Don't bet on China bending anytime soon

Editorial | Mary Ma 3 Aug 2018

Stakes are on the rise for the United States and China as their trade war intensifies, with President Donald Trump's doubling down to boost tariffs targeting US$200 billion (HK$1.56 trillion) worth of Chinese goods from 10 percent to 25 percent.

For China, the damage can't be more obvious - its exports are being hurt and the yuan is falling.

While the yuan weakening may be read as a directed response by Beijing to cushion the impact caused by Trump's tariffs, the devaluation has stoked fears China could be hit by another wave of capital flight, along with losing American buyers to competitors on other continents.

But it's highly doubtful Beijing is returning to the negotiation table as reported.

Claims that US Treasury Secretary Steven Mnuchin had been in touch with Vice Premier Liu He via their assistants were likely trial balloons released by the United States to trick China to play into Uncle Sam's hands.

Trump's rapid strides to up the ante - hence the risks as well - could be due to domestic concerns.

Albeit slowly, discontent over his trade war gambit is growing at home as the effect of tariffs on consumer goods has begun to surface. According to US media reports, the average cost of washing machines, for example, surged 17 percent from March to May, and CPI for household appliances jumped nearly 16 percent in the past three months.

The cost of raw materials American manufacturers rely on has also soared. According to options and futures exchange CME Group, the cost of US Midwest Domestic Hot-rolled Coil Steel - a US steel price indicator - has climbed 30 percent since February, meaning that US manufacturers are paying more to produce.

Similarly, tariffs on Canadian lumber are making new homes pricier since wood is mostly used in building.

But those aren't as pressing as the loss of Chinese appetite for soybeans grown by Trump's diehard supporters.

The president's literal surrender to the European Union's demand to lift import tariffs on EU cars in exchange for EU's undertaking to fill the huge soybean hole was made in a hurry to pacify the Republicans' voter base ahead of the November mid-term elections.

That Trump has been making rapid strides to corner China helps reveal the increasing heat he must be feeling at home. He needs a timely win against China to swing the November vote.

If Beijing kowtows, the Grand Old Party may hope to score a big win in November, paving the way for Trumpism to prevail for many more years to come. It will be unrealistic to expect Trump to step down the trade war after tasting the dividends.

Then, nobody can stop him, as hardliners around him will push him further to encroach on China - their imagined enemy of 2025. The pendulum may swing back only if the Republicans are dealt a heavy blow in November.

The current stalemate is fluid. Investors had better armor themselves against the falling knife if they think it's high time to buy on dips.

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