Who will emerge victorious in Sino-US trade war?

At the beginning of 2017, Donald Trump, President of United States tried to contain Beijing by restrictive economic policies. At the time, he stated that US$346 billion US trade deficit was due to imbalanced trade with China. In year 2019, this deficit has reached US$419 billion, which shows well that Trump's economic policies toward Beijing are not yielding positive results.

China's stoppage of US agricultural products and imposition of reciprocal tariffs on American products indicate that this Asian economic super power does not intend to surrender to the US. In such circumstances, there will be no opportunity for President Trump and his companions to maneuver. Many US economic and policy analysts believe that in year 2020, China can hurt Trump in the re-election. It is already evident that China has become a symbol of America's economic and political failure in the world.

Lately, Bloomberg has reported that the ups and downs of asset prices on any given day are being determined, more and more, by the words and actions of three men. First, of course, is Donald Trump, who has rediscovered his power to send markets soaring—or into a tailspin—with less than 280 characters on Twitter. Then there’s U.S. Federal Reserve Chairman Jerome Powell, who repeatedly finds himself on the receiving end of nasty Trump tweets for abiding by his mandate to do what’s best for the U.S. economy, which isn’t necessarily always the same thing as what’s best for Trumph. And in Beijing, it’s Xi Jinping, the president of China who sits atop a Communist Party in which politicians and central bankers famously sing from the same hymnal, at least when the audience is outside observers.

With each of these collisions, the fragility of the global economy and markets is exposed. It seems increasingly possible that something big and important is broken. Investors who’d believed Sino-U.S. relations were stabilizing, if not improving, were caught on the wrong foot when tensions abruptly escalated. The prevailing assumption that President Trump won’t allow the trade war to continue through the 2020 presidential campaign season is being reconsidered, as the two sides appear further apart than ever. Economists at Goldman Sachs Group Inc., no longer expect a trade agreement before the election and see the Fed cutting its benchmark interest rate two more times this year in an effort to counteract the economic damage that will be done by the impasse.

A question being openly debated on Wall Street is whether lower borrowing costs will be enough to fend off a recession. There signs that economic activities in the United States are shrinking. In Europe, whose factories are caught in the crossfire between China and the US, manufacturing barometers already point toward recession. Trade war being converted into currency war—in which countries race to devalue to get a competitive edge for their exports.

Other disturbing signs are could US sell F-16 fighter jets to Taiwan? Is Washington supporting anti-Beijing protesters who’ve paralyzed Hong Kong this summer? And what could be at risk among more than a quarter of a trillion dollars of US investments in China since 1990?

All these questions are arising at a time when Wall Street’s vacation calendars are jammed and markets seem especially easy to rattle. Evidences of stock market volatility rose in August, some of the ugliest collapses in equities market over the past decade have occurred in this month.

The recent rush into safe havens sent gold to a five-year high and triggered a rally in Treasuries that pushed 10-year yields to their lowest since Trump was elected in 2016. At the same time, rates on three-month Treasury bills were higher than those on 10-year bonds—a phenomenon known as a yield-curve inversion that’s widely considered a reliable warning of an impending recession. The lower long-term yields signal that markets expect interest rates to come down in response to weak economic growth.

With each of these collisions, the fragility of the global economy and markets is exposed. It seems increasingly evident that something big and important is broken. Investors who’d believed Sino-US relations were stabilizing, if not improving, were caught on the wrong foot when tensions abruptly escalated.

The prevailing assumption that President Trump won’t allow the trade war to continue through the 2020 presidential campaign season is being reconsidered, as the two sides appear further apart than ever. Economists at Goldman Sachs Group no longer expect a trade agreement before the election and see the Fed cutting its benchmark interest rate two more times this year in an effort to counteract the economic damage that will be done by the impasse.

