The next US-China trade war won’t be fought in Washington or Beijing over trade frictions. It will be fought in Venezuela and Africa, where China has been an active investor, antagonizing the US.
Take Venezuela, first. For years, China has been a big creditor to the oil-rich country. It was a deal made in heaven for both sides. For Beijing, extending credit to Maduro’s regime was a way to expand its influence in America’s neighborhood. And a way to tap into the country’s vast oil reserves.
Meanwhile, this sort of deal raised the prospect of swapping loans for equity, allowing China to take control of Venezuela’s strategic assets. In case Venezuela failed to repay its loans, that is–a model China has applied in Sri Lanka and how Beijing took control of the country’s ports, obtaining strategic outposts in the Indian Ocean.
For Caracas, China’s loans were a way to overcome the reluctance of capital markets to provide credit to Venezuela’s corporations, as its economy deteriorated.
China Yuan Loan GrowthKoyfin
But things didn’t turn as planned for Beijing. Maduro’s regime is teetering on the edge of collapse, Washington has come to the side of the opposition, and the US Treasury imposed sanctions on PdVSA last week.
That’s a significant development. It has made it difficult for Maduro’s government to repay his country’s loans to China. And that raises the risk of US-China trade wars spreading to Venezuela.
“The old saying is that there’s ‘never just one cockroach in the kitchen,’ and that axiom is also true when the kitchen is the global economy,” says Murray Gunn, Head of Research at Elliott Wave International. “Taking our metaphor one step further, the cockroaches in this case are the various and sundry manifestations of negative social mood, best reflected by the individual player’s stock markets. The negative social mood trend in Venezuela over the last few years has set the table for the country’s dire cultural milieu and recent attempt at political change.”
A political change that could in turn set the table for another dispute between US and China, as a new pro-American government might refuse to repay loans to China altogether.
Worse, the collapse of Maduro’s regime could create a contagion that leads to the collapse of authoritarian regimes in other parts of the emerging market world. Like Africa, where China has been expending credit to unpopular regimes, and drawing strong criticism from the US.
“When this happens in a peripheral economy, other countries often do not become involved,” says Gunn. “However, if those countries are also experiencing negative trends in social mood, the anger that underlies that mood compels them to intervene (misery loves company). Given the current negative mood trends, the probability of a China/U.S. trade conflict escalating is significant – but Venezuela will not be the only venue. Africa could be another.”
Paul R. Kutasovic, Professor of Finance at NYIT, doesn’t see it happen. “The US-China trade friction has been blown out of proportion,” he says. “The trade deficit America is running with China is a symptom of a strong US economy, which drives imports of Chinese products, rather than a matter of Chinese trade protectionism.”
This means that the trade deficit will ease once the American economy slows down.
Kutasovic further sees a disconnect between Washington policies and the American consumers who buy Chinese products at Costco and Walmart. “I don’t see consumers complaining when they buy China-made products in these stores,” he adds.
While it’s still unclear which way things will end with the US-China trade disputes, one thing is clear: China needs to take a close look at its ‘debt for diplomacy’ policies in Latin America and Africa.