Roughly 99.9% of economists regard President Donald Trump’s trade war against China as idiotic. Doesn’t he get that American consumers will pay the costs of the tariffs on Chinese imports in the form of higher prices? Doesn’t he realise that a trade deficit is not equivalent to a loss in business?
When he studied at Wharton business school, Trump evidently missed the class on David Ricardo’s theory of comparative advantage. But somewhere along the way he picked up an intuitive understanding of power.
A visit to Beijing last week revealed to me a governing elite scrambling to formulate a strategy for a trade war they thought would be over months ago, an economic elite divided about the consequences of the “Trump shock” and a middle class increasingly ambivalent about the government of President Xi Jinping.
China has few good options. It has imposed retaliatory tariffs, but it knows that Chinese imports of US goods are much less than US imports of Chinese goods. The idea of sending another delegation to Washington has been quietly abandoned. Last week the former finance minister Lou Jiwei called for export restrictions on US companies such as Apple, but everyone I spoke to dismissed him as a “loose cannon”. And no one thinks that a significant weakening of the Chinese currency would work.
Optimists in Beijing argue that the trade war has created an opportunity for the government to speed up economic reform. Pessimists admit that the US tariffs pose a significant threat. They worry that, far from accelerating reform, the trade war could lead to its postponement. China is supposed to be grappling with the mounting debts of its corporate sector, overcapacity in heavy industry and a financial system infested by shadow banks. But to offset the effects of the trade war, China’s rulers look like restarting their debt-propelled infrastructure investment machine.
The most striking feature of China today is the division at the top. As one hugely successful businessman put it to me, there are three Chinas: the “New New China” of the dynamic technology sector, the “New Old China” of the most profitable state-owned enterprises (SOEs), such as banks and telecoms, and the “Old Old China” of the heavy industrial, rust-belt SOEs.
There is growing pressure on New New China from the government, which regards the big tech companies as having grown so large as to pose a political threat. Jack Ma’s recent announcement that he intends to step down as executive chairman of Alibaba (the Chinese Amazon) has been the subject of febrile speculation. Rumour has it that Ma was told to step down with immediate effect but was able to negotiate a postponement.
Cheng Li of the Brookings Institution argued in a recent article in the US magazine Foreign Affairs that the key to China’s future was the attitude of its vast new middle class. I agree. The question is whether criticism of China’s leadership — which has focused on the escalation of the trade war but relates to other issues, including Xi’s abolition of term limits — will mutate into resentment of American bullying.
I wonder. My impression is that many educated Chinese people view the government’s foreign policy with derision. The recent media coverage of Xi in the People’s Daily has been comically old-fashioned, with innumerable boilerplate reports of his meetings with obscure heads of state, the majority from Africa. Last Sunday, for a change, the front pages pictured Xi with Nicolas Maduro, the Venezuelan dictator, and Vladimir Putin. A popular meme on social media is a WeChat message contrasting China’s history of conflict with Russia with its history of good relations with the United States.
There is much about Xi Jinping’s China that brings to mind the French Second Empire, proclaimed in Paris 166 years ago. The emperor, Napoleon III, was a modernising autocrat, a living advertisement for the benefits of strong leadership over democracy. Like Xi, Napoleon III pursued a free trade policy, exemplified by the 1860 Cobden-Chevalier trade treaty with the UK. Like Xi, he was a bold urban planner. During his reign Paris was transformed into the spacious city we know today, just as Beijing is being shorn of its migrant workers’ slums.
As in China today, the bourgeoisie in Second Empire France was, on the whole, content with its lot as long as the good times rolled. There was a railway construction boom. The department stores of Paris, such as Le Bon Marché, were a sensation. But, like their Chinese counterparts, they held dear the gains of their enterprise. Property rights were sacrosanct, and threats to them were unpopular. If the threat was posed by corrupt officials, the reaction took the form of a liberalism that asserted the benefits of limited government, the rule of law and representative institutions.