 According to a CNBC report, a trade war with China hasn’t tarnished his image as a champion for an unlikely group: farmers and ranchers. Farmers are one of the most visible casualties of the Sino-US trade war, which escalated sharply lately as both sides landed blows that could hold potentially devastating consequences for US agriculture, yet they appear to be sticking by Trump. More than 75% of farmers had voted for Trump in his successful campaign against Democrat Hillary Clinton in 2016. They are still sticking by him because they consider Trump a better option as compared to those running presidential race.

Iraq Iran considering removing US currency from bilateral trade

Iraqi Ambassador to Iran Sa’d Javad Qandil has lately said that his country and Iran are considering mechanisms to use local currencies in their bilateral trade to reduce reliance on the currency of United States. The two neighbors are holding talks to find the best way to facilitate their financial transactions, the ambassador noted.

The Iraqi diplomat once again reiterated his government's clear stance against the unilateral sanctions imposed by United States on Iran, saying that such restrictions are against the international rules and regulations. Noting that the bilateral trades between Iran and Iraq have not been affected by the sanctions, Qandil expressed his country's readiness to increase the level of cooperation with Iran in various economic spheres.

Iraq is currently Iran’s biggest trade partner and the two countries have been taking significant steps to improve their mutual trade over the past few years. In early February this year, central banks of Iran and Iraq reached an agreement to set up a payment mechanism to facilitate banking ties and boost trade between the two countries.

In the meeting, Governor of central bank of Iran, Abdolnasser Hemmati, who visited Iraq to discuss expansion of banking relations, expressed hope that the trade volume between the two neighboring countries would increase even more.

In early May, officials from the two countries held a meeting in Tehran to discuss establishing an Iran-Iraq trade committee.

According to Iran’s Trade Promotion Organization (TPO), the two sides discussed several issues including joint investment and establishment of industrial zones, facilitating the transit of goods, facilitating business travels, organizing pilgrimage and health tourism, as well as solving the existing problems regarding mutual trade.

Iran’s exports to Iraq have increased by 37% in the last Iranian calendar year and the two neighbors have it on agenda to boost their mutual trade to $20 billion by 2021.

Is US Federal Reserve losing control of gold price?

The price of physical gold has lately surpassed US$1,510/oz and likely to remain on upward trajectory in the near future. Efforts are often made to bring the price of precious metal driven down, but it recovers quickly and moves on up. Analysts either don’t have any plausible explanation or are too afraid to talk the truth.

It is not a secret that many central banks around the world have been converting their dollar reserves into gold, which reduces the demand for dollars and increases the demand for gold.  Existing stocks of gold available to fill orders are being drawn down and mining output is not keeping pace with the rise in demand, perhaps this could be one of the explanations for the rise in gold price.

During the many years of Quantitative Easing the exchange value of the dollar was protected by the Japanese, British and EU central banks, also by printing money to insure that their currencies did not rise in value relative to the dollar. The U.S. Federal Reserve needs to protect dollar’s value so that it continues to play its role as the world’s reserve currency in which international transactions are conducted.

If the dollar loses this role, the US will lose the ability to pay its bills by printing dollars.  Dollar decline in value relative to other countries would cause flight from the dollar to the rising currencies. Catastrophe quickly occurs from increasing the supply of a currency that central banks are unwilling to hold.

The dollar has been depreciating relative to gold.  Rigging the currency market was necessary but not sufficient to stabilize the dollar’s value. The gold market also had to be rigged. To stop the dollar’s depreciation, naked short selling has been used to artificially increase the supply of paper gold in order to suppress the price. 

Unlike equities, gold shorts don’t have to be covered. This turns the price-setting gold futures market into a paper market where contracts are settled primarily in cash and not by taking delivery of gold.  Therefore, participants can increase the supply of the paper gold traded in the futures market by printing new contracts. When large numbers of contracts are suddenly dumped in the market, the sudden increase in paper gold supply drives down the price, this seems to be happening now.

If flight from the dollar is beginning, it will make it difficult for the Fed to accommodate the growing US budget deficit and continue its policy of lowering interest rates. With central banks moving their reserves from dollars (US Treasury bonds and bills) to gold, the demand for US government debt is not keeping up with supply.  The supply will be increasing due to the US$1.5 trillion US budget deficit. 

