's predictions</strong> have earned him the nicknames "Dr. Doom" and "permabear" in the media.<sup>&rsquo;</sup></li><li>&lsquo;<strong>In 2008</strong>,&nbsp;<em>Fortune</em> magazine wrote, "In 2005 Roubini said home prices were riding a speculative wave that would soon sink the economy. Back then the professor was called a&nbsp;<a href="" target="_blank">Cassandra</a>. Now he's a sage."&rsquo;</li></ul><h6>This issue of CHINADebate InDepth is devoted to Dr. Roubinin&rsquo;s China analyses.</h6><ul><li><strong>Presented</strong> here are the podcast, above, and excerpts from three of his recent essays on the U.S.-China trade war, the impact on the global economy, and the stakes at the coming G20.</li></ul></td></tr>

2. ‘The Global Consequences of a Sino-American Cold War’

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption"></p><p class="excerpt">‘What started as a trade war between the United States and China is quickly escalating into a death match for global economic, technological, and military dominance.  If the two countries' leaders cannot manage the defining relationship of the twenty-first century responsibly, the entire world will bear the costs of their failure.’</p><p><strong>&lsquo;The US blames China for the current tensions.&rsquo;</strong></p><ul><li><strong>&lsquo;Since joining</strong> the World Trade Organization in 2001, China has reaped the benefits of the global trading and investment system, while failing to meet its obligations and free riding on its rules.&rsquo;</li><li><strong>&lsquo;According to the US</strong>, China has gained an unfair advantage through intellectual-property theft, forced technology transfers, subsidies for domestic firms, and other instruments of state capitalism.&rsquo;</li><li><strong>&lsquo;At the same time</strong>, its government is becoming increasingly authoritarian, transforming China into an&nbsp;<a href="" target="_blank">Orwellian surveillance state</a>.&rsquo;</li></ul><p><strong>&lsquo;For their part</strong>, the Chinese suspect that the US&rsquo;s real goal is to prevent them from rising any further or projecting legitimate power and influence abroad.&rsquo;</p><ul><li><strong>&lsquo;In their view</strong>, it is only reasonable that the world&rsquo;s&nbsp;<a href="" target="_blank">second-largest economy</a> (by GDP) would seek to expand its presence on the world stage.&rsquo;</li><li><strong>&lsquo;And leaders</strong> would argue that their regime has improved the material welfare of 1.4 billion Chinese far more than the West&rsquo;s gridlocked political systems ever could.&rsquo;</li></ul><p><strong>&lsquo;Regardless</strong> of which side has the stronger argument, the escalation of economic, trade, technological, and geopolitical tensions may have been inevitable.&rsquo;</p><ul><li><strong>&lsquo;What started as a trade war</strong> now threatens to escalate into a permanent state of mutual animosity.&rsquo;</li><li><strong>&lsquo;This is reflected</strong> in the Trump administration&rsquo;s&nbsp;<a href="" target="_blank">National Security Strategy</a>, which deems China a strategic &ldquo;competitor&rdquo; that should be contained on all fronts.&rsquo;</li></ul><p><strong>&lsquo;Accordingly</strong>, the US is sharply restricting Chinese foreign direct investment in sensitive sectors, and pursuing other actions to ensure Western dominance in strategic industries such as artificial intelligence and 5G.&rsquo;</p><ul><li><strong>&lsquo;It is pressuring partners</strong> and allies not to participate in the Belt and Road Initiative, China&rsquo;s massive program to build infrastructure projects across the Eurasian landmass.&rsquo;</li><li><strong>&lsquo;And it is&nbsp;</strong><a href="" target="_blank">increasing</a> US Navy patrols in the East and South China Seas, where China has grown more aggressive in asserting its dubious territorial claims.&rsquo;</li></ul><p><strong>&lsquo;The global consequences</strong> of a Sino-American cold war would be even more severe than those of the Cold War between the US and the Soviet Union.