Martin Jacques, a British journalist and commentator, explains in a TED talk ‘Understanding The Rise of China’, which helps explain why Donald Trump has miscalculated his usual pressure tactics when seeking to impose his conditions on China. It is because he views China through Western eyes and civilisational values, and expects that, as China develops economically, it would emulate the Western values. But China’s cultural values are different and, though not a democracy, its people believe in, and follow, their government. Chinese leaders, coming from a civilisation that is aged and matured over centuries, take 50-year views; western democracies take three month views.

The new leadership is making structural changes in China. They are moving from a manufacturing economy to a service economy. From an investment dependent economy to a consumer dependent one. From a huge net saver to a spender. And from an importer of technology to developing its own technology. So says Yale Professor Stephen Roach, who sees ‘US in danger of repeating past legislative mistakes’.

Go back in history. In 1930 the US faced a recession. President Herbert Hoover ignored the warnings of over 1,000 economic experts and levied import tariffs, called Smoot Hawley tariffs. Because of this the recession turned into the great depression! Not only did high tariffs cause the depression but the resulting political extremism probably led to the rise of tyrants such as Adolf Hitler, which, in turn, led to World War II.

Trump, not one to read and learn from the lessons of history, nor one to heed good advice, is about to follow Hoover. He has already raised import tariffs to 25 per cent from 10 per cent on $200 billion of Chinese imports, and threatens, unless a deal is struck within a month, to raise tariffs on the remaining $300 billion. China has retaliated by raising tariffs on US imports.

World trade accounts for 58 per cent of GDP.

If there is a full scale trade war, the impact on the US economy would be a loss of 2 million jobs, a rise in inflation pushing up average household cost by $2000/year (a majority of Americans can’t afford it), a fall in US GDP by 2.1 per cent and global GDP by 1.7 per cent.

Global stock markets will, of course, collapse in this scenario. The horrifying part is that Central Bank interest rates are too low to reduce further; in 2008 they had the cushion to do so but now they don’t. Global debt is over $250 trillion (3 times global GDP) and this will result in a lot of bankruptcies.

In all this India is poorly prepared. The Bankruptcy Act was expected to sell off distressed assets within a time bound process, and help clear debt to banks. Sadly the defaulting corporates have been able to delay the resolution.

Another poster boy of reforms was civil aviation. This, too, is in doldrums. Mainly because it is not a level playing field. Air India, owned by the government, is given dollops of equity to cover unending losses whilst private airlines have to raise money at a cost. This has resulted in the failure of Kingfisher and Jet, and, now, internecine fighting in IndiGo. Jayant Sinha’s commitment to sell Air India rings hollow; if it has not been done for years, its unlikely to happen soon. The politicos want free rides and upgrades.

Getting lighter is something to be considered.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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