The Second Empire grew ossified. Growth slowed. Foreign policy reverses culminated in the Franco-German War of 1870, in which French forces were swiftly defeated by the superior Prussian army. After a revolutionary interlude (the Paris Commune), the Third Republic was proclaimed. The lesson of history is that an autocratic regime that brings into being a large middle class runs a certain risk, one that Karl Marx — a keen observer of the events described above — understood well.
Xi Jinping is a student of Marx. He must therefore be aware of the risks he is running. For that reason I expect him to do whatever it takes to avoid a significant slowdown in Chinese growth. I also expect him to avoid the sort of head-on confrontation with his geopolitical rival that undid Napoleon III. But that leaves him in a very uncomfortable position if Trump presses on with his trade war.
Unlike Kim Jong-un, Xi is not able to give Trump a symbolic victory by conceding to his demands at a showy summit, although the North Korean leader has demonstrated the ease of reneging when the cable TV cameras move on. Even if Xi were sure that China’s trade policy could remain unchanged after such a summit, he still would not risk the associated loss of face.
Jack Ma took a small piece of revenge on his political master last week by reflecting that the US-China trade war might last 20 years. That is the stuff of nightmares in Zhongnanhai, the compound inhabited by today’s Chinese emperor.
Sure, Trump’s tariffs violate the theory that free trade is a “win-win” process, but they make a good deal more political sense than is generally realised. With his uncanny instinct for the weak spot of the counter-party, Trump has found the Chinese leadership’s principal vulnerability.
How far this weakness may lead to real economic problems for China remains to be seen. But it is already causing real political problems to Xi, six months after the decision to extend his term in office sine die. Future historians may be as impressed by the Trump shock as today’s economists are contemptuous of it.
Niall Ferguson is the Milbank family senior fellow at the Hoover Institution and a visiting professor at Tsinghua University, Beijing
I am not sure exactly when I received The Subprime Primer, a slideshow that someone emailed me early in 2008. I do recall thinking it was unlikely ever to be surpassed as an introduction to the financial chain reaction that began as I was writing The Ascent of Money and reached its climax in the months after the failure of Lehman Brothers, the 10th anniversary of which fell yesterday.
Illustrated with foul-mouthed stick men, The Subprime Primer’s 45 slides told the story of how “crappy” mortgage loans originated by “Ace Mortgage Brokers” came to be owned by “First Bank of Bankland, Inc”, which sold them to “RSG Investment Bank of Wall Street”. The “really smart guys” (RSG) were the ones who came up with the plan to “create a new security and use these crappy mortgages as collateral” and then sell the resulting collateralised debt obligation to investors such as the “Norwegian Village Pension Fund”. We all now know how the story ended.
A decade has passed since the escalation of the credit crunch into a global financial crisis and then a great recession. There are four questions we need to address. First, why did it happen? Second, why, in most countries, did it not turn into a full-blown depression? Third, why was the recovery from the crisis so anaemic? Finally, and most importantly, could it all happen again?
Gordon Brown, prime minister when the storm struck, is among those who think it could. “We are in danger of sleepwalking into a future crisis,” he said last week. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.” Having sleepwalked into the last crisis — and then prematurely claimed to have “saved the world” — Brown speaks with a certain authority.
Ten years ago I was right to foresee that, bad though things already were in the summer of 2008, they were going to get a great deal worse. A US recession had already begun. Banks all over the world were about to reduce lending to compensate for losses from mortgage-backed securities. I was right, too, that Europe would be at least as badly affected as the United States. There was to be a “great dying” of weak banks and asset managers. Millions of people would lose their jobs, their homes, their savings.