&rsquo;</p><ul><li><strong>&lsquo;Whereas the Soviet Union</strong> was a declining power with a failing economic model, China will soon become the world&rsquo;s largest economy, and will continue to grow from there.&rsquo;</li><li><strong>&lsquo;Moreover</strong>, the US and the Soviet Union traded very little with each other, whereas China is fully integrated in the global trading and investment system, and deeply intertwined with the US, in particular.&rsquo;</li></ul><p><strong>&lsquo;A full-scale</strong> cold war thus could trigger a new stage of de-globalization, or at least a division of the global economy into two incompatible economic blocs.&rsquo;</p><ul><li><strong>&lsquo;In either scenario</strong>, trade in goods, services, capital, labor, technology, and data would be severely restricted, and the digital realm would become a &ldquo;splinternet,&rdquo; wherein Western and Chinese nodes would not connect to one another.&rsquo;</li><li><strong>&lsquo;Now</strong> that the US has imposed sanctions on&nbsp;<a href="" target="_blank">ZTE</a> and&nbsp;<a href="" target="_blank">Huawei</a>, China will be scrambling to ensure that its tech giants can source essential inputs domestically, or at least from friendly trade partners that are not dependent on the US.&rsquo;</li></ul><p><strong>&lsquo;In this balkanized world</strong>, China and the US will both expect all other countries to pick a side, while most governments will try to thread the needle of maintaining good economic ties with both.&rsquo;</p><ul><li><strong>&lsquo;After all</strong>, many US allies now do more business (in terms of trade and investment) with China than they do with America.&rsquo;</li><li><strong>&lsquo;Yet</strong> in a future economy where China and the US separately control access to crucial technologies such as AI and 5G, the middle ground will most likely become uninhabitable.&rsquo;</li><li><strong>&lsquo;Everyone</strong><strong>will</strong><strong>have to choose</strong>, and the world may well enter a long process of de-globalization.&rsquo;</li></ul><p><strong>&lsquo;Whatever</strong><strong>happens</strong>, the Sino-American relationship will be the key geopolitical issue of this century.&rsquo;</p></td></tr>

3. The Coming Sino-American Bust-Up

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption"></p><p class="excerpt">‘Whether or not US President Donald Trump and his Chinese counterpart, Xi Jinping, agree to another truce at the upcoming G20 summit in Osaka, the Sino-American conflict has already entered a dangerous new phase. Though a negotiated settlement or a managed continuation of the status quo are possible, a sharp escalation is now the most likely scenario.’</p><p><strong>&lsquo;The nascent Sino-American&nbsp;</strong><a href="" target="_blank">cold war</a>&nbsp;is the key source of uncertainty in today&rsquo;s global economy.&rsquo;</p><ul><li><strong>&lsquo;How</strong> the conflict plays out will affect consumer and asset markets of all kinds, as well as the trajectory of inflation, monetary policy, and fiscal conditions around the world.&rsquo;</li><li><strong>&lsquo;Escalation of the tensions</strong> between the world&rsquo;s two largest economies could well&nbsp;<a href="" target="_blank">produce</a> a global recession and subsequent financial crisis by 2020, even if the US Federal Reserve and other major central banks pursue aggressive monetary easing.&rsquo;</li></ul><p><strong>&lsquo;Much, therefore, depends on</strong> whether the dispute does indeed evolve into a persistent state of economic and political conflict.&rsquo;</p><ul><li><strong>&lsquo;In the short term</strong>, a planned meeting between US President Donald Trump and his Chinese counterpart, Xi Jinping, at the G20 Summit in Osaka on June 28-29 is a key event to watch.&rsquo;</li><li><strong>&lsquo;A truce could </strong>leave tariffs frozen at the current level, while sparing the Chinese technology giant Huawei from the crippling sanctions that Trump has put forward; failure to reach an agreement could set off a progressive escalation, ultimately leading to the balkanization of the entire global economy.