The US Massively Underestimates the Trade War Blowback

Yves here. Even though most readers know the general point very well, that US trade and financial sanctions haven’t brought targets to their knees, and had instead pushed them to find allies, but it’s useful to have detail to flesh out the story. There are some bits one can quibble with, like the “annexation of Crimea” bit, and the US objectives for its sanctions against Russia. At least under the Obama Administration, the belief was that they would damage the economy severely and force a regime change.

By Robert Berke, an energy financial analyst with experience as a government consultant to the State of Alaska. Originally published at OilPrice

Trade wars and sanctions are economic weapons against rival regimes, and like actual military warfare, often lead to unanticipated and sometimes devastating blowback from the targeted regimes.

A prime example was President Obama sanctioning Russia over its annexation of Crimea. The sanctions were designed to block Russia from any access to western financing, aimed at causing a dire financial and economic crisis in Russia that would force it to relinquish Crimea and end support for Ukraine’s breakaway territories.

In fact, the sanctions did cause Russia to enter a short-lived recession. But it also had other, much more drastic results for the West. It forced Russia to move closer to China, and Moscow saw Beijing as a great alternative to western financing for Russian industries.

At the same time, western companies were forced to withdraw from Russian mega-deals because of sanctions. The best-known example was Exxon, forced by sanctions to walk away from an Arctic joint venture with Russia’s state-owned oil giant, Rosneft, where it had invested $3.2 billion. In their very first effort, the partners successfully drilled oil wells containing 750 million barrels.

As noted by Reuters, the withdrawal was costly:

Exxon will post an after-tax loss of $200 million as a result of pulling out of the Rosneft deal, but the true costs for the company run much deeper. Exploring and developing giant offshore fields in Russia was supposed to provide long-term growth for the company, and, in recent years, has seen falling reserves.

But the opportunity losses are likely to be far higher for Exxon, the company that famously missed the US shale revolution. The long-term deal with Rosneft, expected to continue for decades, included exploration for oil in the Black Sea, enormous shale resources in Western Siberia, and the development of three large blocks in the Arctic (Kara Sea).

The trade war with China that has led to tariffs on billions of dollars in Chinese exports to the US, and as a result, Russia and China have moved even closer. It remains an absolute mystery why no one in the west had foreseen the blowback from economic warfare leading to an alliance between two of its most powerful adversaries.

China’s major state-owned oil companies and its Silk Road fund each became 10% partners in Russia’s first major Arctic LNG (liquified natural gas), project in the Yamal Peninsula, undertaken with Novatek, Russia’s largest independent gas producer. The project offers great prospects for enormous expansion.

The US acts as if it has been blind-sided by the Russian/China moves, even though years before it undertook economic warfare against them, China, the world’s largest energy importer, agreed to finance oil and gas multi-billion-dollar pipelines in neighboring Russia. Now Russia has become China’s largest energy supplier, equaling or perhaps even surpassing its energy supplies to Europe.

A similar scenario is taking place in the Persian Gulf where the US has withdrawn from the Iran nuclear deal, while imposing economic sanctions on Iranian oil exports.  The French energy giant, Total, that in recent years has been a leading international oil company in that country, was forced to withdraw because of sanctions, just like Exxon in Russia’s Arctic, it left billions of dollars on the table.

This may also answer the question as to why French Prime Minister Macron was so intent on inviting the Iranian Foreign Secretary to the recent G7 meeting in France. It’s also no secret that French carmakers Peugeot and Renault are the main suppliers to Iran’s auto assembly plants.

As stated by Global Village Space (GBS), China and Russia rushed to aid Iran, with China replacing Total, in a 25-year deal estimated to be worth some $400 billions. With that, China inherits a bonanza, providing much needed finance and technology to a country that was and could again become one of the world’s leading energy producers. China is looking to finance $280 billion to develop Iran’s gas, oil and petrochemicals industries, along with $120 billion to improve transport and manufacturing, making it a key partner in China’s Road and Belt program.

The deal also gives China the right to buy any or all Iranian oil, gas, and petrochemicals products at a minimum guaranteed 12% discount to global benchmarks, plus an additional discount of 6-8% for risk adjusted compensation. Financing will proceed using local currencies, avoiding the costs of converting to a hard currency like the US dollar or the Euro, giving the Beijing yet another 10% cost advantage.

