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The cycle of trade sanctions and financial uncertainty goes around and around; Roger Williams explores the possible knock-on effects.
Watching the world’s economies is like watching a spinning top; unless it is left untouched except to wind it up, the top wobbles and slows. It has a cycle, speeding up when you push the plunger and slowing down as the energy is dissipated.
Poke it with your finger and it both wobbles and slows down. Currently, three fat fingers are causing the spinning top of the world economy to wobble: Iran; the EU and China.
Iran is believed to be behind recent attacks on two Saudi oil tankers and damage suffered by vessels from Norway and United Arab Emirates. This marked escalation in tension comes as the US sends an aircraft carrier back to the Gulf.
Saudi Arabia and its partner, the USA, are pushing back on Iran, continuing to apply sanctions, as well as training, funding and arming opponents.
Both countries have reasons to do this. For Saudi Arabia it is both religious and about regional power. For the US, Iran has long been behind various groups fighting in the Middle East against Israel, or in Syria, Lebanon or Yemen where the US and Saudi Arabia is backing the ‘other side’.
The economic impact of Iranian aggression is being felt worldwide. President Trump is invoking his emergency powers to run around a hostile Democratic House of Representatives which has been holding up $8 billion of arms sales to Saudi Arabia and United Arab Emirates.
This benefits the US arms industry (the world’s largest which includes the world’s three largest defence companies) and puts military pressure from US surrogates on Iran throughout the Middle East.
This is a win-win scenario for President Trump and bullish for oil prices. It highlights the oil supply problem posed by sanctions and by Iran’s sabre-rattling in the 21-mile Gulf of Hormuz through which approximately 20 per cent of world production of oil passes.
Moves to enforce oil sanctions against Iran puts pressure on countries with which the US is engaged in trade discussions and disputes. This pressure is most markedly put on China who has taken up to a quarter of Iran’s production4 but also on France and Germany, the former whose oil companies are active in Iran and on the latter which is a significant buyer.
The ‘second finger’ is the EU which is suffering from weak banks, most importantly in Germany and Italy, and an impossible common currency for government debt, the support of which continues to dog southern states in the EU causing persistent youth unemployment and a widening gap between the ‘haves’ and ‘have nots’.
In turn, this is leading to a rising popularist wings which are destabilising the control of centrist politicians from Germany and France over the EU.
The driving economy of the EU, Germany, is threatened by President Trump’s tariffs on cars and car parts. Germany has received a stay of execution until November this year, giving the US administration the chance to see what trade deal is done with Japan before turning back to the EU.
Unlike the trade war with China, the US skirmish with the EU, is really focussed on fairness and not the theft of technology: tariffs are unequal and in the EU’s favour and EU purchases of US goods are restricted by skilfully-crafted EU trade standards.
President Trump has recognised that the UK has been out negotiated by the EU and he seems clear that these tactics will not be effective against US interests.
Two additional markers have been placed by the US: firstly, a continued demand by the US for France and Germany to meet the two per cent of GDP target spending on defence as NATO members and secondly, the threat of sanctions against Germany should the gas pipeline from Russia, which by-passes the Ukraine and Poland, become a reality.
These markers come at a time when the German car industry is struggling, the economy is on a bit of a knife-edge between growth and stagnation and government tax revenues have left Germany facing a budget shortfall of £124 billion over the next four years5.
Add Brexit and doubt on the UK’s managed exit and its payment of $39 billion, and this piles pressure on Germany at a time when Wall Street banks continue to outperform and take revenue from Germany’s biggest banks, Deutsche Bank and Commerzbank.
Last of the three ‘fat fingers’, is China. The US has moved forward with the addition of Huawei to a list of blacklisted companies, ‘untouchable’ for anyone who wants to trade with the US. The immediate announcement that Google would no longer trade with Huawei, nailed down the huge damage inflicted.
Following this trump card, a media storm concerning the use of forced labour in China has brought the world’s largest clothing companies into the fray alongside the hi-tech companies fleeing liaisons with Huawei.
A United Nations panel of experts reported that more than a million people from Muslim minorities, mostly ethnic Uighurs, but also Kazakhs, Kyrgyz and Hui, are being held in internment centers.
China’s appalling record of pollution has been highlighted as chemical plants in China have been blamed for stalling the fight to protect the ozone layer. Completely in breach of the 1987 Montreal Protocol banning CFCs, China has labelled the plants ‘rogue’ and has shut down two sites.
Clare Perry of EIA International has said that to stop the continued degradation of the ozone layer by CFCs, “will involve high-priority large-scale sustained intelligence-led enforcement efforts on the part of China, something we have yet to see evidence of.”
China has been painted by the US as a thief, a global polluter and racial-religious bigot with whom you should not trade and if you do, you can’t trade with us. This media campaign looks set to continue alongside tariffs and blacklisting
The effect of US tariffs has put real pressure on the Yuan. It began to re-establish itself in April this year: on 13 April 2018 there were 6.27 Yuan to the US dollar; today there are 6.906. After the Chinese authorities last failed attempt to support its currency, it is thought that they will not risk another trillion dollar loss.
The damage being inflicted on itself by China’s behaviour is being felt in Hong Kong also. The Hong Kong dollar (against which Asian currencies are often marked) fell to a 33-year low in May as net outflows from China hit a four-year high at $1.6 billion in a single day7. This is the largest move since the 2015 Chinese exchange rate crisis.
With the Middle East in conflict; trade wars ramping up together with a willingness to use physical force to impose sanctions; volatility in oil, other commodity prices and freight rates is more likely than not. The international trade war continues to spin out of control; caution is your watch word.
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