&rsquo;</li></ul><table class="intable"><tr><td class="intable-border"><h5>JAW-JAW OR WAR-WAR?</h5><p><strong>&lsquo;Viewed broadly</strong>, there are three scenarios for how the situation might develop between now and the end of 2020, when the United States will hold its next presidential election.&rsquo;</p><ol><li><strong>&lsquo;One possibility</strong> is that Trump and Xi will find a truce or&nbsp;<em>modus vivendi</em> in Osaka, paving the way for a negotiated settlement toward the end of this year.&rsquo;</li></ol><ul><li><strong>&lsquo;On the trade front</strong>, the US wants China to buy more American goods, reduce tariff and non-tariff barriers, open more financial and service sectors to foreign direct investment, and commit to maintaining currency stability and transparency with respect to foreign-exchange data.&rsquo;</li><li><strong>&lsquo;On</strong><strong> technology</strong>, the US is demanding that China strengthen intellectual-property protections, cease making the transfer of technology to Chinese firms a condition of market entry for US (and other) companies, and crack down on corporate cyber espionage and theft.&rsquo;<ul><li><strong>&lsquo;A temporary </strong>deal could include any of the above, with the US offering medium-term (through the end of 2020, and possibly longer) exemptions to Chinese tech firms that use US components, semiconductors, and software.&rsquo;</li><li><strong>&lsquo;This would leave</strong> Huawei severely constrained, but not dead in the water.&rsquo;</li></ul></li></ul><ol start="2"><li><strong>&lsquo;The second possibility</strong> is a full-scale trade, tech, and cold war within the next 6-12 months.&rsquo;</li></ol><ul><li><strong>&lsquo;In this scenario</strong>, the US and China would adopt rapidly diverging positions after failing to successfully restart negotiations (with or without a truce).&rsquo;<ul><li><strong>&lsquo;The US would follow</strong> through with import tariffs &ndash; starting at 10% but increasing to 25% &ndash; on the remaining $300 billion worth of Chinese goods that have so far been spared.&rsquo;</li><li><strong>&lsquo;And the Trump </strong>administration would pull the trigger on Huawei and other Chinese tech firms, barring them from purchasing components and software from US companies.&rsquo;</li></ul></li><li><strong>&lsquo;China, meanwhile,</strong> would take steps to protect its economy through macro-level stimulus, while retaliating against the US through measures that go beyond tariffs (such as expelling American firms).&rsquo;<ul><li><strong>&lsquo;Huawei might survive</strong> within the Chinese market, but its growing global business would effectively be crippled, at least for the time being.&rsquo;</li></ul></li><li><strong>&lsquo;Beyond trade</strong> and technology, this scenario also implies increased geopolitical and military tensions.&rsquo;<ul><li><strong>&lsquo;The possibility</strong> of some type of conflict over the East and South China Seas, Taiwan, North Korea, Xinjiang, Iran, or Hong Kong could not be ruled out.&rsquo;</li></ul></li></ul><ol start="3"><li><strong>&lsquo;Finally, in the third scenario,</strong> China and the US would fail to reach a deal on trade and technology, but they would forego rapid escalation.&rsquo;</li></ol><ul><li><strong>&lsquo;Instead of plunging into</strong> a total trade and technology war, the two powers might ratchet up their conflict more gradually.&rsquo;</li><li><strong>&lsquo;The US would impose</strong> new tariffs, but keep them at 10%, while renewing only temporarily exemptions that allow Huawei and other Chinese firms to continue purchasing key US-made inputs, while retaining the option of pulling the plug on Huawei at its discretion.&rsquo;</li><li><strong>&lsquo;Negotiations </strong>could continue, but the US would essentially hold a veto over Huawei&rsquo;s bid to develop 5G and other key technologies of the global economy.&rsquo;</li><li><strong>&lsquo;Given that Trump</strong> could suddenly pull the plug on the company whenever it suits him, China&rsquo;s leaders would probably abstain from blatant full-scale retaliation, but would still intervene to minimize the economic damage.