Growing hostility toward the US is creating opportunities for China. Photo: iStock

The United States starts a tariff war with China. Japan and Germany jump at the chance to gain market share in China’s booming auto industry and boost their capacity in China, the world’s fastest-growing passenger car market.

The United States imposes sanctions on Turkey. Germany announces that it will offer economic aid to Turkey, Qatar pledges $15 billion in new investment and a $3 billion foreign exchange swap line, and Chinese banks provide billions of dollars in new loans to the cash-strapped Turks. Chinese commentators declare that crisis is a great opportunity to integrate Turkey into China’s “One Belt, One Road” strategy.

US President Donald Trump chides German Chancellor Angela Merkel for buying Russian natural gas through the Nord Stream II pipeline. Merkel summits with Russian President Vladimir Putin and confirms the pipeline arrangement, and also strikes a deal to aid the reconstruction of Syria in cooperation with Russia.

The United States imposes economic sanctions on Iran, and Western insurance companies stop insuring Iranian oil cargoes. China responds by accepting Iranian insurance on oil imports, increasing oil imports from Iran, and shipping the oil in Iranian tankers, Reuters reported August 20. India was offered Iranian insurance on oil shipments as well, but Indian refiners reportedly will reject the offer. Western insurance companies have told them that if they import Iranian oil, they will cancel insurance on refinery operations.

And German Foreign Minister Heiko Maas proposes a new international payments system independent of the dollar sphere, a new interbank transfer system, and a European Monetary Fund, to “protect European businesses from [American] sanctions. He also proposed a digital tax on American Internet firms. Writing in the German daily Handelsblatt on August 21, Maas declared, “We will not let the United States go over our heads.” No representative of a major Western European government has suggested anything remotely like this in public before.

Maas’s Handelsblatt manifesto is only talk for the time being. European companies do not want to test America’s resolve when it comes to sanctions against Iran or Russia. The threat of secondary sanctions against the US operations of international firms who do business with Iran has led European firms to stop buying Iranian oil and to pull out of prospective investments. Even if European governments created a payments system entirely independent of the purview of the American government, secondary sanctions remain a formidable enforcement tool.

In the longer term, though, important shifts in investment patterns in response to America’s new assertiveness are likely to buttress China’s Eurasian ambitions.

Opportunism rather than strategic vision appears to motivate these subtle and sometimes not-so-subtle shifts in European and Japanese policy towards China. China evidently is willing to open its markets to America’s competitors in return for help during a brewing trade war.

Opportunism rather than strategic vision appears to motivate these subtle and sometimes not-so-subtle shifts in European and Japanese policy towards China

Chinese premier Li Keqiang’s Berlin visit in early July appears to have set a precedent. Germany’s big three automakers announced groundbreaking joint ventures with Chinese firms as well as major expansion plans. Siemens, Germany’s top capital goods provider, and chemical giant BASF also announced major projects in China, while BMW warned that the Trump tariffs might cause it to shift capacity from its South Carolina plants to China.

This week, Japan’s largest automakers followed the German example. Toyota announced plans to increase Chinese capacity by 20% and Nissan slated a $900 million investment to raise capacity by 30%. Japan’s decision to expand into the Chinese market is an important gauge of America’s isolation. Japan has a much smaller share of China’s auto market than Germany, in large part due to historic tensions between the two Asian powers. Nonetheless, the Japanese automakers smell an opportunity to profit at the expense of the United States. General Motors is the likely loser. It produces a Buick sport utility vehicle in China which will be subject to a 25% US tariff. GM sold 4 million vehicles in China last year with a 5% market share, and is vulnerable to Chinese retaliation.

The European and Chinese response to the Turkish financial crisis—long in the making but exacerbated by American sanctions – shows how fast economic alliances are shifting. I have warned of Turkey’s descent into near-bankruptcy since 2014, and reiterated this warning on several occasions prior to the collapse of Turkey’s lira this summer. On August 10, when the crisis struck with full force, I argued in this newspaper that China would buy up Turkey on the cheap.

On August 21 the Chinese financial news outlet The Asset wrote: “Economic crisis in Turkey is forcing the embattled President Recep Tayyip Erdogan to reach out for financial support, leaving the door open for China to grasp a not-to-be-missed opportunity to accelerate its Belt & Road ambitions in the region.”

Rather than go to the International Monetary Fund and accept its policy dictates in return for cash, The Asset reports, Erdogan is looking for new friends. “First Qatar was embraced, with a US$15 billion package announced on August 15, after Qatari Emir Tamim bin Hamad Al Thani met with Erdogan in Ankara. Qatari state media said the money would go toward economic projects and investments. But China is also likely to feature heavily in the Turkish government’s recovery plans. Back in February, Turkey said that it was planning its debut Panda Bonds in China’s domestic RMB market, and mandated Bank of China, ICBC and HSBC to prepare the way for an offering.”

None of this is surprising: the gas-bubble emirate …read more

From:: The Korelin Economic Report