Trade wars have reached a 'red line'

Published 17.05.2019 22:47
Updated 18.05.2019 00:08

Even though the administration of President Donald Trump has been managing negotiations with harsh language and by escalating tensions, which enabled it to get the compromises the U.S. wanted with Canada and Mexico, the same methodology has not given the same results in negotiations with China and the European Union.

This brings the following danger: How much more brutal can the Trump administration be to achieve the desired result against China and the EU? International institutions and academics who have been analyzing the process over the last 40 years point out that for the first time ever in trade wars, we are pressing the red line, which could seriously harm the world economy and global trade.

The issue that further complicates the trade war between the U.S. and China stems from the fact that the negotiations are not limited to addressing the trade imbalance between the two countries in favor of China. A critical point in the negotiations relies on China allowing its currency, yuan, to float; in other words, allowing it to appreciate in value, and another point relies on China's constant demand for U.S. government bonds.

However, during the late hours as I was writing these lines, it was announced that the Chinese Central Bank reduced its reserves by another $10 billion worth of U.S. bonds at the end of March. While we remember the rumor that in the 1980s while the U.S. and Japan were conducting negotiations, U.S. Trade Representative Robert Lighthizer was making paper planes from Japan's proposals and flying them back to the Japanese, it is being discussed if China will repeat Japan's mistake.

On the EU front, on one side, Angela Merkel's call for unity against both China and the U.S., on the other side, President Trump's call to the U.S. Federal Reserve for interest rate cuts; we are witnessing a war followed by the international economy and financial circles in a multifaceted way.

No doubt Trump's biggest expectation is to decrease the U.S. Dollar Index below 90 points. The strong dollar weakens the Trump administration's hand in trade wars. Let us hope that this war will be over without serious damage to the world economy.

Hormuz and beyond

As of the 2000s, one of the trivets of the accelerating rivalry over the global power center between the Atlantic and Asia-Pacific is based on energy. The Asia-Pacific region's increasing weight in world commodity production requires energy.

The Asia Pacific's daily crude oil imports climbing from 19 million barrels to 20 million between 2016 and 2019 will reach 21 million in 2020, 25 million in 2025 and 30 million barrels in 2030. During this period, while North America's daily crude oil exports will rise from 1 million barrels to 6 million barrels, the Middle East's daily crude oil exports will rise from 20.5 million barrels to 22 million barrels. The projections in question point to this: The U.S. will further build up its production of crude oil from 2020 to 2030 to supply more than half of its daily crude oil demand of 22 million to 25 million barrels while exporting 3-4 million barrels of its daily production.

Until 2040, this balance in the global oil market means that the U.S. has to get cheap oil through domestic production and imports to meet its own people's demand and to keep the fuel needs of all sectors, especially of the aviation industry, at an acceptable level.

While the U.S. cut its daily oil imports to 10 million barrels, it reduced imports from the Persian Gulf and the Strait of Hormuz between 2000 and 2017 from 3 million barrels to 2 million; but during the same period increased imports from Canada from 1.8 million barrels to 3.8 million barrels. This indicates that the U.S. has significantly reduced its dependence on the import of crude oil from the Middle East and the Persian Gulf over the last 18 years. On the other hand, it is expanding its claim in the export of crude oil. While the U.S. plans to reduce its daily oil imports to 4.5 million barrels, it is expected that India's daily oil imports will reach 5 million barrels, while China's daily oil imports are expected to reach 10 million barrels.

Some 26 percent of Iran's oil exports are to China, 23 percent is to India and 19 percent is to EU countries. Since last weekend, in between the lines of news on the sabotage of two Saudi tankers and four cargo ships in United Arab Emirates (UAE) territorial waters and the drone attack in Saudi Arabia, there are deeper meanings for the two groups, on one side for buyers such as China and India, and on the other side, for producers in the Gulf and sellers like the U.S. Thus, I believe it would be beneficial to read "Hormuz and beyond" and the "energy war" in Syria, Iraq and the Eastern Mediterranean from this aspect.

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