&rsquo;</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5>THE GOLDILOCKS OPTION&hellip;</h5><p><strong>&lsquo;The third scenario</strong> is the most likely for now, because China is playing a waiting game until November 2020, to see if the US elects a more even-keeled president.&rsquo;</p><ul><li><strong>&lsquo;Even with a truce</strong>, therefore, any negotiations that are relaunched after the G20 summit will probably drag on indefinitely, with no real signs of progress.&rsquo;</li><li><strong>&lsquo;In the meantime,</strong> the Trump administration will want to apply additional pressure on China, while keeping its options open.&rsquo;</li><li><strong>&lsquo;Better, then, to start</strong> with a 10% tariff on that remaining $300 billion worth of exports.&rsquo;</li><li><strong>&lsquo;The US could always</strong> hike the rate to 25%, but at the risk of raising the costs of goods that many of Trump&rsquo;s own lower-income voters rely on.&rsquo;</li></ul><p><strong>&lsquo;In the absence</strong> of a trade deal, the same modulated escalation is likely on the tech front.&rsquo;</p><ul><li><strong>&lsquo;With Chinese firms</strong> already on a tight leash, the US could convince European countries and other allies not to grant Huawei tenders or licenses relating to 5G and consumer products such as smartphones, thereby undercutting Huawei&rsquo;s current advantage in this market.&rsquo;</li><li><strong>&lsquo;That would</strong> buy the US a couple of years to cultivate its own national champions in 5G and related technologies, and to get a head start on 6G.&rsquo;</li></ul><p><strong>&lsquo;Moreover</strong>, a managed escalation has potential political advantages for Trump, and even for Xi.&rsquo;</p><ul><li><strong>&lsquo;Trump will not</strong> be exposed to charges from Democrats that he got suckered or went soft on China.&rsquo;</li><li><strong>&lsquo;At the same time</strong>, the lingering uncertainty from an unresolved conflict will probably prompt the Fed to start cutting its policy rate in July &ndash; or September at the latest.&rsquo;</li><li><strong>&lsquo;Those cuts could</strong> reach 150 basis points if the slow rise in tensions starts to take a toll on business confidence.&rsquo;</li><li><strong>&lsquo;In fact</strong>, if the conflict is managed well, the US could avoid a recession altogether, albeit with a deceleration of annual growth from 2% toward the 1-1.5% range.&rsquo;</li></ul><p><strong>&lsquo;Whether the stock market</strong> would suffer a correction (a decline of 10% or more) or merely a sideways shift in the third scenario would depend on a variety of factors, such as investor confidence, growth trends, and monetary-policy measures.&rsquo;</p><ul><li><strong>&lsquo;One also cannot</strong> rule out some type of fiscal stimulus in the US and other advanced economies.&rsquo;</li></ul><p><strong>&lsquo;The &ldquo;managed-warfare&rdquo;</strong> scenario also has advantages for Xi.&rsquo;</p><ul><li><strong>&lsquo;The Chinese economy</strong>, after all, can be backstopped with monetary, fiscal, and credit stimulus, not to mention a weakening of the renminbi (above CN&yen;7 to the dollar).&rsquo;</li><li><strong>&lsquo;The government</strong> could also make a modest show of retaliation, such as by threatening to restrict (but not ban) exports of rare-earth metals, which are used in a wide range of high-tech products.&rsquo;</li><li><strong>&lsquo;At the same time</strong>, the authorities could make life harder for the hundreds of US firms with business and investments in China, not with a full boycott, but through a thousand small cuts and abuses.&rsquo;</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5>&hellip; ISN&rsquo;T REALLY AN OPTION</h5><p><strong>&lsquo;Because China and the US</strong> both know that they are in for a decades-long rivalry, they may well conclude that it is better not to risk a full-scale conflict and global recession in the short run.