What had gone wrong? In The Ascent of Money I argued that this deepening financial crisis could not be explained simplistically — “It was the greed of the bankers!” or “It was reckless deregulation!” — but required a consideration of six pathologies:
1) The inadequate capitalisation of the banks of the western world;
2) The contamination of the short-term debt market with toxic securities of the sort depicted in The Subprime Primer;
3) Errors of monetary policy by the US Federal Reserve, which turned a blind eye to signs of overheating in the American property market;
4) The rapid growth of the forms of financial life known as derivatives, which added an opaque layer of complexity to the system;
5) The politically motivated campaign to increase the homeownership rate in the United States (and some other countries that also experienced housing bubbles);
6) The unbalanced relationship that had developed between the United States and China, which I gave the name “Chimerica”.
Second question: whom or what should we thank for the fact that the 2010s were not the 1930s — the Federal Reserve? The spirit of John Maynard Keynes? A bit of both would be a fair answer, although monetary policy was used for much longer than fiscal policy. But I would give more credit than most western commentators to China’s massive stimulus programme.
Question three: whom or what should we blame for the fact that the 2010s were also not the 1990s? Why was the recovery that followed the crisis so underwhelming? Is it justified to speak, as the Harvard economist Larry Summers has, of “secular stagnation”? Or was his colleague Kenneth Rogoff right when he argued that such a large financial crisis was bound to result in a prolonged but finite economic hangover?
I am inclined to side with Rogoff in this debate but I would add two further points. First, the EU’s horrible mishandling of the crisis surely acted as a brake on recovery. Second, the administration of Barack Obama did its best to throw sand in the American economic machine in the form of overcomplicated regulation.
Keynesians have claimed the recovery could have been more rapid with even larger fiscal stimulus — the construction of umpteen bridges to nowhere, paid for by yet more government debt. Brown last week endorsed that story. But might it not have made more sense to try tax cuts plus deregulation — the policies belatedly adopted by Donald Trump’s administration last year?
Final question: is Brown right to fear another financial crisis? The answer is yes. The most striking feature of the global financial system is how little it has changed in a decade, despite the promulgation of thousands of pages of new financial regulations on both sides of the Atlantic. Banks are certainly better capitalised than they were 10 years ago. But that’s about it.
There are novelties, to be sure. Ten years ago bitcoin was introduced to the world in a paper published under the pseudonym Satoshi Nakamoto. By 2017 there was enough speculative interest in bitcoin and other cryptocurrencies to produce a spectacular bubble. Yet the bubble burst. Despite the cryptocurrency mania, Planet Finance is still dominated by fiat money created by banks with fractional reserves, long and short-term debt instruments issued by governments and corporations, stocks issued by corporations, insurance policies and mortgages.
The thing to worry about — as in 2008 — is the sheer size of the debt mountain. Relative to global GDP, the financial sector has reduced debt and households have held steady, but the debts of governments and non-financial firms have soared. Total debt is up from 280% of GDP in 2008 to 320%.
If the global financial system has not changed fundamentally since 2008, then it does not take great prophetic gifts to predict another crisis. Financial history has not ended any more than political history ended with the fall of the Berlin Wall.
The next crisis will not be like the last one. History teaches us not to expend too much energy trying to prevent the last crisis from happening again, but instead to ask the broad question: which borrowers around the world have overextended themselves to the point where they will begin to fail in the event of rising real interest rates? And which lenders or investors will be in trouble if the defaults exceed their expectations?
What makes it so easy to predict the next financial crisis is that in some overleveraged emerging markets — notably Turkey and Argentina — it has already begun. Who will be next — South Africa? Brazil? Or the big one: China?
Somewhere, I hope, the author of The Subprime Primer is working on a sequel. The Submerging Market Road Map, anyone?
An updated edition of Niall Ferguson’s book The Ascent of Money: A Financial History of the World will be published in 2019
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President Trump at the White House on Tuesday. (Mike Theiler/Pool/Epa-Efe)
Two years ago, at the World Economic Forum in Davos, Switzerland, it seemed inconceivable that Donald Trump would be elected president of the United States. One year ago, it seemed inconceivable that he would ever come to Davos in that role. This week, the worst nightmare of Davos Man is coming true. President Trump — the personification of all that the “globalists” fear and loathe — is coming to town.
