M Ziauddin

President Trump’s surprise announcement on March 1, 2018 that the US will institute tariffs on steel and aluminum imports seem to have upset stock markets, angered US allies around the world and even drawn criticism from members of his own party — but whether it represents the start of a global trade war is said to depend on China’s reaction.

Beijing’s immediate response the next day was as expected measured in tone — urging the US “to abide by the multilateral trade rules and make contributions to the international trade and economic order” — and concerns in the West and the US about potential retaliation for the tariffs have largely centered on China imposing its own punishing economic measures.

But Chinese officials have previously warned they are willing to do what they think is necessary to “defend our rights” should Trump introduce additional measures that target the Asian economic giant more heavily and directly.

In the opinion of US media in addition to the vast array of painful economic response options at its disposal, China could target US geopolitical interests if Trump escalates trade tensions.

The US media believes Trump’s latest move risks stoking an adversarial economic standoff with Beijing that could prompt geopolitical retaliation on issues ranging from North Korea to the South China Sea.

“When we go to the next step and take action against China on investment and trade that will be much more significant, and then you will see their response spill over into other areas,” US media stated quoting Wendy Cutler, a former diplomat and negotiator who serves as the vice president of the Asia Society Policy Institute.

One concern, according to CNN, is that China could respond to a more focused American trade campaign by slowing its cooperation on implementing sanctions against North Korea, a key component of the Trump administration’s “maximum pressure campaign” to bring Pyongyang to the negotiating table over its nuclear programs.

What is more likely to happen is China would promote even more aggressively its global economic interests than trying to retaliate with geopolitical responses. Indeed, instead of wasting its time on trying to squeeze the US on the North Korean issue, China perhaps would focus more on converting its yuan into a convertible currency challenging in the process the dominance of the US dollar as the single most powerful global currency.

The phenomenal progress that China has achieved on the economic front in what appears to be a short span of only 15 years backed, of course, by about 35 years of a dedicated process of strengthening its economic fundamentals has propelled the country to the second place in the global economic ranking, very close to the top ranking USA.

Today China is an important player in the global markets. In fact, global growth has come to be crucially dependent on the performance of China’s economy. Any slowdown in its growth seriously affects the global markets.

Indeed, China’s meteoric rise over the past half-century is one of the most striking examples of the impact of opening up an economy to global markets that the world has ever seen.

Jeffery Moore II, senior analyst at Global Risk Insights in an article (Can Emperor yuan dethrone king dollar as world’s currency?) published on March 1, 2018 in the ozy.com referring to China’s shift from a largely agrarian society to an industrial powerhouse shows how the country lifted nearly a billion people out of poverty reshaping the world’s economic landscape.

“In the process, it has seen sharp increases in productivity and wages that have allowed China to become the world’s second-largest economy,” adds Moore II.

Clearly, President Xi Jinping is working hard to lift his country’s economic ranking from second to first position. In this regard, efforts seem to be on to build yuan into a global convertible currency more in demand ultimately than the US dollar.

China is likely to try to seek to displace dollar by the end of current year by forcing yuan-denomination of specific commodities, “marking a cataclysmic shift in the world financial order that’s been in place since World War II.”

For example: If China switched from dollar to yuan to pay its oil-sector suppliers, it would eliminate annual dollar demand in such contracts by $876billion, leading to historic depreciation of dollar.

“As the world’s No. 1 oil importer, China may have the leverage to demand such a dollar-to-yuan switch, which would directly influence nearly 40 percent of global oil production and create a massive oversupply of U.S. dollars. And China changing to yuan-denominated oil contracts is significant because it could begin to unravel the US dollar’s dominance worldwide and, in turn, lessen the United States’ ability to wield the soft power associated with currency leverage.

“The saying ‘the bigger they are, the harder they fall’ is relevant here because the U.S. dollar is immense — it makes up 64 percent of known central bank foreign exchange reserves; more than 85 percent of world forex trading (the decentralized over-the-counter trading in foreign currencies); and 39 percent of all debt issued in the world. In addition, more than one-third of world GDP comes from countries whose currencies are pegged to the dollar. The sudden fall of US$ would be very hard indeed. It would lead to massive inflation in the US, threatening the smooth function of debt markets that make the financial world go round.

“And what are the low-probability, high-impact events that could trigger such a global disruption? Key developments over the course of 2018 could accelerate the onset of a previously dismissed yuan-denominated future, especially in Asia.”

In the opinion of Moore II if the US decides not to respond to belligerent threats of a nuclear North Korea, for example, South Korea and Japan could conclude China would be a better security guarantor and demonstrate their new allegiance by dumping dollars and adopting more yuan.

“After all, China is already making moves to displace the dollar. In late July, China proposed pricing oil in yuan to Saudi Arabia. China has been reducing Saudi Arabia’s share of its total imports, which fell from 25 percent in 2008 to 15 percent in 2016. Chinese oil imports rose 13.8 percent year-on-year during the first half of 2017, but supplies from Saudi Arabia inched up just 1 percent year-on-year. With the US increasingly becoming energy independent, Saudi Arabia may have no other option than to yield to yuan-denominated oil in order to keep its biggest customer.

It is, of course, possible that the threat to the dollar’s hegemony would not be well-received in Washington, D.C., and the US government could suspend weapons sales to the kingdom. The knock-on political risks of switching from petro-dollar to petro-yuan would certainly ring alarm bells globally. Despite global-wide skepticism, Chinese media report that the plan for yuan-oil contracts is moving swiftly.

“And that’s just oil, of which China consumes approximately 12 percent globally, according to the World Economic Forum. While oil is the lifeblood of any industrial economy, the share of global consumption by China in other commodities is even higher, including more than half of all aluminum and nearly half of all steel and copper.

“Some experts believe that changing the world’s working currency would occur at a glacial pace. In fact, it could happen overnight in response to geopolitical conflagrations. Like pressure building, undetected beneath fault lines, an unexpected and sudden release could send King Dollar hurtling off its throne, with Emperor Yuan ready and waiting to take its spot. Such is the nature of black swans.”