&rsquo;</p><ul><li><strong>&lsquo;Only through proper</strong> preparation over the medium term can the two powers manage a long-term cold war and the de-globalization that will be necessary to protect their respective supply chains.&rsquo;</li></ul><p><strong>&lsquo;The sequencing</strong> of a potential deal also matters.&rsquo;</p><ul><li><strong>&lsquo;As matters stand</strong>, persistent uncertainty will lead the Fed to loosen its monetary policy one way or another.&rsquo;</li><li><strong>&lsquo;Suppose that Trump and Xi</strong> restart negotiations that then drag on until late fall or early winter of this year.&rsquo;</li><li><strong>&lsquo;The Fed would</strong> have to cut its policy rate by at least 50 basis points, after which point the Trump administration may agree to a deal.&rsquo;</li><li><strong>&lsquo;Because the impact</strong> of monetary easing takes time, the Fed would have to remain on hold until November 2020.&rsquo;</li><li><strong>&lsquo;(Even if the economy</strong> and inflation were to rebound, monetary policymakers would be hesitant to reverse course before the election, lest they appear to be acting politically.)&rsquo;</li><li><strong>&lsquo;In this sequence</strong>, Trump&rsquo;s re-election prospects would be doubly improved. The Fed would have locked in rate cuts as insurance, and a new agreement would have bolstered investor confidence and the stock market.&rsquo;</li><li><strong>&lsquo;But, of course, this could</strong> happen only by chance. Trump&rsquo;s &ldquo;art of the deal&rdquo; does not involve such multistep, multidimensional thinking, after all.&rsquo;</li></ul><p><strong>&lsquo;As for China</strong>, an agreement would, at a minimum, prevent further damage to its economy, and particularly its tech sector.&rsquo;</p><ul><li><strong>&lsquo;The government would</strong> secure a few more years with which to prepare for a longer-term conflict over trade, investment, artificial intelligence, 5G, and geopolitical dominance in Asia and beyond.&rsquo;</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><h5>THUCYDIDES RETURNS</h5><p><strong>&lsquo;Unfortunately</strong>, an even more likely course of events is that the third scenario &ndash; a managed trade and tech war, which is my baseline of how the rivalry will evolve over the next few months &ndash; would then devolve into the second (a full-scale confrontation).&rsquo;</p><p><strong>&lsquo;Even if</strong> the Americans and Chinese can overcome differences in their negotiating style, the US will still want legislative commitments from China, and China will still view such demands as a violation of its national sovereignty.&rsquo;</p><ul><li><strong>&lsquo;The Chinese are highly sensitive </strong>to anything resembling the imperial interference that weakened China in the nineteenth century.&lsquo;</li><li><strong>&lsquo;Like Trump</strong>, Xi cannot afford to lose face.&rsquo;</li></ul><p><strong>&lsquo;Moreover</strong>, as the war of words has escalated over the last month, the spillover of trade frictions into the technology domain has intensified.&rsquo;</p><ul><li><strong>&lsquo;Once kept formally separate</strong>, the two issues are now inextricably intertwined, which will make a resolution even harder to achieve.&rsquo;</li><li><strong>&lsquo;The Chinese</strong> cannot agree to any deal that does not rescue Huawei.&rsquo;</li><li><strong>&lsquo;But now</strong> that Huawei has become a bargaining chip, national-security hawks in the Trump administration and Congress will force Trump to take a hard line on the company.&rsquo;</li></ul><p><strong>&lsquo;Each side seems</strong> to think that the other will blink first.&rsquo;</p><ul><li><strong>&lsquo;For example</strong>, the US assumes it can inflict more economic pain on China than China is capable of returning, because US&nbsp;exports to China ($130 billion) are a fraction of China&rsquo;s exports to the US ($560 billion).&rsquo;</li><li><strong>&lsquo;Hence,</strong> when it comes to tariffs, China seems to have more to lose.