Trump’s unrelenting global trade wars have sealed our fate – we’re in for an economically depressed decade

Like the 1930s, the 2020s are shaping up to be a difficult decade. Now, as then, a financial crisis had been followed by a retreat to economic nationalism and populism

I keep a 1 yuan coin on my keyboard. It reminds me about what matters in life. This is in the same way as some people keep photographs of their family on their desk, or an image of their Alfa convertible as a screensaver, or carry a locket of Boris Johnson’s flaxen hair around their neck.

Anyway, my yuan is worth 12 pence, or, more to the point, just over 14 cents (US). Thus, an American dollar will buy seven of these yuan, or renminbi (the formal term meaning “people’s currency”, of course). The exchange rate has just, as the saying goes, “cracked seven” (or “po qi”, as they say in China). A year ago, a dollar would buy 6.85 renminbi, and five years ago 6.15. So it is not a seismic shift, but it is a psychologically and symbolically significant moment. The Chinese have devalued their currency to offset Donald Trump’s tariffs, and no doubt he will simply add more tariffs in a tit-for-tat retaliation. Such are the escalating dynamics of the US-China trade war.

It doesn’t stop there. The White House, generally, has begun to create “linkage” between the two powers’ economic relationship and their equally strained geopolitical one. These points of contention cover everything from American unease about the Belt and Road Initiative (with its overtones of neo-colonialism from Sri Lanka to Djibouti to Italy, Taiwan, various sovereignty disputes in the South China Sea and, potentially, over Hong Kong). Washington and Beijing don’t have to look far for things to row about.

Trump has announced he will extend the current 10 per cent tariff on imports from China on 1 September to cover virtually everything, with the threat of them going to 25 per cent. The Chinese authorities’ response has been to allow the renminbi to drift lower – “manipulating” it, in US terms. China has also introduced trade restrictions of its own on US agricultural products. The US Treasury department has formally re-designated China a currency manipulator.

This tension has prompted the current sell-off of riskier assets, especially shares in firms exposed to international trade, and a flight into safer assets, such as some government bonds. The likes of Apple, for example, get hit many ways. First they face higher costs of importing componentry and finished products such as iPhones from China. Second, when the price of Apple gadgets goes up, the firm has to trim its profit margins to protect market share.

Third, when US consumers find they have less spending power overall, because of the inflationary effects of tariffs and because in some sectors, such as farming, incomes will be hit by a reduction in Chinese demand. So they delay buying a new iPad. Fourth, a lower share price makes it more expensive for Apple to raise capital. When Apple and other shares are worth less, so is your pension fund. If they do as Trump wants, and shift production to high-cost America, that hits their margins too. It can “bring jobs home”, but it is not economically efficient.

In other words, everyone gets poorer, as usual, in a trade war. Hence a recent move to buy government bonds, supposedly less prone to risk in a downturn. Indeed, the yield on long-dated (30 years maturity) German government bonds has turned negative, meaning that you, the “depositor”, will actually get marginally less back in cash terms in three decades than you have lent the Berlin government today, such is your nervousness about other financial investments. About half of all European government bonds have a negative yield, being a nominal €4.4 trillion, (ie €4,400bn), against “only” €3.3 trillion at the end of January, (according to data from Tradeweb). This is all conditioned and reinforced by a still ultra-low central bank interest rate regime worldwide. The US Fed’s cut in rates last week by a quarter-point to a 2-2.25 per cent range is the outstanding example of this renewed downward trend in rates.

The Fed is effectively underpinning Trump’s protectionist policy by cushioning businesses and households from some of the worst effects of the import taxes – but that may not work forever. The US yield curve has recently turned slightly negative, mean long-term rates are lower than short-term rates, which is, again, the opposite of common sense.

This all adds up to a forward indication, or prediction, of a global recession – because low interest rates go with deflation. It is plainly driven by a downturn in trade and consequently depressed demand in the world’s two largest economies, and assorted geopolitical scraps. Other, more trivial, developments in international trade are also concerning – a no-deal Brexit, for one, and the Japanese-South Korean trade war (and not forgetting Trump’s intermittent trade skirmishes with Mexico, the EU and Canada which can flare up again anytime).

Nor are there many forums to end trade wars. The poor old World Trade Organisation is virtually moribund as an instrument for arbitration, because Trump refuses to nominate judges for the WTO court, and will ignore it in any case (and a development that makes the UK relying on WTO terms for anything rather risky).

So, like the 1930s, the 2020s are shaping up to be an economically depressed decade. Now, as then, a financial crisis is followed by a retreat to economic nationalism and populism. Today, too, economic sanctions driven by political motives, for example on Iran and Russia, are adding to those more ostensibly about economic rivalry. Either way, nations are impoverishing each other and killing growth and jobs – just like they did the 1930s. And we all know what happened next.