China Could Face Recession If Trade War Not Resolved: Stephen Moore

August 21, 2019 Updated: August 21, 2019

That is Stephen Moore, the Chief Economist of the Heritage Foundation. In the wake of the Fed’s lowering the interest rate, Trump’s new tariffs on China, the RMB falling to a historic low and the U.S. designation of China as a currency manipulator, we need to make sense of the whole sequence of events.

How are they interrelated and why did they happen? What’s next for the U.S.-China trade war, how is it going to affect the 2020 elections, your investment portfolio, your job security and more. I am Simone Gao and you are watching Zooming In.

Ms. Gao: China devalued its currency as a direct response to Trump’s new tariffs. Do you think that is a good move on China’s side?

Mr. Moore: When China does that, when they devalue their currency as a response to the tariff, what effectively that means is the Chinese are bearing the whole cost of the tariff. Because it means…let me just give you a very simple example. Let’s say China sells a toy to the United States that costs a dollar. And then all of a sudden the United States slaps a 10 percent tariff on that toy. So now it’s cost would go from a dollar to a dollar ten because of the tariff. If the Chinese in Beijing devalue the currency, so now it’s price is 90 cents, right? And then the 10% tariff makes the cost to the consumer a dollar. So in other words, it still costs a dollar. Who bears the burden of that 10 percent tariff? Now it’s effectively China is paying the cost by reducing their price.

So I don’t think it’s a very smart strategy. Again, these are short term strategies to try to neutralize the impact of the tariffs, but I don’t think it makes sense in the medium and longterm for China. China should be more cooperative here. I mean, I think there’s a very real sense that the hard liners in Beijing have really taken control of these negotiation processes. And that’s frustrating to Donald Trump, to the White House, to the American people, that China isn’t making some reasonable concessions to improve, you know, the relationship between the US and China, but also if you look at the…It was frustrating to me…is everything that Donald Trump is asking China to do, to stop stealing intellectual property, to honor our patents, to open up markets to American companies. To stop some of the spying that’s going on by China. Those are reasonable things that the United States is asking. And in fact, I would argue if China were to open up its markets to the United States, that would be good for China. It would help. It would help both countries. So, there’s a lot of frustration right now on this side of the Atlantic with respect to China not bargaining in good faith right now.

Ms. Gao: So what do you think will happen to the U.S.-China trade war next after this sequence of events happened?

Mr. Moore: I think what is going on right now is an escalation on both sides. So Trump got frustrated with China and sort of backed away from the previous deal. So then he imposed these new tarrifs. China responded by saying, “well we’re not going to buy your agriculture.” And so that’s an escalation, the tensions. That’s the reason the stock market, not just in the United States, but around the world, has really crashed as a result of this. So we all want a resolution to this. I don’t think Donald Trump will back down nor do I think he should. I think he’s got the angel on his shoulder on this one. You know, China has clearly been the bad actor and for 25 or 30 years they’ve been able to, you know, get away with kind of more one sided relationship.

But China’s now the second largest economy in the world. You know, they’re not a developing country now. They’ve developed and there are new rules. You’ve got to play by the rules of the World Trade Organization and you know we can’t live with China having higher tariffs on us than we impose on them. And so, China I think will either have to change their ways and make some concessions or I think China is in real danger here. I think the economy of China could really implode if this trade war continues. It’s hurting both countries. Now let’s be very clear about this. You know, it hurts the United States. It hurts investment in the United States it hurts shareholders it hurts workers, but it’s also hurting China significantly. And I think, you know, the Chinese government is trying to masquerade the impact that these tariffs are having on the Chinese economy.

But I would make the prediction that if this doesn’t get resolved in the next year, this could drive China into its first recession in 30 years.

Ms. Gao: What about to America?

Mr. Moore: Hopefully not, but maybe, you know, maybe. I still think our economy is pretty fundamentally strong with the tax cuts and the deregulations and the American energy output. But you know, it’s a negative and you know, you’re seeing right now what’s happening is the whole world is jittery right now. And so when you get that kind of nervousness, everybody rushes to buy American dollars because it’s a flight to safety and therefore you’re seeing, you know, interest rates fall, you’re seeing the inversion of our yield curve. It’s not a healthy situation. So it’s almost like a mutually assured destruction scenario. If we don’t get this trade war resolved. I think Trump would, would take a very…I mean he does, he’s not asking for the world.

