Why China should walk away from a trade war, and toss the US some concessions while it’s at it
Andy Xie says while China can afford a trade war and Donald Trump cannot, China’s new global role calls for a more magnanimous posture, which could include opening up its markets further
The trade war, or rather the simulation of it, between the United States and China is escalating. In response to Donald Trump’s proposal to subject US$50 billion worth of Chinese goods to tariffs on April 3, China responded with similar tariffs on US$50 billion in American imports. Trump is raising the stakes again by considering another US$100 billion in Chinese imports.
Nothing concrete is happening yet. What’s going on is like two fighters in a kung-fu novel talking about how they would hurt each other: “I put a knife in your arm, you put an ice-pick in my thigh; I punch your tummy, you kick my crotch.” Maybe the purpose is to decide who gets what without a fight. That would be efficient.
It’s how negotiations should proceed. Both parties should bluff all the way to the end, become fully aware of each other’s cards and reach a deal at the last minute. It’s crazy to shoot at each other just for the sake of it. China and the US shouldn’t go down in a hail of bullets like two alpha males in a Hollywood film.
Trump would be insane not to negotiate. In a trade war, the US stock market would plunge 50 per cent and Trump’s rural support would evaporate. The Republican Party would lose the midterm election and the Democrats would have a hold on Trump afterwards. While Trump often behaves like a madman, he isn’t one. He has hired hordes of lawyers to get through the sticky stuff all his life. His talk of further tariffs is probably a bluff.
The US has a bigger stick, because it imports three times as much from China as it exports, but China has enough cards in hand
In the long term, China needs trade more than the US and, hence, should do more to ease tensions. But, in the short term, China is in a much better position to withstand a trade downturn and a stock market collapse, having distanced the labour market from corporate profitability and consumption from the stock market. If global trade declines by 20 per cent, the average Chinese wouldn’t feel the pinch. But both the wealthy and the working class in the US would suffer. After nursing an asset bubble for 10 years, a trade war would send the US’ wealthy back to 2008. The labour market would be squeezed hard by rising interest rates and declining demand.
Advertisement
It would be insane for Trump to start a trade war, but crazy stuff sometimes happens. When Trump talked about tariffs on goods worth US$100 billion, was it his stable genius or testosterone talking? The man is 71. He might want to go out in a blaze of glory, even if he likes luxury too much. Just in case, the stock market is pricing in a 10 per cent chance that Trump doesn’t care any more.
In my view, China shouldn’t escalate the issue. The current proposal has already stymied Trump. He won the presidential election by less than a 100,000 votes in the Midwest. Soybean and ginseng tariffs will do the trick. The US has a bigger stick, because it imports three times as much from China as it exports, but China has enough cards in hand.
