Special to Arab News Japan
TOKYO: US president Donald Trump appears to be switching the emphasis of his attacks on China from trade and supply-chain wars to financial system combat. He is threatening to restrict China’s access to the global payments system, a move that some experts believe boomerang back and harm the United States itself,
Trump may well be bluffing or practicing the “art of the deal” by trying to scare China into making concessions on trade in order to avoid being decoupled from the global payments network. But his tactics have set China thinking seriously about creating alternative systems.
Huge amounts of money are exchanged daily between trading nations, the US and China being the two biggest ones, via the global payments system. Being denied access to that system could do China a lot of harm, in the same way that Trump is seeking to hobble China by denying it access to US capital markets.
At the same time, the Trump administration is hinting that it might, as an extreme measure, or “nuclear option” as some term it, consider seizing Chinese assets in the US, including part of the $1 trillion of US Treasury securities that China holds, if Beijing does not do a big trade deal with the US.
It is easy to see this as bluff on Trump’s part, designed to win him concessions from China on trade to bolster his flagging position in the US presidential election race. So far, Washington has only a tentative or “first phase” bilateral trade deal with Beijing.
However far-fetched the US leader’s threats against China to cut its access to the international payments system or to seize some of the country’s financial assets in the US assets may seem, China does not appear ready to leave anything chance.
The US leader’s very first act on coming to office in 2016 was to pull the US out of the Trans-Pacific Partnership (TPP), an alliance which was of great strategic value to the US in Asia. He then launched trade wars against China and others which arguably hurt US consumers more than others.
Now he is taking his wars onto new fronts. Reuters recently quoted officials and economists in China as saying that a “broad financial war has already started” and that China has to be prepared for Washington’s “nuclear option” of kicking China out of the dollar payment system.
It seems that having failed to secure a decisive victory in his trade war against China the US leader is preparing for financial combat this could be simply scare tactics, because it could damage the US as much as China but the threat of mutual destruction does not always seem to deter Trump.
His attacks on Huawei, TikTok, WeChat and others are directed against easily identifiable targets but an assault on aspects of China’s financial system operations is something else – vague but potentially very risky.
At present, most of China’s cross-border transactions are settled in dollars via the SWIFT international payment network which is one of the largest financial messaging systems in the world. Such a move would of course hurt China’s international trade and capital transactions.
Shutting China out of international dollar payment systems is possible as a sovereign act by the US. But it would be an odd thing to do at a time when the Trump administration is trying to lever Beijing into making big ticket purchases of US goods, which of course have to be paid for.
As Hung Tran, former chief economist at the Institute of International Finance on Washington says, the US “will continue to trade with China as it expects China to raise annual imports from the US to $350 billion and China has to use the Swift system to pay the US for the purchases.”
This suggests that Trump is either bluffing, or simply failing to think through the consequences of his own threatened actions, in the hope that Beijing will be sufficiently unnerved as to give the US President a pre-election trade deal.
Chinese officials seem to be taking Trump’s posturing seriously however. The threat of Sino-US financial “decoupling” is “clear and present,” Reuters cited the head of Greater China economic research at Standard Chartered and a former economist at the People’s Bank of China Shuang Ding as saying.
Former director of the international payments department of China’s State Administration of Foreign Exchange and now chief global economist at BOC International (China) Guan Toh have reportedly cautioned that the US “could expel China from the dollar settlement system.”
Guan has recently called for increased use of China’s Cross-Border Interbank Payment System in financing global trade. China meanwhile could seek to use the euro to settle trade and other transactions with Europe, and the yen with Japan while using the RMB for payments elsewhere in Asia.
Another action that the Trump administration has hinted at is to seize certain Chinese assets in the US. This would be tantamount to an act of financial war on Trump’s part.
As Tran at the Atlantic Council in Washington says, these are extremely aggressive moves sure to invite retaliation. Such acts “would roil international financial markets and cause world trade to collapse leading to severe economic dislocations in all trading countries,”
Reneging on sovereign debt would seriously dent the reputation of US Treasuries as the world’s premier safe asset. Investors would have to price in the probability of the US reneging on its debt for political reasons, leading to higher interest rates and difficulty in funding US deficits.
Not everyone is taking Trump’s threats of financial system sanctions seriously. “I do not believe The Trump administration would be so stupid to take such actions,” Yuqing Xing, a former economics professor and Asian Development Bank Institute official in Tokyo says.
Nevertheless, few people believed initially that the Trump administration would risk the damage to the world trade system and to production supply chains that have in fact resulted from his political assaults, as well as from belated US actions on tackling the COVID-19 pandemic.
A lot is hanging on the outcome of the US elections in November and some thin that maybe China will opt to buy time until then by appearing to take Trump’s threats seriously.
Beijing could opt counter Trump’s “Art of the Deal” by practicing the “Art of War” to quote the title of a book Chinese military strategist of ancient times Sun Tze. That work advocated getting to know your enemy well in order to defeat him and Beijing seems to be “getting Trump’s measure” quite well now.