The Fed will have to take up the gap between the amount of new debt that has to be issued and the amount that can be sold by purchasing the difference.  In other words, the Fed will print more money with which to purchase the unsold portion of the new debt.  

The creation of more dollars when the dollar is experiencing pressure puts more downward pressure the currency.  To protect the dollar or make it attractive to investors and central banks, the Fed would have to raise interest rates substantially.  If the US economy is in recession or moving toward recession, the cost of rising interest rates would be high in terms of unemployment.  

With a rising price of gold, who would want to hold debt denominated in a rapidly depreciating currency when interest rates are low, zero, or negative?

The Fed faces an impending crisis that it has set up for itself. It is being said that the Fed is accountable to the elites who want to rid themselves of President Donald Trump.  Collapsing the economy on Trump’s head is one way to prevent his reelection.

Why Trump Can't Afford to Intervene in the Dollar Affairs

Volatility wise, Thursday was a relatively quiet day in the forex market. USD/JPY extended its losses but the greenback recovered against euro, sterling and other major currencies. The rallies in the Australian and New Zealand dollars were the strongest with both currencies experiencing their biggest one-day rally in 3 weeks against USD. While there were no US economic reports released, the rebound in stocks supported the steadier price action. Better than expected Chinese trade also helped fuel the recovery in AUD and NZD.

The big story of the day was President Trump's comments on USD. In a series of tweets, he said, "As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed's high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?"

Investors are worried that by expressing a preference for a weaker dollar, President Trump is hinting that he could order the Treasury to intervene in the currency. This would be similar to his actions last week where he called China a currency manipulator on twitter and a day later, the Treasury made the label official. Could President Trump devalue the dollar? Certainly. Just last month he said he "could do that in two seconds if I wanted," but any intervention could backfire.

President Trump will argue that by devaluing the dollar, he's making US exporters cheaper and foreign profits of American companies more valuable in USD terms.

But dollar intervention is a bad idea because it drives up prices, creates more volatility in the markets and makes the Fed's job more difficult. If Trump's primary goal is to pressure the Fed to cut interest rates further, he's accomplished that by escalating the trade war with China. Markets collapsed, global growth will slow and investors are looking for two more rate cuts this year.

If Trump devalues USD, stronger foreign profits could be offset by lower stock valuations and weaker demand at home.

Also intervention rarely works if it is not coordinated with the central bank. If the Fed sterilizes the intervention, the impact could be limited. If stocks crash, investors will flock to the safety of US dollars anyway.

If intervention move is aimed at leveling the playing field with China, the US can't afford to intervene because China has deeper pockets. The Chinese government has $3 trillion in reserves to prevent the currency from weakening. US intervention on the other hand is funded by the Exchange Stabilization Fund, which has a buying power of USD 100 billion. Trump could allocate more funds but that would require the approval of Congress.

Judging from the price action in the dollar today and the move in US stocks, investors are not worried about intervention risk. They feel that the chance is low because it is unprecedented and dangerous but Trump likes to buck convention and could find ways to push this through.

Time to mend Saudi-Iranian relationship

The young Muslims often ask their seniors the reasons behind Saudi-Iranian animosity. The seniors very conveniently let the youngster to refer to internet, because they themselves have been brain washed by the dishonest western media. One of the outcomes of this constant brain washing is the perception drilled into the minds of Arabs, “Iran is a bigger threat than Israel”.

Let one begin analysis from the recent history spread over nearly half a century. Immediately after Islamic Revolution in Iran, Arab monarchs were made to believe that Iran is their number one enemy, which wants to dethrone them. United States emerged as the biggest enemy of Iran, as it failed to contain Islamic Revolution in Iran and also faced a few humiliating defeats. Having faced some worst defeats the United States, which was solely dependent on Arab oil prompted Iraq to attach Iran. In this war, spread over nearly a decade, Saudi-Iraqi petrodollars were used but all in vain, which also initiated an era of economic sanctions on Iran. Iranians must have lost hundreds and thousands of soldiers and civilian in that war, but economic sanctions gave them the courage to keep their economy afloat as well as face all sorts of external aggression, but they lost their substantial share in global oil trade.

