World trade is now America versus China (and Russia)



The anti-Russian frenzy in the United States amounts to little more than a great deal of evidence that the intelligence community suspects there might be a great deal of evidence that the Russians have been meddling. It has to rank as one of the biggest, and most orchestrated, blind alleys of modern media coverage. When a journalist says an anonymous ‘respected source’ thinks the Russians are up to something, this writer is always left wondering: respected by whom? His dog?

xxxxxIn truth, it is just journalistic code for ‘I know this person is selling me a line, but, hey, it sells papers.’ Little wonder that no-one is terribly interested in looking at information that might actually help, such as the Democratic National Congress (DNC) servers or talking to the former British ambassador who said he passed the file on to Julian Assange and that it definitely did not come from a state source. Never let the facts get in the way of a good nationalistic furore.

Just how much the anti-Russian phobia has gripped America was graphically demonstrated when the Congress, in an almost unanimous vote, imposed even more extreme sanctions on Russia. This was highly significant, because, in effect, it sounded the death knell for the ethic of open, world trade that has been an article of faith in the globalization push of the last quarter of a century.

We are now facing what is likely to look much more like a bi-polar world, with America on one side and much of Eurasia, especially China, on the other. Where Europe will head is yet to be decided.

To get an insight into what America has done, it is worth watching this exchange between a BBC journalist and Vladimir Putin. The Russian president points out that it took Russia 19 years to join the World Trade Organisation (WTO). The sanctions, he protests, are against both the rules of the WTO and international law.

And that is the point. The WTO is supposed to supervene national interests in matters of trade, and this has been thrown away by America’s politicians—with sanctimonious gusto.

It has put Europe, especially Germany, into an invidious position. Any EU company doing business with Russia may find itself being attacked by America and hit by lawsuits or fines. In the short term it will affect companies involved in financing Nord Stream 2, a pipeline intended to provide Germany with much needed natural gas from Russia. The Germans, unsurprisingly, are furious.

In effect, what America is saying is: ‘We believe in world trade provided you follow our laws only—and that we always win.’ It is not a new attitude. In 2014 the French bank BNP-Paribas copped a fine of $US9 billion from American interests for transactions that were legal under French law.

Last October, Deutsche Bank was threatened with a fine of $US14 billion, which would have crippled the bank. It would probably have brought down the whole European banking system, making the Greece crisis look like small change.


"The WTO is supposed to supervene national interests in matters of trade, and this has been thrown away by America’s politicians—with sanctimonious gusto."


How, then, do the sides line up in what is looming as a war of economic power? America certainly has the advantage. It has the world’s reserve currency (because over $US4 trillion is transacted per day in the dollar) and it controls SWIFT, the international mechanism for international financial transfers. So it can certainly boss the banks around.

But China has to an extent neutered this advantage by fixing its currency, the yuan, to the US dollar, accumulating a large amount of US Treasury bills, purchasing gold, especially for use in Hong Kong where it makes the yuan more transferable (especially for the Russians) and developing its own payment system, CIPS.

China also has a sizable portion of America’s industry base on its territory, making trade wars somewhat self defeating. About half of the so-called trade deficit is actually shipments inside American companies' supply chains.

The country’s approach has been astute. It knew that it would become a continental economy, like America. Because of its size, trade can in the end only be a small portion of the economy—unlike mercantile Japan or Korea, which both traded their way to success. Instead, China opened itself up to a massive knowledge transfer with a view to boosting its domestic economy. It has worked spectacularly.

The sanctions have pushed Russia towards China, increasing the economic linkages between the countries and increasing Russian cooperation with China's massive New Silk Road (One Belt, One Road) infrastructure initiative, which will span all of Eurasia and extend to North Africa and much of South East Asia.

China is taking this expansionary route because its economic growth has heavily depended on investment, which is about 40 per cent of its economy (investment is usually only about 5 per cent of developed economies). Whereas consumption in developed economies is usually more than 80 per cent; in China it is only about 40 per cent.

So to keep the game going, China is now investing outside the country on a scale not seen before. While America is intent on turning trade into a weapon of national hegemony—and spending an exorbitant amount, up to $US1 trillion a year, on non-productive military hardware—China is looking to open productive trade up even more.

Put another way, far too many people in America make exorbitant amounts of money by turning foreign countries into rubble, while China intends to make money by building things.

That is the dynamic now facing the world economy. Who the ‘winners’ will be is far from clear. China is more of a land based power, while America is a maritime power and history favours the latter.

But one thing is certain. Russia will now be on the side of China.


David JamesDavid James is the managing editor of

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"... non-productive military hardware." Like Australia's waste of billions on submarines that will never be used, just as the current ones have never been used.

Frank | 23 August 2017  

Excellent contrarian economic analysis by David James. This needs to be read widely by Australian economists and business analysts - as well as foreign policy gurus.

Tony Kevin | 23 August 2017  

This is a great topic David but your required editorial summary mocks the importance of the issues you cover. Graham Allison's new book dedicates Itself to an analysis of Thucydides principle and to the coming war between these empires. Do you want to be on the side of the most determined democracy in the world or the country that jails its Nobel Peace Prize winning laureates? So the question : what are they building ? Germany will not share any of its automotive secrets because of theft. Japan puts an unbreakable algorithm around its high speed rail technology. US chip manuafactures refuse to collaborate in any sidnificant technology developments. The ex President of China owns pigs and ends up with a $2B net wealth that The NY Times exposes. The NY Times is subsequently blocked on all Chinese internet sites. Banking is a global business. Deutsche Bank is a great example. They have been stung by scandals of impropriety / criminality in CDS markets through the crisis, sub prime losses in the crisis, criminal libor fixing. The list goes on. DB's own shareholders complained in disgust there was not a single scandal they had missed. Hence the CEO sackings in 2014 and 2015. DB's problem is it lacks governance at board level. It is not as you say an issue of unfair US trade rules or rules in general. The US laws are designed to penalize heavily those that break them. Just ask VW who were prepared to poison the air of American cities for the benefit of new car sales. The sanctions against Russia are firstly about proceeds of corruption and crime. Read this article from the Atlantic detailing Browder's testimony to the senate judiciary committee from a few weeks ago. This is the line the US investigators are following to understand any election interference.. The USA wrote the Magnisky act in response to the Russians tying the names lawyer to a bed and beating him to death. His crime ? Uncovering corruption. Great topics David. You are on the right trail but looking at these events through the wrong lenses.

Patrick | 23 August 2017  

Excelent read. Lets just hope we can avoid WWIII

TT | 24 August 2017  

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