I think China is going to have to make some concessions on lowering their tariffs and opening up their markets to US goods and doing something about the intellectual property. But these are not…I don’t think he needs major concessions right now, but he does need China to change its behavior with respect to trade. We in the United States feel like the trade relationship with China has become abusive. And that’s I think the, the view of not just the White House, but you know, most Americans, even the Democrats, who don’t like Trump very much, tend to agree with them that China’s a big problem. So there is a consensus opinion in the United States that China is a problem and they have to change their ways.

Ms. Gao: Do you think president Trump really needs a US China trade deal for his reelection?

Mr. Moore: I think he’d certainly benefit from that, you know. Yeah. He needs this trade deal. China needs the trade deal. Everybody wants the trade deal to happen.

Ms. Gao: well about that, there is a suspicion that China has changed its mind, and it actually doesn’t want a trade deal now.

Mr. Moore: If that’s the…if they don’t want a trade deal, there’s not going to be a trade deal. And the Chinese economy will significantly suffer as a result. Now they might take the American economy down with them, but you know, China.

Ms. Gao: Do you think that will happen? [That] they would be able to take down the US economy with them.

Mr. Moore: I think Donald Trump has said this well and I’ll say, and I’ve said it many times myself, if we can’t trade with China, we sneeze. If China can’t trade with the United States, they catch pneumonia. And so there’s significant more downside risks to China than there is to the United States. However, it is also true that in the United States we have a very important election coming up in 14 months. And Donald Trump’s whole case for being reelected is “look what I’ve done for our economy. You know, it’s doing well”. If the trade war drags down the economy, that certainly could hurt Trump’s chances of being reelected. And you know, there was a perception here that the Beijing government would rather have Trump lose and then deal with a Joe Biden or someone else who would be more accommodating to China. My own view is that this is an important moment in world history. United States cannot capitulate and cave in to China. Cannot. That would be the worst possible outcome. I would rather have the trade war go on, then see Trump retreat in any way. China is going to have to make the next move and they’re going to have to make some capitulations and some concessions that should have been made a long time ago. If they do, the United States will make concessions too, but it’s a precarious moment for the United States, China and the whole world economy.

Ms. Gao: There are some movements in Congress, for example, the Senate might introduce a bill that will put sanctions on major Chinese banks that violated the US sanctions law.

Mr. Moore: We’ve already seen the sanctions against Huawei and that’s hurt in the billions of dollars and that’s one of the major companies in China. So I would think that more of those things are going to be done, more sanctions, more tariffs, more restrictions on China. Sorry, I’m going to say it again. I think you could see more. We’ve seen already sanctions against Huawei and that has hurt one of China’s most profitable and largest companies. I could see that expanding to other companies, including possibly some of the Chinese banks. And you know, there’s a real danger right now that because so much of China’s assets are dollar denominated, that you know, they are very much at risk of a big free fall in the economy. I don’t think that Beijing leaders really understand how vulnerable China has been because it’s been decades. You know, China’s grown and grown and grown at a very, impressive rate for what 25, 30 years straight. It’s been a long, long time since the economy has fallen on its knees. But that could happen. So China’s playing a dangerous game here too. I think both sides are frankly.

Ms. Gao: What’s the likelihood of the Fed lowering the interest rate again.

Mr. Moore: The Fed has to lower interest rates and has to do it immediately. In fact, I just wrote column saying they need a 50 basis point reduction in interest rates lower the interest on reserves, bank reserves and they have to do it next week. They have to have an immediate session, an emergency session cause global markets are in turmoil right now. Commodity prices are falling. We’re in a deflation and the Fed has to cut that off immediately, by having, an emergency meeting and correct. They should have done 50 basis points at the last meeting. They didn’t, that was a mistake. So they should correct that mistake. And I don’t think this can wait until September. I think it has to be done right away.

Ms. Gao: Would this be a reaction to President Trump’s new tariffs and designation of China as a currency manipulator?

