Dig in for a long, hard war
It's clearer than ever the Sino-US trade war will last longer than feared. Only a few days ago, I urged investors to prepare for the next shock after the last round of negotiations between China and the United States wrapped up hastily in Shanghai. In politics, it's so true that even a few days can...
Thursday, August 08, 2019
It's clearer than ever the Sino-US trade war will last longer than feared.
Only a few days ago, I urged investors to prepare for the next shock after the last round of negotiations between China and the United States wrapped up hastily in Shanghai. In politics, it's so true that even a few days can be too long.
In no time, US President Donald Trump started hitting his Chinese counterpart and pal Xi Jinping below the belt, slapping on new tariffs on the rest of the US$300 billion (HK$2.34 trillion) of mainland-made products, while also accusing China of being a currency manipulator.
In a tit-for-tat for the double whammy, China struck back with a significantly weakened yuan, and a direct strike at Trump's political base by suspending purchases of US agricultural products.
If worse comes to worst, the trade war would last until after the US presidential election in 2020 - or even longer - unless either one of the leaders can't bear the pain any longer and throw in the towel.
The latest act by US Treasury Secretary Steven Mnuchin to categorize China as a currency manipulator was as loud as it sounded to financial market investors, but soft for China as the most likely penalty of such a charge would be sanctions, including punitive tariffs on Chinese goods.
Unless other countries act in concert with the Americans, the outcome would be immaterial since Washington has already imposed tariffs on all Chinese goods.
Instead of making better use of an otherwise quiet summer to prepare for the trade talks to resume in Washington in early September, both sides are drifting away from each other to allow differences to widen.
Nobody will remain unscathed in the ongoing boxing match.
Looking ahead, Trump would be tempted to jack up the tariffs on the US$300 billion worth of Chinese-made goods further to the 25 percent, after slapping 10 percent at the start of September - unless he's satisfied with the progress being made in the next round of negotiations.
Beijing must be prepared for that eventuality.
As the People's Republic of China will turn 70 on October 1, it will be impossible for Xi to make concessions that may embarrass him when the anniversary is celebrated across the country.
The tug of war is about how much pain can be endured.
For Trump, he will likely come under intense pressure from American farmers who, in addition to wishing for a quick end to the trade war, are apprehensive about losing their market to competitors for good if the battle persists.
Meanwhile, US consumers will also speak out louder and louder as they would buy less with their pay checks.
Pressure on Xi mounts too. More factories will close and the US tariffs and weakened yuan will escalate supply chain relocation and capital outflows. While a weaker yuan will help exports, it'll stoke inflation and increase the cost of dollar-denominated debts facing mainland companies.
However, Chinese people are historically known for being resilient, and Xi may rely on that.
So, which side is going to blink first? Let's stay tuned.