The next target was Iraq, which proved an easy prey. Not only many of strategic oil installations were destroyed, the attempts to fragment it, left it too feeble. Over the years Israel has emerged the biggest buyer of stolen Iraqi oil. Now the target is Saudi Arabia. Since most of the Saudi oil is produced from fields located in area having Shia population, Sunni-Shia rivalry is being fueled. This has started decades ago after Hibzullah came to rescue Muslims living in Lebanon. The second phase of this proxy was fought in Syria and third phase is going on in Yemen and Bahrain, all the three countries having Shia population.

Anyone who does not accept this theory must scan the newspapers filled with accusations that Iranian and Houthis have attacked the tankers; dishonest western media is playing a key role in spreading disinformation. This is helping United States to sell billions of dollars arms to Saudi Arabia; United States has also previously sold huge arms by promoting ‘Iranian Phantom’.   Now most of the Arabs believe Iran is a bigger threat as compared to Israel.

Having fallen prey of western propaganda machine, Saudis are fighting US proxy war with Iran. Over the years they have been made to believe that keeping Iran out of oil trade, is bringing huge petro dollars to Saudi Arabia, which have enjoyed the status of ‘largest oil producing country’. However, most of the Saudi petro dollars are going back to United States, being the payment for the purchase of arms. Despite having tons of arms, Donald Trump says, “Saudis can’t survive if we take our hands off”. It is on record that soon after attacks on oil tankers; United States posted its soldiers in Saudi Arabia for the safety of Royal family.

This raises a question; does Saudi Arabia pay to the United States to defend its territory?  Even a person with ordinary wit knows ‘nothing comes free’. Despite buying billions of dollars arms every year, Saudi Arab has been neither successful in building its own army, navy and air force nor missile batteries that can help in combating Iran. Therefore, the monarchy is forced to depend on United States, which still consider its biggest enemy it savior. It must revisit history and see fate of Shah of Iran, Anwar Sadat of Egypt and Saddam Hussein of Iraq, to mention a few names.

It is an opportune moment for both Iran and Saudi Arabia to restore friendly relation, bid farewell to proxy wars and identify their real enemies. Hike in crude oil price has benefited United States, which has attained the status of biggest oil country. However, it goes without saying that many of US oil companies can go broke if oil prices fall below US$50/barrel. It is the time to save oil produced by Muslim countries, which its enemies are buying at huge discount.

Saudi Arab must pay attention to the offer made by Heshmatollah Falahatpisheh, a member of the Majlis National Security and Foreign Policy Committee of Iran. He has suggested that Arab countries in the Persian Gulf region must try to deescalate tension in the region, a move which Iran welcomes.

“We should move towards de-escalation. Tension is a reality in Iran’s foreign policy. Iran has many enemies that naturally cause tension. This situation should be managed. This is the opposite of Trump’s policy of increasing tension,” he told ISNA in an interview.

He noted, “Certain countries have adopted a different stance which shows a kind of green light to deescalate tension in the region. These countries have reached the conclusion that insecurity in the region harms them.”

Earlier, Abdullah al-Muallemi, the Saudi envoy to the United Nations, had said that Saudi Arabia seeks “diplomatic interactions” with Iran. “Saudi Arabia does not want war with Iran, neither in Yemen and nor anywhere else,” the Mehr news agency quoted him as saying.

Mohammad Javad Jamali Nobandegani, the deputy chairman of the Majlis National Security and Foreign Policy Committee, has said that Saudi Arabia can be a “strategic partner” of Iran if it abandons following the United States.

“If Saudi Arabia abandons animosity and stops blindly obeying America it can have a good strategic partner like the Islamic Republic, which will be to the benefit of all regional countries and Muslims”, Jamali Nobandegani told ISNA.