GBS further reports that the security for these projects will include up to 5,000 Chinese security personnel on the ground in Iran to protects Chinese projects and to safeguard the transit of energy products from Iran to China, including security for the very strategic Hormuz Straits.

In direct defiance of US sanctions against Iran, China has stepped into the breach, increasing its oil purchases from Iran while becoming Iran’s major energy trade and finance partner. Like Russia, it seems that Iran is moving towards a military alliance with China. If the west worries about China’s expansive moves in the South China Sea, along China’s own borders, what to make then of China moving in on Hormuz, where some 30% of world oil is transited each day?

If these are considered winning policies for the West, one has to ask what failure looks like.

The West is already slowly becoming aware of the blowback this disastrous policy has caused. Evidence for this can be found in Macron’s efforts to persuade Trump towards a peaceful resolution with Iran.

It is well known that the US has been in secret meetings with Iran representatives, much to the dismay of the Saudi Arabia and Israel. As Bloomberg reports, after the G7 meeting, Trump publicly and repeatedly stated he was ready to meet with Iran’s President, Hassan Rouhani. Bloomberg also reported that in a meeting with his Cabinet, Trump announced that he was ready to ease sanctions as a possible way to open negotiations between the two countries. Treasury Secretary Mnuchin agreed with the President, while National Security Advisor Bolton voiced strong opposition, that only one day later, led to his firing. Secretary of State Pompeo stated that Trump may meet on the sidelines of the upcoming UN meeting with Iran’s President.

The firing of Bolton was immediately followed by a fall in the price of oil and gold. Allowing Iran to continue to increase supplies into already well supplied oil markets will add downward pressure on oil prices. For the Trump administration, this is not necessarily a bad thing… unhappy consumers at the gas pump make for unhappy voters.

Similarly, the Trump Administration badly needs to move towards ending the trade war with China in order to calm global markets. The recent announcement of the resumption of trade talks between the US and China in October may provide an opportunity for a similar easing of tariffs and a path towards further resolution.

Although these actions could help to quell global tensions, it may be too late to reverse some of the serious damage caused by US-led economic warfare. Once China positions itself in Iran, it will not likely be interested in withdrawing from its new strategic position in the Middle East, that it gained as a result of US near sighted foreign policy.

Prior to the election, we may see a breakthroughs in the trade war, and the alleviation of sanctions with Russia, Iran, China, and perhaps even North Korea, but the US will almost certainly see the negative consequences from adversaries it helped to expand and strengthen.

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  1. The Rev Kev

    Can’t speak much about the effects of the Chinese sanctions but I know a little bit about the Russian ones. These Russian sanctions are biting hard but not the way they were intended and it is not only the big oil companies that are losing big. Since they kicked in Russia has lost about $50 billion in trade with the European Union which kinda stings. But in the same time frame, the European Union has lost about $240 billion. Considering that fact that these sanctions were never for their benefit but for solidarity with the US, that is a very expensive price tag. The US lost only about $17 billion but I remember reading that after the sanctions kicked in, trade between the U and Russia actually increased. Europe is a big loser here, particularly with agriculture. When the EU sanctioned Russian products to the EU, the Russians did the same to them a few weeks later which came as a shock. Since then Russia has made huge investments into growing their own food crops and those markets will never come back again for the EU. As an example, Russia is once more a world leader in the production of wheat second only to the US and has learned the value of autarky.
    You see these results in all sorts of areas as the country started phasing out imports and replacing them with domestically made products. They even started making marine engines out of necessity as they were denied purchase of foreign ones. People might remember how Russia was going to buy two specially built ships from France but France reneged under pressure from Washington. France not only had to give back all the money the Russians paid but also had to compensate Russia for all related costs that the Russians made. In the end France paid Russia over a billion dollars which was triple what the Russians initially paid. And now the Russians are constructing their own ships of this class in the Crimea using the knowledge acquired from France. Perhaps it is things like this that has cause Macron to open up contacts with Russia once more in spite of what Washington demands.

    Add in the purchase of gold stocks, developing financial systems in case the US cuts Russia off from the SWIFT clearance systems, the development of weaponry that makes the deployment of nuclear missile systems in Europe futile, you realise that Washington has massively underestimated the response of counties like Russia, China and Iran and depended on unicorn wishes instead.

