Although it may not seem so, timing is proving to be everything in the on-again, off-again trade war between China and the US. In coinciding the imposition of $75-billion worth of tariffs on US goods and oil with the Jackson Hole Federal Reserve retreat and ahead of the G7 weekend meeting, China’s announcement was designed for maximum impact.
On Friday 23 August, China caught both Trump and financial markets completely off guard, forcing Trump to issue a rushed statement saying he would respond by the end of the day. In the end, it was the prospect of what was to come when Trump did reveal his retaliatory measures, more than the Chinese shock tariff announcement, that sent investors rushing for the doors.
Predictably, Trump came back fighting, raising tariffs on existing and upcoming tranches and, more ominously, threatening to declare a state of economic emergency that would require US companies to cease doing business with China. In upping the ante with his threat to resurrect 1977 economic emergency legislation, he gave us a peek into how far the situation could deteriorate and the potentially irreversible impact the US and China’s failure to reach an agreement could have on the world as we know it.
Neil Shearing, Capital Economics’ chief economist, tackled the implications of the end of the world as we know it, in a recent note on the trade war. He has believed for some time that it is more likely that the conflict between China and the US will escalate than recede, given the political dynamics on both sides of the trade war. One of the longer-term scenarios he considered was “a more malign form of deglobalisation driven by the deliberate erection of barriers by policymakers”.
However, he felt the impact on the broader global economy might not be too bad if the current tensions remained limited to the US and China.
“What’s more, history shows that some countries may continue to integrate at the same time that others put up barriers. A protectionist shift by the US need not prevent economies in Europe and Asia from seeking closer ties.”
He did spell out one starkly different global future: “It’s even possible that this might lead to an eventual Balkanisation of the global economy, with US-, and China-led spheres of influence, each with separate payment systems, regulatory standards and technological platforms. It goes without saying that this would have much graver economic and market consequences.”
In the medium term though, the most challenging aspect of these tortuous, and unpredictable, negotiations are that the parties on either side have such completely different, but equally difficult to read, confrontational negotiating styles.
China’s provocative moves in the last two rounds and then subsequent attempts to appease the US appear to be understated compared to Trump, yet equally hard-hitting and strategic. In early August, when it allowed the renminbi to depreciate after Trump imposed tariffs, China quickly followed this with a statement saying it had no intention of using the currency as a weapon in the trade war.
This time, the Chinese government said it was “resolutely opposed” to an escalation in the trade war, days after shaking up world markets with its surprise tariff announcement. On the other side of the ring, it’s equally difficult to interpret or anticipate Trump’s next move, other than to know it will be bold and most likely unhelpful.
Time is not on the side of either the US or China, with both countries likely to suffer the consequences of not reaching a deal within the next few months. The stakes get higher each time either side tries to land the knockout blow and the one thing we do know, contrary to Trump’s claims that tariffs are already benefiting the US, is that no one will be left standing if the two parties fail to meet in the middle before the end of 2019.
China needs to find a way to underpin its slowing economy after industrial production came in below 6% in July for the first time in 17 years. With China’s direct and indirect exports to the US contributing four times as much to Chinese gross domestic product than the other way around, according to ING, continuing to do business with the US is critical.
Meanwhile, after officially launching his election campaign in mid-June, Trump needs to show that he has managed to improve the US terms of trade by at least the beginning of 2020 when he has 10 months to convince voters he has delivered on his 2016 election promises.
In a note titled “Time is running out for Trump to cut a trade deal”, ING says: “Voters will not like this, mainly because they will increasingly pay the price for the trade war now that the tariff hikes are about to hit imported consumer prices as well.”
ING adds that the US’s far-reaching demands, such as expecting China to give up its autonomy over its own economic policy and accepting that the US would be entitled to decide for how long tariffs would stay in place, is asking too much from China.
“Mr Trump has said several times that the trade war will not take long and that the US is winning. However, given the tougher stance of China since the failure to cut a deal at the Trump-Xi meeting in May, Trump will have to lower his demands in order to get a deal done with the Chinese anytime soon.”
While many saw last week’s events as one step too far, putting any chance of a trade agreement out of reach, this week China attempted to reintroduce calm and Trump said China had indicated a willingness to return to the negotiation table.
But who knows whether this ham-fisted attempt at diplomacy will result in a step closer to a trade deal or whether the Chinese, with their velvet-glove approach to negotiations, will continue to toy with Trump’s confrontational gloves-off style. BM