Be wary of the American black hole destroying global prosperity

China Plus Published: 2018-08-09 22:28:58
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Note: The following is an edited translation of a commentary from the Chinese-language "Commentaries on International Affairs."

On May 8, the White House announced that the United States was withdrawing from the Joint Comprehensive Plan of Action, better known as the Iran nuclear deal. And so, at one minute past midnight U.S. Eastern Time on Tuesday, the United States reimposed economic sanctions against Iran's automotive and aviation industries, and the country's metals market.   

The Americans have also threatened to cut business ties with any country trading with Iran. It is reported that the two major French car groups, PSA Peugeot Citroen and Renault, have already been affected. Peugeot Citroen sold 445,000 cars in Iran last year, and now has to suspend its operations in the country. And Renault took steps ahead of the American move to reintroduce sanctions, by reducing the amount of business it was doing in Iran. This led to a fall in sales of more than 10 percent in the first half of this year.

When it comes to the global economy, White House policy is like a black hole that pulls in and destroys economic growth. This will become even more apparent on November 5, when the United States introduces the second phase of its sanctions regime targeting Iran's energy, oil, and finance sectors. 

[Photo: China Plus/Chen Xiwen]

[Photo: China Plus/Chen Xiwen]

The United States is aiming to end Iran's oil exports. As a pillar industry in Iran, oil brings in 70 to 80 percent of the country's export revenue. Destroying this revenue stream will be devastating for Iran's economy. But the effect of the American sanctions won't be limited to Iran's domestic economy. Iran produces around 2.5 million barrels of oil a day, meeting about 3 percent of global demand. It is the third largest oil producer in the Organization of Petroleum Exporting Countries, and the fourth largest oil producer in the world. The American move to end Iran's oil exports will inevitably lead to an increase in global oil prices.

As British financial services company AJ Bell warned investors, "History suggests that it is only when oil prices have doubled year-on-year that global growth really starts to feel the pinch. The price spikes of 1974, 1979, 1990 and 1999 all served to usher in recessions, and a near-doubling in crude in 2008 may not have helped matters then either, while even the rapid rise in summer 1987 will conjure up memories of stock market chaos."

In July this year, Bank of America Merrill Lynch Group predicted that if the United States adopts a zero-tolerance policy on Iranian oil exports, global oil prices will soar to 120 U.S. dollars a barrel. Since the current American administration won the election in November 2016, global oil prices have already risen by 50 percent in less than two years. The chain reaction caused by rising oil prices has led to growing inflation, rising costs in the transportation and manufacturing industries, a decline in economic activity and household disposable income, and a reduction in corporate profits and consumer spending.

The International Monetary Fund has warned that the good times the global economy has been experiencing will not last. Its view is that the growing trade conflicts might cut global growth by as much as 0.5 percent by 2020, which represents a loss of about 430 billion U.S. dollars in lost GDP. And the World Bank concluded in a report in early June that a worldwide escalation of the trade tensions between the United States and its major trading partners would have consequences for global trade equivalent to that of the 2008 financial crisis. It warned that developing nations would be the hardest hit, because they were relatively more dependent on the development of the major economies. Franziska Ohnsorge, the lead author of the bank's report, said: "The threat of trade protectionism is a real risk. Anything that puts sand in the wheels of global trade is a risk to global growth."

Similarly, in a public speech in early July, Bank of England Governor Mark Carney pointed out that trade protectionism directly affects the real economy in three ways: It reduces trade volumes, it disrupts supply chains, and it increases import costs. According to the Bank of England's July forecast, if the tariff increase between the United States and all its trading partners reaches 10 percentage points, it could reduce American economic output by 2.5 percent and global output by 1 percent. JPMorgan Chase predicts that the growing trade war will cause the global economy to fall by up to 1.4 percent in the next two years.

President Trump has claimed that the United States is winning its trade war with China. But the reality is that global economic growth is closely linked to trade, and raising tariffs will inevitably reduce the volume of trade and drive down business confidence. This will likely lead to stagflation, where economic stagnation is coupled with rising inflation, which in turn will drag the global economy towards a recession. As the Japan Times, in a commentary criticizing the United States for triggering a global downturn, said: "Welcome to an economist's greatest nightmare: Stagflation." Normally, when an economy is strong, the inflation rate will rise. However, although the trade war has brought about an economic downturn, it will also raise the rate of inflation. Richard Bernstein, former chief investment strategist at Merrill Lynch, said that there hasn't been "any time in history where restricting the flow of goods and services has not been inflationary."

