Ezio Gutzemberg/Adobe Stock
The markets appear strangely relaxed about the growing economic and political standoff between the U.S. and China.
Maybe because it has been a slow burn over the last six months or maybe because no one quite believes either side would be stupid enough to allow a full-blown trade war to develop, but markets are generally quite sanguine … so far.
Yes, the Chinese stock market is down. In addition, commodity prices are depressed relative to where we would have expected them to be back in Q1, when global growth was strong and there appeared little to deflect both mature and emerging markets from enjoying another couple of years of robust growth.
Gideon Rackman, writing in the Financial Times, argues that we are being far too relaxed about this, that for a number of reasons the prospect of these initial $50 billion of tariffs escalating to $200 billion — or worse — is real and the consequences should worry us.
For a number of reasons, neither side is likely to back down.
President Trump tweeted “Trade wars are good, and easy to win” back in March, setting out his perception of a likely victory. By nailing his colors to the mast with robust aggressive rhetoric, he cannot be seen to accept anything less than a significant climb down by China or he will have been seen to fail.
His apparent success in driving a renegotiation of NAFTA, at least as far as auto parts with Mexico, has probably emboldened his view that the tactic works.
Unfortunately, President Xi Jinping of China can no more be seen to capitulate than can Trump.
As the Financial Times points out, the Chinese people have been taught that their “century of humiliation” began when Britain forced the Qing dynasty to make concessions on trade in the 19th century. Xi has promised a “great resurgence of the Chinese people” that will ensure that such humiliations never occur again. Caving in to U.S. pressure will run counter to everything he has stood for since coming to office and would seriously undermine his position politically.
Part of the U.S. administration’s rationale is that China exports more to the U.S. than the U.S. exports to China and therefore has more to lose. However, that dos not mean the U.S. is immune from the impact of a full-blown trade war.
China is the world’s largest car market and via its joint ventures America’s automakers are big players. It is also Apple’s largest market for iPhones, among many other products, for which China is America’s largest export market. The U.S. is also an open market under a democratic political structure, subject at least eventually to the will of the people, whereas China is a state-controlled, closed economy with less need to pander to the whims of an electorate that will progressively be faced with rising costs and falling fortunes in both countries if a trade war escalates.
Rackman points out that while the current U.S. administration has used tariffs to tackle perceived injustices with just about all its trading partners, its position with China is fundamentally different.
There is a long-term strategic struggle developing with China as the Chinese economy grows in power and influence.
Economically and politically, China is seen by many in the U.S. administration as a threat that has to be contained. One of Trump’s demands is significant changes to China’s “Made in China 2025” program, which would require profound changes in the relationship between the Chinese state and industry that have political, as well as economic consequences.
Seen from Beijing, it looks as though the U.S. is trying to prevent China moving into the industries of the future so as to ensure continued American dominance of the most profitable sectors of the global economy and the most strategically significant technologies. Rackman quite realistically observes no Chinese government is likely to accept limiting the country’s ambitions in that way.
What we have are possibly unreconcilable positions, with two strong leaders who cannot be seen to back down, all set against the backdrop of a growing economic shift in global power and influence.
If that isn’t a recipe for potential disaster, I don’t know what is.