&rsquo;</li></ul><p><strong>&lsquo;Yet, as we have seen</strong>, the conflict is about much more than tariffs, and China can retaliate in a number of ways.&rsquo;</p><ul><li><strong>&lsquo;In addition</strong> to imposing new non-tariff barriers, it can strike a blow against major US firms that rely on Chinese supply chains and consumer markets, while allowing the renminbi to weaken.&rsquo;</li><li><strong>&lsquo;And if tensions</strong> escalate too far, China could even resort to the nuclear option of dumping its massive holdings of US Treasuries; it has already started to reduce its holdings of such US assets.&rsquo;</li></ul><p><strong>&lsquo;Moreover,</strong> US leaders may be underestimating the costs of the conflict.&rsquo;</p><ul><li><strong>&lsquo;According to</strong> the prevailing narrative, the tariffs now in place have had only a modest impact on US growth and inflation.&rsquo;</li><li><strong>&lsquo;But the latest economic data </strong>suggest otherwise, as the US and global economy are slowing.&rsquo;</li><li><strong>&lsquo;In fact</strong>, one reason why the Fed has started considering preemptive interest rate cuts &ndash; likely to start in July &ndash; may be that it is worried that tariffs are hurting the US economy more than was initially anticipated.&rsquo;</li></ul><p><strong>&lsquo;Making matters worse</strong>, the US has nowhere near as many tools to respond to macroeconomic shocks as China does.&rsquo;</p><ul><li><strong>&lsquo;In addition to</strong> massive stimulus and currency depreciation, China&rsquo;s government can bail out private and public enterprises at will.&rsquo;</li><li><strong>&lsquo;The US, by contrast,</strong> must rely on traditional monetary and fiscal tools, all of which are already severely constrained.&rsquo;</li><li><strong>&lsquo;And while Trump must</strong> worry about re-election, Xi has abolished presidential term limits, faces few constraints on his power, and presides over a sprawling apparatus of social control, including the Great Firewall of online censorship.&rsquo;</li></ul><p><strong>&lsquo;Politically,</strong> then, it is much easier for China to take the long view, which is what Xi has done by announcing a &ldquo;new Long March.&rdquo;&rsquo;</p><ul><li><strong>&lsquo;By wrapping himself</strong> in the Chinese flag and fomenting nationalism at home, Xi is preparing Chinese society for a protracted struggle.&rsquo;</li><li><strong>&lsquo;If a full-scale</strong> cold war ensues, he will be able to remind the Chinese of the need to suffer today to achieve glory tomorrow.&rsquo;</li><li><strong>&lsquo;In fact, it is possible</strong> that Xi actually wants a full-scale economic war as a means of damaging Trump&rsquo;s re-election chances.&rsquo;</li><li><strong>&lsquo;In the parlance</strong> of the foreign-policy establishment, Xi may see&nbsp;<em>de facto</em> escalation as the quickest route to regime change in the US.&rsquo;</li></ul><p><strong>&lsquo;Moreover</strong>, Xi is not an absolute ruler.&rsquo;</p><ul><li>&lsquo;While he controls most of the levers of power, there are still factions within the Communist Party of China (CPC) that could turn on him if he does not &lsquo;mount a sufficiently aggressive response to the US.&rsquo;</li><li>He is not in a position to accept a deal in which he &ndash; or China &ndash; loses face or power.&rsquo;</li><li>&lsquo;If America&rsquo;s medium- to long-term goal is to contain China, as the Trump administration&rsquo;s&nbsp;<a href="" target="_blank">National Security Strategy</a> clearly suggests, Xi cannot agree to anything in the short term that advances that agenda.&rsquo;</li><li>&lsquo;In the grand scheme of things, it might be better to start a full-scale conflict now than to grant the US a tactical advantage for the next two years.&rsquo;</li></ul><p><strong>&lsquo;The danger is that Trump</strong>, too, would prefer a partial or full-scale trade and technology war to a weak deal.&rsquo;</p><ul><li><strong>&lsquo;If Trump makes</strong> any notable concessions, he will be accused by both Democrats and right-wing pundits of appeasing China and betraying American blue-collar workers.