He added that Iran has always “extended hands of friendship to its neighbors”, citing Qatar as an example in which Iran opened its arms to the country when it was surrounded from land, sea and air by Saudi Arabia and the United Arab Emirates.

“Iran has always announced that it has no fundamental problem with its neighbors and extends hands of friendship to them. As a powerful country in the Persian Gulf region, we are ready to be a safe harbor for our neighbors,” he noted.

Iran also had good relationship with Saudi Arabia, the United Arab Emirates and Bahrain. However, Saudi Arabia and the UAE changed their policy toward Iran as Tehran seriously entered nuclear negotiations with the 5+1 countries – the five permanent members of the UN Security Council plus Germany – to end more than a decade of nuclear standoff with the West. Saudi Arabia was so unhappy with the negotiations that it even sent its then foreign minister Saudi al-Faisal to Vienna, the venue of the talks, in November 2014 to undermine the process of nuclear negotiations. Donald Trump has misused the frosty relationship between Iran and Saudi Arabia to sell more arms to Saudi Arabia and the UAE.

Iranian Foreign Minister, Mohammad Javad Zarif has rightly proposed non-aggression pact with regional Arab states to invalidate claims by the Trump administration that Iran is a threat to its southern Arab neighbors. 

China in defiance of US sanctions on Iran

According to a recent Bloomberg report, China is still importing oil from Iran despite re-impositions of the sanctions on the country by the United States. The energy starved Asian country imported 855,638 tons (about 209,000 barrels per day) of crude oil from Iran during June 2019.

The data adds to speculation that Beijing may risk running afoul of the US sanctions to secure crude supplies from the Islamic Republic.

All eyes are on China’s oil purchases as Donald Trump’s administration continues to clamp down on companies and individuals flouting its restrictions. 

The import-reliant Asian nation is one of the few remaining buyers of Iranian barrels, after other countries such as South Korea and Japan halted flows.

China imported about 494,000 barrels a day of Iranian crude in the first five months of this year, compared with more than 660,000 barrels a day in the same period in 2018. 

In late June, China’s Jinxi Refining and Chemical Complex received a one-million-barrel cargo of Iranian oil in the first month after the Trump administration ended waivers permitting imports of Iranian oil.

Since April when the US announced that buyers of Iranian oil should stop purchases by 1^st May 2019 or face sanctions, China has been constantly opposing Washington’s policies toward Iran and Chinese officials have repeatedly announced that they will continue purchasing oil from Iran.

In early May, Chinese Commerce Ministry announced the country’s opposition to unilateral sanctions of the US against Iran, saying that cutting Iranian oil supplies will only worsen volatility in global energy markets.

In late May, Reuters reported that Iran delivered 130,000 tons of fuel oil to China despite the US sanctions.

Later in June, Bloomberg informed that China is still importing liquefied petroleum gas (LPG) from Iran after the US imposed sanctions on the country’s oil industry.

According to ship tracking data, the Paris-based energy researcher Kpler SAS estimated that at least five supertankers loaded Iranian LPG in May and June for China.

China is Iran’s largest oil customer with imports of 475,000 barrels per day (bpd) in the first quarter of this year, according to Chinese customs data.

Can US afford an assault on Iran?

The US-Iran standoff continues to evolve quickly, yet commentaries covering tanker attacks, a downed drone, and reversed orders for airstrikes from the White House fail to explain the logic behind an intervention, if the Trump administration decides to intervene. Therefore, it is worth exploring what a war between the two would actually look like.

Ideally, the US should have learnt some lessons from Vietnam, Afghanistan and Iraq wars. Distant foreign conflicts are difficult to win, which most of the Americans are usually unwilling to think unless faced with a massive and immediate threat. Small-scale engagements accomplish little and are instead more likely to evolve into larger conflicts. Installing foreign governments are more difficult, costly, time-consuming and even deadly than leaders are likely to claim.