    1. fajensen

      But in the same time frame, the European Union has lost about $240 billion. Considering that fact that these sanctions were never for their benefit but for solidarity with the US, that is a very expensive price tag.

      Well, Looks like Donald Trump let “The Swamp(tm)” run loose and they went and over-torqued the screws!

      Some decision makers in within the EU have begun to see the US sanctions against everything and everyone as having the true goals of ablating EU’s influence on the world while hampering EU-based businesses. There are initiatives and polices that hints at “cutting the cord” are quietly being introduced.

      The EU defence industry initiative, the ECB’s money transfer service, the EU army (or defence collaboration :) are all longer term policies aimed at reducing the EU’s reliance on systems that are controlled by the USA.

      The ‘North Stream’ pipeline and keeping the Iran deal kinda alive are more immediate and direct challenges, as was the total unwillingness to join in any of the planned military adventures involving Syria and Iran.

      France is being rather open about about it. Possibly to test out on behalf of the EU what the USA is actually willing to do to exact revenge and enforce compliance, possibly also because opposing the USA in France remains a reliable way to win votes.

      1. Carolinian

        It’s not just Trump. Our Congress is totally at the beck of special pleaders such as LNG exporters and arms companies. All seek to use the US economic weapon to further their own interests.

    2. John A

      Plus, Russia is determinedly GMO free. The more the US goes down the GMO route, the less likely the food trade with the EU – the European dogs wont eat GMO dogfood.
      Post Brexit perhaps, Britain will accept US foods, all the more reason to insist on a proper border if NI remains part of the ‘UK’.

      1. notabanker

        It’s not just GMO, but the level and quality of technocratic oversight. US government agencies are incapable of regulating anything in the private sector. While the EU is still greatly influenced by private money, it has not completely sold out.

  2. jackiebass

    What is ignored by media is the harm sanctions inflict on the people living in these countries.I think it should be considered a crime against humanity and our leaders should be prosecuted. Sanctions are a weapon that is just as harmful as weapons to kill. We only seem to look at the economic effects and ignore the social effects.

    1. Ander Pierce

      Sanctions are the modern equivalent of siege warfare, only the target is a nation, not a city.

      I’ve known in a vague intuitive way that US sanctions would alienate nations and isolate the US, it’s useful seeing how exactly these sanctions are backfiring with more nuance!

  3. John

    What is the next step after you have sanctioned everything and everyone and the reaction is a shrug and a work around? Sanctions do have their bite, but they are, or are becoming, a more effective tool for global economic and political realignment than a means to accomplish their stated purpose.

    1. Susan the other`

      Good question. I am wondering the same thing. There is a vague pattern here with Russia, the most resource-rich oil producer. We don’t want Russia to take off too fast. What can be left in the ground should be left in the ground. And maybe that was the existential threat posed by Exxon – a private, profit seeking US corporation geared to do everything fast in order to make their profits. Just thinking about slamming the breaks on manufacturing and consumption and how this can make a mess of the oil industry if it is going for profits – race to the bottom (currently). Rather, anyone thinking straight would want to conserve oil, control it’s production and marketing. John Bolton is clueless. He’s a throwback to ruthless American competition and cowboy capitalism. And he appears to be an idiot.

  4. Watt4Bob

    There was a discussion of China’s role in manufacturing drugs for Big Pharma on the news last night, truly frightening.

    They’ve already been found to be selling us contaminated drugs, what happens when they refuse to deliver anything other than fentanyl?

    I find it hard to understand how we’re going to recover from the damage done by the short-sighted, wholesale outsourcing of our manufacturing to China.

    1. Drake

      Given the centrality of drugs to American life, we should categorize them as sensitive items of national security and declare a war on foreign drugs. That would brilliantly combine the failed policies of the past with the failed policies of the present. We could make exceptions for most-favored nations like Colombia or Afghanistan.

      I’m not even sure how sarcastic I’m being. ;)

    2. VietnamVet

      When I saw that China has a monopoly on basic pharmaceutical stock ingredients, I thought “they sold us down the river for a buck”. Like Boeing, this is innate corruption. No thought of the consequences. This is similar to patients dying because insulin is too expensive. Sooner or later something is going to cut the just-in-time supply chain. That will be the inevitable black swan event that crashes everything. What is not mentioned by corporate media is that the only way out is for the federal government to start contracting the manufacture of vital drugs in North America for national defense and safety, to lower costs, and employ Americans.