&rsquo;</li><li><strong>&lsquo;Even if he can&rsquo;t secure</strong> a favorable deal, at least he can say he remained tough.&rsquo;</li><li><strong>&lsquo;Among those</strong> who have Trump&rsquo;s ear are national-security hawks &ndash; some of them modern-day Dr. Strange loves &ndash; who believe that China is so fragile that an economic shock could precipitate a political collapse, and even regime change.&rsquo;</li><li><strong>&lsquo;This is a dangerous game</strong> to play, because it could lead to actions that turn a cold war into a hot war.&rsquo;</li><li><strong>&lsquo;The mere presence</strong> of such extreme voices in Trump&rsquo;s orbit suggests that the administration&rsquo;s intent is to contain China at any cost.&rsquo;</li></ul></td></tr></table></td></tr>

4. The Growing Risk of a 2020 Recession and Crisis

<tr><td class="bg-holder"><img width="100%" src="" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption"></p><p class="excerpt">‘Among the risks that could trigger a recession in 2020, the Sino-American trade and technology war deserves special attention.’</p><p><strong>&lsquo;Last summer</strong>, my colleague Brunello Rosa and I&nbsp;<a href="" target="_blank">identified</a> ten potential downside risks that could trigger a US and global recession in 2020. Nine of them are still in play today.&rsquo;</p><p><strong>&lsquo;Many involve</strong> the United States.&rsquo;</p><ul><li><strong>&lsquo;Trade wars with China</strong> and other countries, along with restrictions on migration, foreign direct investment, and technology transfers, could have profound implications for global supply chains, raising the threat of stagflation (slowing growth alongside rising inflation).&rsquo;</li><li><strong>&lsquo;And the risk of a US</strong> growth slowdown has become more acute now that the stimulus from the 2017 tax legislation has run its course.&rsquo;</li></ul><p><strong>&lsquo;Meanwhile,</strong> US equity markets have remained frothy since our initial commentary.&rsquo;</p><ul><li><strong>&lsquo;And there are</strong> added risks associated with the rise of newer forms of debt, including in many emerging markets, where much borrowing is denominated in foreign currencies.&rsquo;</li></ul><p><strong>&lsquo;With central banks&rsquo;</strong> ability to serve as lenders of last resort increasingly constrained, illiquid financial markets are vulnerable to &ldquo;flash crashes&rdquo; and other disruptions.&rsquo;</p><ul><li><strong>&lsquo;One such disruption</strong> could come from US President Donald Trump, who may be tempted to create a foreign-policy crisis (&ldquo;<a href="" target="_blank">wag the dog</a>&rdquo;) with a country like Iran.&rsquo;</li><li><strong>&lsquo;That might bolster</strong> his domestic poll numbers, but it could also trigger an oil shock.&rsquo;</li></ul><p><strong>&lsquo;Beyond the US</strong>, the fragility of growth in debt-ridden China and some other emerging markets remains a concern, as do economic, policy, financial, and political risks in Europe.&rsquo;</p><p><strong>&lsquo;Worse</strong>, across the advanced economies, the policy toolbox for responding to a crisis remains limited.&rsquo;</p><ul><li><strong>&lsquo;The monetary and fiscal</strong> interventions and private-sector backstops used after the 2008 financial crisis simply cannot be deployed to the same effect today.&rsquo;</li></ul><p><strong>&lsquo;The tenth factor</strong> that we considered was the US Federal Reserve&rsquo;s interest-rate policy.&rsquo;</p><ul><li><strong>&lsquo;After hiking rates</strong> in response to the Trump administration&rsquo;s pro-cyclical fiscal stimulus, the Fed&nbsp;<a href="" target="_blank">reversed course</a> in January.&rsquo;</li><li><strong>&lsquo;Looking ahead</strong>, the Fed and other major central banks are more likely to cut rates to manage various shocks to the global economy.&rsquo;</li></ul><p><strong>&lsquo;While trade wars</strong> and potential oil spikes constitute a supply-side risk, they also threaten aggregate demand and thus consumption growth, because tariffs and higher fuel prices reduce disposable income.