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US-China and Japan-South Korea trade wars undermine world's economy

Everything that can go wrong in global system is going wrong

| China
Trump and Abe really do seem to be spending too much time together. (Handout photo from Japan's Cabinet Public Relations Office)

Murphy's Law -- which states that anything that can go wrong will go wrong -- is now the official economic doctrine of our times. Indeed, just about everything that could go wrong from Washington to Tokyo is going awry, and at the worst possible moment for the global financial system.

Last week gave renewed life to this adage. First, Donald Trump upped the ante on his 18-month trade war with China: atop his 25% taxes on $250 billion of Chinese goods, the U.S. President plans an additional 10% on $300 billion worth.

Then it was Japan's turn. Prime Minister Shinzo Abe is formally removing South Korea from its "white list" of 27 countries with preferred trade status. In Seoul, President Moon Jae-in's government is devising ways to retaliate, ensuring an escalating tit-for-tat sure to roil markets near and far.

The specter of the world's three biggest economies and South Korea exchanging trade-policy blows is the last thing the global economy needs, and investors and consumers alike should be afraid in case the geopolitical wrangling unnerves markets.

This year was billed as one of grand bargains: Trump's much-advertised trade deal with China would soothe markets; a deal with Japan would increase global prosperity; the U.K. would bring the Brexit saga to a close.

Instead, Trump is brawling with his Federal Reserve chief at home, redoubling efforts to tackle Asia's biggest economy and most likely plotting his next targets. Abe is venturing down his own populism-inspired path too. Last week's events portend a sharp escalation of the trade clashes observers hoped world leaders had got out of their systems.

Markets had already been buzzing about slowing growth, with or without trade clashes. The ten-year synchronized global expansion since Lehman Brothers collapsed was already looking tired at the start of 2019, and the bill was becoming clear. S&P Global Ratings, for example, pointed out that world debt jumped had 50% over the past decade to an eye-popping $178 trillion.

You might expect cooler heads to prevail as governments internalized that bill. That is not Trump's way, of course. Miffed that President Xi Jinping refuses to bow to his mercantilist onslaught, Trump is doubling down. Abe, too, is going in harder, in ways sure to complicate Japan's efforts to avoid another recession.

How much worse could things get? Considerably worse.

Trump's tiff with Xi and Abe's with Moon are different disputes. The common thread, though, is world leaders putting narrow domestic priorities over global stability. Trump and Abe really do seem to be spending too much time together.

Most pin the blame for this tag-team dynamic on Trump. His political brand is confrontation, and his waning fortunes at home may only fuel bigger clashes abroad, particularly in Asia.

Xi, after all, has made a mockery of Trump's assertion that "trade wars are good and easy to win." There is nothing good about the way his taxes on China, steel and aluminum are raising prices for American consumers.

Nor do economists find much good in Trump's $16 billion bailout for farmers suffering from those tariffs. Think about it: Washington is borrowing from Beijing through U.S. Treasurys to finance corporate welfare needed to soften the blow from a trade war against China.

Trump's latest tariffs may stem from a realization that he is getting outmaneuvered by Xi's team. It is also a reflection of troubles in Washington, where impeachment efforts are heating up. Trump is desperate for a win on the global stage. Any will do, as North Korea's missile tests make a mockery of Trump's purported bromance with Kim Jong Un.

This puts the E.U. in harm's way. In recent months, Trump previewed $11 billion of tariffs on EU goods and has lashed out at everything from imports of cheese to aircraft parts. He is also holdings threats of 25% levies on imports of cars and auto parts. That would upend supply chains from Detroit to Germany to Japan.

And what happens if Trump turns on Abe? Abe struggled to convince the ruling Liberal Democratic Party to join the Trans-Pacific Partnership and conclude a free-trade deal with the E.U., so his latitude to placate Trump with concessions is limited. This raises the odds of Trump lashing out against Japan.

At the same time, seemingly all that can go wrong between Tokyo and Seoul appears to be. While never particularly warm, the latest breakdown in relations stems from last year's rulings by South Korea's Supreme Court to award reparations to wartime laborers at Japanese companies. Abe's government objected, arguing the rulings ran afoul of a 1965 treaty between Tokyo and Seoul.

On July 1, Abe began hitting back, Trump-style. He tightened controls for three high-tech materials on which companies from Samsung Electronics to SK Hynix rely when making semiconductor products. Now, Abe is removing Korea from the "white list" effective later this month. It means companies must now go through a cumbersome approval process on a wide range of goods.

In the space of a month, Abe has blown any change of portraying Tokyo as a bastion of "free, fair, and nondiscriminatory trade," as leaders at the G-20 summit in Osaka set out in late June. On Friday, Moon convened an emergency cabinet meeting. That suggests Seoul will retaliate in kind, putting the onus back on Abe to respond.

Meanwhile, #BoycottJapan goes from a Twitter hashtag to a movement dissuading customers from Seoul to Busan from shopping at Uniqlo, Muji, Daiso or 7-Eleven stores.

All of this is muddying the outlook for global growth, corporate profits and investment, and altering everything investors thought they knew about the direction of asset markets. It suggests even more aggressive monetary easing around the world is to come.

When you add these trade disputes to the world's other problems -- Japanese exports down seven straight months, North Korea gaining in aggression, Brexit careering out of control -- it truly seems like Murphy's Law is having its day.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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