China insists it can survive the volley of trade thunderbolts US President Donald Trump is hurling in its direction. But will the world’s second-largest economy emerge unscathed? The CSI 300 index of mainland companies has fallen nearly 20 per cent in 2018 — erasing $2.3 trillion from Chinese stocks’ value — and is trading at a 22-month low (though it went up sharply on Monday on news of fresh stimulus to the economy).

Over the past four months, China’s renminbi also has been heading south, spreading more market gloom. Cross to Germany where data show new manufacturing orders slid by 4 per cent in June, the fall greased by Trump’s tariff war. Around the globe, including in the US, there’s a miasma of uncertainty about the economic impact of the increasingly erratic president’s protectionist trade policies.

CFIUS scrutiny

In Washington, Congress has just passed the tortuously named Foreign Investment Risk Review Modernization Act. The Act gives a body called CFIUS (Committee on Foreign Investment in the United States) more powers to scrutinise foreign investments. In the firing line are Chinese investments and this has the tech and financial sectors especially jittery. Fledgling Silicon Valley start-ups are nervously wondering where their next funding round will come from.

Trump airily dismisses media hand-wringing, disaster forecasts by think-tanks and opposition from many US companies that are concerned about tit-for-tat reprisals. He’s triumphantly pumping the country’s strong 4.1-per cent annualised second-quarter growth, saying it’s proof his hardball tactics with friends — including hitherto “best buddy Canada” — and foes alike are producing results.

Trump also insists buoyant US growth means the economy’s so strong it can take the pain of a tariff war and that other countries around the world will come crawling to the negotiating table to settle on US terms..In fact, just a few days ago, Trump gleefully tweeted “tariffs are working far better than anyone ever anticipated”, pointing to the slump in Chinese stocks as proof.

It could be argued Trump had good reason to push ahead with CFIUS. China’s cash-rich giants and venture capitalists have been fanning out across the US, snapping up everything from hotels like New York’s storied Waldorf Astoria back in 2014 to all manner of advanced tech start-ups.

The Chinese also unwisely let it be known they want to acquire intellectual property from the companies they buy and push the US into second position in the tech world. It’s not only mega-deals, though, that CFIUS will scrutinise. From now, even a small foreign stake in a company could trigger CFIUS scrutiny. For Silicon Valley, that’s a big problem because Chinese venture capitalists have been far more lavish spenders than American VCs.

The hostile environment created by Trump’s tariffs and aggressive pronouncements have already resulted in Chinese investors steering well away from America. Chinese businesses invested a massive $45 billion in the US in 2016. That tumbled to $24 billion in 2017. In the first six months of this year, Chinese investments into the US have dwindled to a meagre $2.5 billion.

Instead of buying into the US economy, the Chinese have turned to Europe, where they’ve written cheques for around $20 billion as they go in pursuit of European companies. But even the Europeans are wearying of the Chinese bearing gifts, worrying they’re on a path to overtake them. Britain is about to legislate for itself CFIUS-like powers to curb foreign investment on grounds of national security.

The government will arm itself with powers to impose conditions or halt transactions. Germany’s also imposing restrictions on foreign buyers. Last week, it blocked the sale to a Chinese suitor of Leifeld Metal Spinning, a company that makes high-strength metals for the nuclear, auto and space industries, citing for the first time national security concerns.

Wobbly world economy

Even before Trump began his ham-fisted efforts to force companies to ‘Make in America’ and reverse US trade deficits worldwide, the global economy was already walking on eggshells. Look at Britain which is sinking deeper into an economic sinkhole of its own making. The pound sank this week to its lowest level against the dollar in 11 months after British International Trade Secretary Liam Fox admitted that a hard Brexit — involving Britain crashing out of the EU without any trade deal — was now the odds-on favourite likelihood.

Top corporations are making emergency contingency plans and so are financial organisations like Bank of America which is lining up Dublin as its EU headquarters.

If all this isn’t enough to throw the world economy into a tailspin, there are also Trump’s sanctions on Iran and anyone that trades with the country. India’s already been stocking up on Iranian oil in a bid to beat the sanctions and is hoping to find ways to keep trading. Iran’s share of global trade is minimal but moves against its oil exports could push up prices and serve as one more negative for the global economy. But the country walking the toughest tightrope is, undoubtedly, China. Even before Trump slapped his hefty tariffs on their products, the Chinese were grappling with significant domestic debt problems and focussing on cooling their property market. Can they cope with the twin internal and external threats now cropping up? The latest infrastructure stimulus indicates they’ve decided to fight the trade war before tackling debt. But murmurings against President Xi Jinping have begun for taking off the velvet glove and making it clear China is aiming to be the world’s paramount power, thus attracting the ire of the US and Europe.

Effect of tariffs

From a pure macroeconomic view, tariffs, in and of themselves, spur two unwelcome consequences that could undermine the already struggling global recovery — economic contraction and inflation. The US-initiated trade war could also up-end the long-established multilateral trading system with disastrous results. Some optimists suggest that Trump’s just posturing and will avoid mutual trading destruction in favour of negotiation.

All in all, it would be wise to take a look at the price of copper, a metal with a long track record of predicting economic trouble. The bellwether metal is used in everything from computers and automobiles to electrical wiring for new construction. It’s also particularly linked to the health of the Chinese economy. The price of copper has slid 18 per cent since January. Significantly, copper prices also began falling before the crash of 2008.

Trump was lucky he inherited a strong economy from Barack Obama. By next year, though, the Trump Effect will begin to show. And we’ll know whether the declining copper prices had been an early warning signal of something much worse to come.

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