It’s Not the Trade Deficit, Stupid!

September 12 2018

The United States and China are engaged in a trade conflict, which is starting to increasingly resemble a real trade war. Now, I am fully aware that I am not saying something new here. However, I do want to address this topic once more, because it is about more than just trade.

Sometimes brief articles, which largely pass by completely unnoticed, are published which could be labeled as tiny pearls, because they are much more revealing that what their headlines at first glance convey. Recently, I came across one such pearls, on the website of press agency Reuters. Reuters featured a brief article with the headline “China wants to resolve trade conflict with the United States by discussing trade as equals”. And thatis the issue at heart. Discussing trade with China on the basis of equality is, after all, precisely what the U.S. wishes to avoid.

Why so? The recent trade conflict is a symptom of an underlying disease. It is no coincidence that the U.S. has initiated the fight with China instead of the other way around. What is the real motive behind the conflict? It is all about a global power struggle or, better yet, world dominance.

Since the end of World War I, the United States has been the supreme ruler of the world. That role became set in stone after the end of World War II. The only other serious pretender after WWII was the Soviet Union, but that was something that did not last for long and came to a complete halt when the Iron Curtain fell.

China barely played a role on the world stage until 1978. Around the year 1500 the country, which up till that point dominated Asia and other nearby regions, receded from its relations with foreign countries. Trade with foreigners became prohibited and China isolated itself. Only roughly five centuries later, Beijing decided to change its stance on foreign trade. The opening of China had enormous consequences. Because of its sheer size, number of inhabitants and its strategic location, China was almost destined to play an extremely important role on the world stage as soon as it would join the “big league”.

When Beijing ended its self-imposed isolation from the outside world, it took of course a while before the country gained enough economic strength. To the extent that the Chinese economy grew, China´s worldwide political influence increased substantially as well. After a while it became clear, also to Washington, that China could seriously jeopardize the United States´ global dominance or could even become thedominant force. The Chinese influence in Africa, Oceania and Asia is undeniably great and growing, with initiatives such as the Belt and Road Initiative.

How would the U.S. react to China´s increasing dominance? Would you wait until your challenger has grown so strong that you are no longer able to impose your will on him or would you try to prevent that from happening in the first place? The second option is of course the correct answer.

The source of the increasing political and military influence of China in the world is its economy. Since the country earns a lot of money from international trade, it can easily afford to invest a lot in its army and to buy political influence elsewhere in the world through numerous investment projects and loans granted to other, poorer countries. That influence reaches as far as to Europe. In the Balkans, for example, China is busy financing and building a variety of projects such as highways and ports, while China is also gaining a foothold in Central and Eastern Europe.

It is therefore a logical move to try to harm the source behind this increasing geopolitical power – the Chinese economic machine. This is the real motive behind president Trump´s trade war with China. Yes, a trade war will harm both sides. But since China is much more interconnected with the global economy than the United States is, a lengthy global trade war would hit the Chinese economy harder than the United States. Economically perhaps not so much, but there is more at stake than just the economy and certainly more than just trade!

What does this mean? It means, among other things, that we should seriously take into account that the trade war behind the two countries could heat up even further and could easily move outside the economic sphere in the coming years, until both countries decide to bury their axes. In other words, the odds of more geopolitical instability in the coming years – I am talking about a horizon of beyond 2020 – are high, which has generally been good news for precious metals. What the past also teaches us, is that it could become a question of who is the most patient. Whoever buys gold to pocket a short-term profit, could easily be confronted with some difficult months in the short run as I have mentioned on an earlier occasion. Nonetheless, whoever has an investment horizon that lies far beyond 2020, 2018 could easily become a year in which gold can be bought against an impressive discount at a very attractive price.

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