Backing a local proxy is often unpalatable for the country’s sense of ethics, but US adversaries often have no such misgivings. Those proxies are often an ineffective substitute for a US military presence when it comes to pursuing the US agenda. Without a substantial, long-term commitment of US forces, such wars are more likely to leave a power vacuum when the US withdraws. The outcomes are collapsed government, invasion by a neighbor, revolution that creates new and uncertain structures – or some combination of all these. In fact, the US has had a few true victories in the wars it has fought since World War II.

Airstrikes

Exploring US government’s options in a war with Iran, the most probable option is limited strikes, similar in scale to or perhaps somewhat greater than the strikes on Syria that the Trump administration ordered on Syria in 2017 and 2018. But Iran is not Syria, as it has a sophisticated air defense infrastructure and plenty of air denial capability, increasing the chance of US casualties. Further, a limited air strike probably wouldn’t accomplish anything meaningful. It might take out a handful of radar and air defense installations, sending a political signal but affecting in no real way the strategic reality on the ground. The only time US air power alone has significantly shifted the reality on the ground was in Kosovo, but Iran today is far more powerful than Serbia in 1999.

On the contrary, limited strikes may have opposite outcome. Iran’s economy is hurting and its society appears more divided as citizens continue to grow frustrated with the government. The US has imposed sanctions as a strategy to hobble the economy enough to create social pressure on Tehran, forcing the government to spend less on its defenses and funding of militias in Syria and Iraq, so far, they’ve been effective. If the US continues this tactic, over time Iran’s domestic situation would worsen, and its citizens would be more likely to blame its leadership for their problems. And that would likely intensify the divisions within the government that are already emerging, resulting in either a more Western-friendly government or one dominated by the Islamic Revolutionary Guard Corps.

Even limited US airstrikes would increase the probability of the IRGC consolidating power. If the sanctions can help create division, an attack would unite Iran’s hard-liners and reformers against the US. That unity would likely occur under the aegis of the hard-liners who have been warning all along that this day would come if Iran were foolish enough to trust the US. As the most powerful entity in the county, the IRGC would probably take over, and do so with popular support.

Use of Ground Force

Ground force is a less likely choice for the US, even with limited objectives (like eliminating specific military equipment or securing passage through the Strait of Hormuz). But it would be more likely to achieve what the US really wants, Iran to recall its foreign militias to defend the home. But when a military force is rapidly removed without a replacement ready to take its place, it creates a power vacuum and, therefore, an opportunity for others to fill the void. The pace at which Iran withdraws its militias from Syria and Iraq can alter the regional balance of power.

If any militant group occupies the space vacated by Iran, US would have to again deal with this problem, which would require reoccupying parts of Iraq while fighting Iran. This would likely entail support from Syrian and Iraqi Kurdish forces, which would again put pressure on US-Turkey relations. But the Syrian Kurds may not see a long-term alliance with the US as in its best interest after the US threatened to leave them high and dry in December 2018. They could instead seek out a political resolution with Damascus, backed by Russia that would protect them from Turkey. It is also likely that Russia may step in to back Kurdish groups such as the Syrian Democratic Forces to fight back. But that would mean the US would be depending on Russian assistance to cover its western flank, and in exchange for such cooperation Russia would likely demand US concessions in places like Ukraine. In short, going all-in with Iran would require either a large-scale US occupation or dependence on Russia in Syria and Iraq. Neither of those are appealing options for Washington.

Regime Change

If it is regime change that the US may attempt in Iran, the risks are even greater. The fallout would look much like that of the second Iraq war, but on a far greater scale. Installing a pro-American regime isn’t easy, but it can easily fail. The US would have to commit to an indefinite occupation of Iran or again risk the emergence of a power vacuum. The US would have to deal with the rest of the Middle East. In the best-case scenario, the US would install a new head of government while facing a lengthy insurgency, which would likely include the vestiges of the IRGC and its heavy weaponry. After a long, costly occupation, the US would have to withdraw, leaving Iran’s leaders to face opposition on their own. The half-life of US-installed leaders in the Middle East would not be long. Limited airstrikes or a full-scale invasion (military confrontation with Iran) would create more problems for the US rather than offering any sustainable solution.