&rsquo;</p><ul><li><strong>&lsquo;With so much uncertainty</strong>, companies will likely opt to reduce capital spending and investment.&rsquo;</li></ul><p><strong>&lsquo;Under these conditions</strong>, a severe enough shock could usher in a global recession, even if central banks respond rapidly.&rsquo;</p><ul><li><strong>&lsquo;After all</strong>, in 2007-2009, the Fed and other central banks reacted aggressively to the shocks that triggered the global financial crisis, but they did not avert the &ldquo;Great Recession.&rdquo;</li><li><strong>&lsquo;Today</strong>, the Fed is starting with a benchmark policy rate of 2.25-2.5%, compared to&nbsp;25% in September 2007.&rsquo;</li><li><strong>&lsquo;In Europe and Japan</strong>, central banks are already in negative-rate territory, and will face limits on how much further below the zero bound they can go.&rsquo;</li><li><strong>&lsquo;And with bloated balance sheets</strong> from successive rounds of quantitative easing (QE), central banks would face similar constraints if they were to return to large-scale asset purchases.&rsquo;</li></ul><p><strong>&lsquo;On the fiscal side</strong>, most advanced economies have even higher deficits and more public debt today than before the global financial crisis, leaving little room for stimulus spending.&rsquo;</p><ul><li><strong>&lsquo;And, as Rosa and I argued</strong> last year, &ldquo;financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.&rdquo;</li></ul><p><strong>&lsquo;Among the risks</strong> that could trigger a recession in 2020, the Sino-American trade and technology war deserves&nbsp;<a href="" target="_blank">special attention</a>. The conflict could escalate further in several ways.&rsquo;</p><ul><li><strong>&lsquo;The Trump administration</strong> could decide to extend tariffs to the $300 billion worth of Chinese exports not yet affected.&rsquo;</li><li><strong>&lsquo;Or prohibiting Huawei</strong> and other Chinese firms from using US components could trigger a full-scale process of de-globalization, as companies scramble to secure their supply chains.&rsquo;</li><li><strong>&lsquo;Were that to happen</strong>, China would have several options for retaliating against the US, such as by closing its market to US multinationals&nbsp;like Apple.&rsquo;</li></ul><p><strong>&lsquo;Under such a scenario</strong>, the shock to markets around the world would be sufficient to bring on a global crisis, regardless of what the major central banks do.&rsquo;</p><ul><li><strong>&lsquo;With the current tensions</strong> already denting business, consumer, and investor confidence and slowing global growth, further escalation would tip the world into a recession.&rsquo;</li><li><strong>&lsquo;And, given the scale </strong>of private and public debt, another financial crisis would likely follow from that.&rsquo;</li></ul><p><strong>&lsquo;Both Trump and Chinese President Xi</strong> Jinping know that it is in their countries&rsquo; interest to avoid a global crisis, so they have an incentive to find a compromise in the next few months.&rsquo;</p><ul><li><strong>&lsquo;Yet both sides </strong>are still ratcheting up nationalist rhetoric and pursuing tit-for-tat measures. Trump and Xi each seem to think that his country&rsquo;s long-term economic and national security may depend on his not blinking in the face of a new cold war.&rsquo;</li><li><strong>&lsquo;And if they each genuinely</strong> believe the other will blink first, the risk of a ruinous clash is high indeed.&rsquo;</li></ul><p><strong>&lsquo;Trump and Xi</strong> will meet for talks during the G20 summit on June 28-29 in Osaka.</p><ul><li><strong>&lsquo;But even if </strong>they do agree to restart negotiations, a comprehensive deal to settle their many points of contention would be a long way off.&rsquo;</li><li><strong>&lsquo;As the two sides</strong> drift further apart, the space for compromise is shrinking, and the risk of a global recession and crisis in an already fragile global economy is rising.&rsquo;</li></ul></td></tr>