Mr. Moore: It’s all interrelated. So you know what’s happened in the last 10 days or so is the Fed didn’t cut rates enough. Then we had the trade war. And what’s happened is you’ve seen, you know, the 10 year treasury now is at 1.6, I believe, percent. That’s the lowest, I think it’s been in decades and decades. Or you’re seeing an inversion in the yield curve that’s sign of a very significant fear of deflation. How do you combat deflation? You cut rates. And what has to happen is the Fed has to inject dollar liquidity into the economy because there’s a huge global demand for dollars right now. And if they don’t accommodate that global demand for dollars, the dollar…You’re going to get deflation. And a huge rise in the value of the dollar, which is, you know, it’s a curious situation. So it’s, it’s clear what the Fed has to do and they’ve got to do it right away.

Ms. Gao: How did the deflation happen?

Mr. Moore: Because global demand for dollars. And so when you have a huge demand for dollars, right, but you don’t have a corresponding increase in the supply of dollars, what happens to the value of the dollar? It rises and that’s what’s happening. So there’s not enough dollars circulating in the economy. So the Fed has to flush those dollars into the…not just the US economy, the world economy and the dollar is the world currency…as a way of, making sure we don’t have an inverted yield curve and to make sure that we don’t have a deflation. I mean, commodity prices have fallen substantially just in the last week or two. Oil prices, corn prices, copper prices, you know, that can’t continue, or you could have a real serious recession.

Ms. Gao: You said the Fed should cut interest rate again next week. And that will be before September 1st. If on September 1st Trump increases the tariffs to maybe 25 percent, do you think the Feb should cut interest rates again?

Mr. Moore: I think the Fed should be watching one thing. What’s happening with prices. And look, the Fed can’t do anything about tariffs right? The Fed doesn’t have control of tariffs. They only have control of the money supply and the interest rates. And so they should be watching what’s happening to the prices, especially commodities, oil, corn, copper, wheat and those have been falling in price. And when you have a fall in the commodities index and you have a fall in the interest rates, that is a sure sign of deflation and the Fed cannot allow that to happen or it will do severe damage to the economy. So you know, I don’t like this tariff war, I want it to end, but you know, the Fed doesn’t have control over that. All the fed has control over is how much money is in the economy and more needs to be poured in immediately.

Ms. Gao: So would you say if China doesn’t want to make a deal, it would be better for the US to keep the tariffs on and the Fed lower the interest rate?

Mr. Moore: I guess so. I mean, I hate to even talk about that scenario because I want to deal so much. I mean, I think we all want to deal, it’s good for everyone. It’s good for everybody to get a deal. And for China to change its ways, you know, and we’re all hoping that happens. China is a big boy now there the second largest economy in the world, you know, it’s an economy with a billion people. They should be buying more American products. We make a lot of good stuff over here. We make good cars. Our agriculture is the best in the world. All of these things. So, you know, that’s what international trade is. It’s a two way street. Right? And for too long it’s been a one way street. So I think the Beijing government doesn’t…Look, I don’t think that the leaders in Beijing understand how frustrated not just Donald Trump, but American people are with the abusive trade practices of China.

Ms. Gao: A thousands days have passed since the election and the president Trump has taken credit for the stock forward. Going forward, what do you think are the biggest risks facing the stock market?

Mr. Moore: Look, there’s clearly two big risks right now. One is the Fed makes mistakes and then when the Fed makes mistakes, that hurts the stock market. We saw that happen in late 2008 when the stock market…when the Fed raised rates, when they should’ve been cutting them. So that’s the number one. And the second one is clearly this China trade war. It’s hurting the stock market very significantly. Everyone wants a, a resolution to this. American businesses, their investment has fallen because there’s so much uncertainty about what’s going to happen with the China-U.S. relationship. I mean, we’re the two largest economies in the world. So, you know, we need a peaceful coexistence and a cooperative coexistence. And so I think those are the two biggest risks, and by the way, if, if you see a resolution to the trade war I think you’re going to see both the stock market both in the U.S. and China go straight up.

I mean, it’s so, it’s so obvious. That’s why it’s so frustrating. Just get a deal done, you know, why shouldn’t China buy more of our agricultural products? Why shouldn’t China, you know, be more respectful of our property rights and our intellectual property. I mean, they should. And so I’m worried that this relationship deteriorates and it will turn into not a cold war, but a hot war where, you know, it just the two countries that are each other’s throats. And that’s bad for everyone.

Simone Gao hosts the show “Zooming In” on The Epoch Times’ sister media NTD. 

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.