  5. oaf

    “What is ignored by media is the harm sanctions inflict on the people living in these countries.”

    …and not just for the citizens of the country being sanctioned/ hit with tariffs…but for those of the perpetrator nation…

  6. John B

    From a climate perspective, all this disruption to the business of transferring carbon from the lithosphere to the atmosphere is great news, even if it’s entirely unintentional. Keep it up!

  7. Fíréan

    Trade War ( and sanctions ) Blowback – Thank You for posting this article.
    How to advance the information to the attention of those persons who can make a difference ?

  8. Chauncey Gardiner

    As in military conflicts, the fog of geoeconomic war together with partisan lens and poor leadership can prevent adversaries from developing an accurate assessment of reality. The writer has raised some examples that support his view pertaining to pushback, and he could be right as The Rev Kev so eloquently pointed out here WRT Russia. However, whether his article provides an accurate overview of the current state of play remains an open question IMO.

    Setting aside deeply troubling questions about our national values and whether sanctions should ever be employed due to their very damaging effects on domestic populations, together with their evident past failure to realize policy goals, there are credible accounts that China is now confronting a U.S. dollar shortage; that China has significant issues in its financial system and economy; and that the people of China are seeing sharply rising food prices as a result of decreased supplies of pork and soybeans. These issues are being perceived as sufficient to cause China’s leaders to be receptive to negotiating resolution of the current tariffs, trade, intellectual property, and investment impasse on terms favorable to the U.S. Whether this will be so remains to be seen, of course.

  9. Sound of the Suburbs

    A multi-polar world became a uni-polar world with the fall of the Berlin Wall and Francis Fukuyama said it was the end of history.

    It was all going so well, until the neoliberals got to work.

    The US created an open, globalised world with the Washington Consensus.

    China went from almost nothing to become a global super power.

    That wasn’t supposed to happen, let’s get the rocket scientists onto it.

    Maximising profit is all about reducing costs.

    China had coal fired power stations to provide cheap energy.
    China had lax regulations reducing environmental and health and safety costs.
    China had a low cost of living so employers could pay low wages.
    China had low taxes and a minimal welfare state.

    China had all the advantages in an open globalised world.

    “The Washington Consensus was always going to work better for China than the US” the rocket scientists.

    If the US left this running it would be China first and America second.


  10. marku52

    It seems since about the Vietnam war era, US FP has been run by hubristic idiots with delusions of grandeur. Its foreign policy 101 that you never, never, set policy to drive your 2 largest rivals to alliance.

    Yet these morons did exactly that. Since Trump, there have been many retirements form the State Dept.

    And maybe that’s not such a bad thing. They show no evidence of competence.

  11. GF

    According to this linked article:

    Russia is leasing out old collective farm lands that was abandoned in the eastern part of the country to Asian countries to farm and grow the export food products needed. It seems the collective farms were abandoned and now the Russian government is re-purposing the vast amounts of land available.

    “Russia is now considering requests from Asian firms to farm another 1 million hectares (2.5 million acres) — an area roughly the size of Jamaica, according to the head of a government agency.”

    It may be said that Trump’s tariffs are the best things that could have happened to China and Russia.

      1. Procopius

        I dunno. Corn, soybeans, and alfalfa were what my grandfather grew on his half-section (320 acres) of Iowa farmland. He made that choice because it was supposed to be the most sustainable way to preserve the land. My grandfather was an innovator and a great believer in science, and he hired a man who was a great natural tinkerer and mechanic. The neighbors were mostly similar. Of course now all the family farms have been sold to giant agribusinesses, because none of the sons or daughters wanted to continue the backbreaking labor and financial uncertainty. I don’t think the new owners are interested in sustainability.

        1. Jerry

          Iowa’s family farms are still here. They are just owned by fewer families because the back-breaking labor has all been replaced with hydraulic power, meaning fewer backs are needed to farm larger fields. We still have uncertain finances, but so do factory workers and school teachers.

  12. Andy Raushner

    Frankly, I think it has pushed up consumer spending and that is about it. In other words, this economy has overcapacity problems in the auto sector and its relation to junk corporate debt, is not good.

    Consumer spending is going to struggle the rest of the year as it rebalances and manufacturing is heading to a full blown recession by December as auto companies try and get their balance sheets under control.

