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Pakistan feeling the pinch as Trump's trade war intensifies

The CPEC (China Pakistan Economic Corridor) miracle, Pakistan's answer to all its problems, is already feeling the squeeze.

By Shahab Jafry (Postscript)

Published: Wed 4 Sep 2019, 9:32 PM

Last updated: Wed 4 Sep 2019, 11:36 PM

It turns out that US President Donald Trump went into his precious tariff war with about as much foresight as his two predecessors did going into their conventional, and not so conventional, wars.
Think about it. The only reason a few old timers still remember George Bush junior's "with us or against us" threat is because everybody's still trying to wrap up the Afghan war.
Do you think George (Bush) or Dick (Cheney) factored that in the early days of the war on terror? And has anybody forgotten Iraq? Nobody in the Middle East has, at least.
Not much later came Obama's "leading from behind" novelty. In case you're wondering how well that did, just look into how deep freedom and democracy have seeped in Libya and Syria.
Talk about wars that changed the lives of millions, much for the worse. Makes you wonder about the power vested in the seat of the US president. Everyone in Washington was on board for Afghanistan, no doubt, but not everybody really wanted to go into Iraq. Yet, Bush could do it because he was the president. Same, pretty much, is true for Obama's smart idea. Look how that turned out.
But Trump has triggered a different kind of war. When he tried to play tough and punish China for Intellectual Property theft - to the tune of $225 billion to $600 billion annually according to the Americans - he clearly didn't expect Beijing to dig in, much less fight back. And now he's stuck in a position where he must raise the stakes every time China retaliates. Otherwise he won't just look weak or lose this particular duel, but he also has to face re-election next year.
He really believed, it now seems, that all he needed to do was stomp his feet, shoot out a couple of tweets, and slap some tariffs on Chinese imports and that'll be it. And, he even tried to threaten the Chinese once they started retaliating. "China should not retaliate - will only get worse!" and since then he's been retaliating against every retaliation. Solid game plan?
As late as May, the world's most important investors were holding onto their initial conviction that Trump's bluff - yes, the world's smartest investment banks took all those tweets for poker play - would force Beijing to blink sooner rather than later.
"Trump may be overestimating the willingness of China's leadership to let him humiliate them, and investors may be overestimating the US president's willingness to lose face if China refuses to give way. This apparent complacency means if things turn out badly, the markets have a long way to fall," wrote Bloomberg magazine in its May 20, 2019 issue's editorial.
And markets have indeed fallen a long way since then, from America itself to the Eurozone already traumatised by the Brexit tragi-comedy to Asia, forcing the International Monetary Fund (IMF) to revise global growth for 2019 down from 3.6 per cent (estimated before the tariff war) to 3.3 per cent. This was in April's World Economic Outlook report, and things have worsened considerably, across the world, since then.
"Trade wars are good, and so easy to win," Trump tweeted in March 2018 just as he started this drama with the steel and aluminium tariffs. Perhaps he changed his mind this Tuesday when markets tanked to news of US factory activity shrinking, this August, for the first time since 2016. The inverted yield curve and threats of recession in the world's largest and strongest economy might not be a false alarm, as Trump's team has been trying to convince anybody who'd listen, after all.
With America slowing, Europe slowing, China suffering, and Asia's emerging markets bracing for a regional currency market meltdown as the trade war's domino effect continues to play out, one wonders how much closer Trump and team are to realising their original objectives. All this started so they could teach China a lesson for its 'industrial espionage', didn't it? The 'greatest transfer of wealth in history', according to former America's National Security Agency director Keith Alexander.
But what's a tariff fight between the world's two biggest economies got to do with somebody trying to make a living in a developing economy, like me? Quite a lot, apparently. One, just like the rest of the world, this exchange has left China somewhat depleted. And this happened when the poor country was already down to six per cent growth, as opposed to its 10 per cent average for over a decade. So, the CPEC (China Pakistan Economic Corridor) miracle, Pakistan's answer to all its problems, is already feeling the squeeze. Two, with China's currency under downward pressure - predictable after repeated financial and political attacks - all of Pakistan's efforts to improve its Balance of Payments situation vis-a-vis China have already hit a brick wall.
And three, should the Chinese let the yuan slide further, which seems like the only plausible outcome not too far down the road, there's a very real risk of contagion spreading through Asia's emerging markets. Where does that leave economies already struggling with current account black holes and very weak currencies?
Perhaps life would be less difficult for everybody if American presidents stopped trying to make the world a better place; politically, militarily, and especially economically.
Shahab Jafry is a senior journalist based in Pakistan

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