Luca Paolini, the chief strategist at investment company Pictet Asset Management, explained that according to modeling done by his company, if the United States imposes a 10 percent tariff on foreign trade, it will lead to an increase in global inflation of 0.7 percent. Company earnings will decline, alongside a 15 percent decline in the global stock price-earnings ratio. The model also shows that in addition to the United States and China, countries such as Luxembourg, Slovakia, Hungary, the Czech Republic, and South Korea will be the ones to be most affected by export risks.

The United States is home to the world's largest economy, and it considers itself the world's only superpower. But the White House has injected a tremendous amount of instability into the global economy. Great power comes with great responsibility, and the world expects America to be a positive force in the world, and not a black hole that destroys prosperity. 

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LU Xiankun Professor LU Xiankun is Managing Director of LEDECO Geneva and Associate Partner of IDEAS Centre Geneva. He is Emeritus Professor of China Institute for WTO Studies of the University of International Business and Economics (UIBE) and Wuhan University (WHU) of China and visiting professor or senior research fellow of some other universities and think tanks in China and Europe. He also sits in management of some international business associations and companies, including as Senior Vice President of Shenzhen UEB Technology LTD., a leading e-commerce company of China. Previously, Mr. LU was senior official of Chinese Ministry of Commerce and senior diplomat posted in Europe, including in Geneva as Counsellor and Head of Division of the Permanent Mission of China to the WTO and in Brussels as Commercial Secretary of the Permanent Mission of China to the EU. Benjamin Cavender Benjamin Cavender is a Shanghai based consultant with more than 11 years of experience helping companies understand consumer behavior and develop go to market strategies for China. He is a frequent speaker on economic and consumer trends in China and is often featured on CNBC, Bloomberg, and Channel News Asia. Sara Hsu Sara Hsu is an associate professor from the State University of New York at New Paltz. She is a regular commentator on Chinese economy. Xu Qinduo Xu Qinduo is CRI's former chief correspondent to Washington DC, the United States. He works as the producer, host and commentator for TODAY, a flagship talk show on current affairs. Mr. Xu contributes regularly to English-language newspapers including Shenzhen Daily and Global Times as well as Chinese-language radio and TV services. Lin Shaowen A radio person, Mr. Lin Shaowen is strongly interested in international relations and Chinese politics. As China is quite often misunderstood in the rest of the world, he feels the need to better present the true picture of the country, the policies and meanings. So he talks a lot and is often seen debating. Then friends find a critical Lin Shaowen criticizing and criticized. George N. Tzogopoulos Dr George N. Tzogopoulos is an expert in media and politics/international relations as well as Chinese affairs. He is Senior Research Fellow at the Centre International de Européenne (CIFE) and Visiting Lecturer at the European Institute affiliated with it and is teaching international relations at the Department of Law of the Democritus University of Thrace. George is the author of two books: US Foreign Policy in the European Media: Framing the Rise and Fall of Neoconservatism (IB TAURIS) and The Greek Crisis in the Media: Stereotyping in the International Press (Ashgate) as well as the founder of, an institutional partner of CRI Greek. David Morris David Morris is the Pacific Islands Trade and Investment Commissioner in China, a former Australian diplomat and senior political adviser. Harvey Dzodin After a distinguished career in the US government and American media Dr. Harvey Dzodin is now a Beijing-based freelance columnist for several media outlets. While living in Beijing, he has published over 200 columns with an emphasis on arts, culture and the Belt & Road initiative. He is also a sought-after speaker and advisor in China and abroad. He currently serves as Nonresident Research Fellow of the think tank Center for China and Globalization and Senior Advisor of Tsinghua University National Image Research Center specializing in city branding. Dr. Dzodin was a political appointee of President Jimmy Carter and served as lawyer to a presidential commission. Upon the nomination of the White House and the US State Department he served at the United Nations Office in Vienna, Austria. He was Director and Vice President of the ABC Television in New York for more than two decades.