  13. RBHoughton

    It is quite well known that an external threat unites a target population against it. There is no better way of bringing the people together. In effect, America has been helping every sanctioned country by punishing it. It will make an interesting chapter in future history books.

  14. ForeignPolicybyFoxnFriends

    Who would have thought installing a mentally ill charlatan grifter conman (who was a failure in business) as our “Leader” would turn out so awful?

    1. Roger Boyd

      This was started under Obama (another charlatan), not Trump. It was Obama who placed sanctions on Russia after the US helped along the coup in the Ukraine, it was Obama who pivoted to Asia, and it was Obama who destroyed Libya (and therefore showed Russia and China that the US could not be trusted). The looting of Russia by the west was done under Clinton, something that Putin put a stop to.

      Clinton, Bush Jr, Obama, Trump – just different flavours of the same hubristic ice cream.

      1. Portlander

        Yes. I think Tulsi was getting dangerously close to helping connect these dots–the bipartisan roots of US FP–in the debates, and had to go.

      2. Jean Smitty

        They placed sanctions after Russia annexed(illegally) a piece of the Ukraine. Tulsi is full of it and takes money from the same sources as Trump.

        1. OpenThePodBayDoorsHAL

          Hi Jean

          It’s funny in general when Americans toss around a word like “ïllegally”. But it’s especially funny when it’s in the context of an election.

          Crimea had a referendum on whether to rejoin Russia. They voted by more than 90% to rejoin in an election that the UN declared was “fair and free”. The transition happened with not a single person beng killed.

          But I know those unfortunate facts do not fit with some peoples’ world view. So here, I’ll get you started, you join in at the chorus:

          Putin Bad
          He Very Bad
          See How Bad?
          Putin So Very Bad Man
          See Him On His Horse?
          He Has No Shirt, That’s Bad
          He Bad
          So Very Bad

          1. Jaded

            Crimea had a referendum on whether to rejoin Russia.

            …which was illegal under Ukrainian law, which would be the law governing the legality of such referendums. And never mind that the referendum offered only the choices of “join Russia” vs. “secede from the Ukraine”.

            They voted by more than 90% to rejoin in an election that the UN declared was “fair and free”.

            [citation needed] – I’ve found no record of UN observers, though I did find plenty of mention of the OSCE refusing to monitor it as they deemed it to be illegal and illegitimate. Although I did also find numerous accounts of irregularities and accusations of fraud.

            The transition happened with not a single person beng killed.

            This is patently false. Even if we detach the ongoing conflict in eastern Ukraine, there were 6 casualties during the annexation period leading up to the dubious referendum. It’s especially odd that you’re praising this as a peaceful annexation immediately after (apparently spuriously) using the UN as a authority to claim the referendum was legitimate while ignoring that the UN has consistently issued condemnations of the annexation of Crimea and increasing human rights abuses since the annexation.

            I feel like a bit of a naive optimist for actually trying to engage your claims logically rather than emotionally, though, given the frankly sophomoric tone of your last paragraph.

      3. Nancy E. Sutton

        So true…let’s not let ‘them’ -divide and conquer- us. The distraction tactic works every time … in the magic act. And offering Hillary as the alternative showed utter stupidity and arrogance… or abject fear of Bernie. Tells us who the real enemy is.

  15. TG

    Another angle on the effects of “sanctions” – if “sanctions” mean that Western financial companies can’t plunder the local economy and turn everyone into a debt slave, in the long run it would not surprise me at all if countries that have been “sanctioned” do better than countries that have been left to the tender mercies of the big banks. Compare Russia with Greece, for example….

  16. TiPs

    Since the “chosen one” doesn’t like to lose–or has never lost in his mind, then any agreement with Iran and China will have to come with a public display that shows “Trump won” this war. The other possibility, if he can’t win the trade/sanctions war then maybe it will be a military conflict he thinks he can win…

  17. notabanktoadie

    A couple of points:

    1) Positive yields on inherently risk-free US sovereign debt constitutes welfare proportional to account balance. Moreover, in the case of foreigners, that welfare proportional to account balance encourages them to NOT purchase US goods and services – thereby worsening the US trade balance.

    2) If assets were more justly owned in the US they would be more BROADLY owned by US citizens who would then be more likely to profit from less expensive foreign goods and labor rather than suffer from them as wage earners.

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