No part of the world — perhaps not even Washington — misses former president Barack Obama more than Davos. Trump wants tighter controls on immigration, and he has only recently referred to African countries in scatological terms. He is openly protectionist and has repeatedly threatened to scrap free-trade agreements such as NAFTA. He has shown little respect for the European political elite that sets the tone at Davos, leaning on them to contribute more to NATO. Above all, the president has come to exemplify the Ugly American in European eyes.
Yet to imagine that Davos is all about liberal principles is to misunderstand it. There’s a reason Obama never showed up. There’s a reason Trump will not be pelted with Swiss rolls when he does.
The forum was founded in 1971 by a bespectacled Harvard-trained German academic named Klaus Schwab with the idea that a regular conference of international business leaders could realize his vision of “corporations as stakeholders in global society, together with government and civil society.” The result has been described as a name-dropper’s paradise, populated not only by the chief executives of multinationals and selected politicians, but also, as the New Yorker’s Nick Paumgarten described the sprawling scene, by “central bankers, industrial chiefs, hedge-fund titans, gloomy forecasters, astrophysicists, monks, rabbis, tech wizards, museum curators, university presidents, financial bloggers [and] virtuous heirs.”
Thanks to Schwab, Davos now truly deserves the name Thomas Mann once gave the mountain that towers above it: der Zauberberg, the Magic Mountain.
Those who mock the World Economic Forum — and there are many, most of whom would drop everything and rush there if they were ever invited — underestimate its power. Think only of Nelson Mandela’s 1992 speech in which he ditched one of the core commitments of the African National Congress’s Freedom Charter: the nationalization of South Africa’s key industries.
But what matters at Davos is not the speeches given by world leaders, much less the panels with worthy titles such as “Rethinking Climate Change and Work-Life Balance in the Sixth Industrial Revolution.” It is the meetings behind the scenes, in the well-guarded private rooms of the resort’s main hotels: meetings like the ones that changed Mandela’s mind on state ownership of the economy. The really interesting question is whether or not Trump and his entourage will be taking such meetings — and with whom.
The media will probably focus their coverage on handshakes and other body language with the other world leaders on this year’s Davos list. Will he and the French President Emmanuel Macron reenact the longest handshake in Franco-American diplomatic history? Will he do the opposite with German Chancellor Angela Merkel, whose hand he declined to shake last year? Will Indian Prime Minister Narendra Modi get some Trump time?
None of this will matter. The real issue is the message Trump chooses to communicate to a global business elite that has an embarrassing little secret they would rather not say too much about: They may hate his tweets and his politically incorrect rhetoric, but they have spent the past year loving his economic policy to bits. Deregulation plus corporate tax cuts have helped to drive the price of nearly every stock represented at Davos to record highs. Forget the public handshakes; it’s the private high-fives that will matter. As I prophesied two years ago: Trump was always going to come to Davos if he was elected president, in order to remind his fellow billionaires that, when all is said and done, he is really one of them.
The reason Obama never went to Davos is that, aside from raising campaign funds from them, he had little real use for businessmen. Trump, by contrast, is a businessman, whose network of business ties — not least to Russia — remains a focal point of an investigation that may yet determine the fate of his presidency.
That is not to say I expect him to turn up at Russian oligarch Oleg Deripaska’s legendary Davos party. But he would not be wholly out of place there: After all, Deripaska employed Paul Manafort before Trump did.
One of my favorite lines about Davos comes from JP Morgan boss Jamie Dimon: “Davos is where billionaires tell millionaires how the middle class feels.” The events of 2016 revealed that Trump knew a lot more than most members of his class about how the American middle — and working — class felt. For that reason, if no other, he can expect more than a cold shoulder from the globalists this week.