The Daily Update - Trade Wars and Paper Tigers

China has hit back hard today with retaliatory tariffs in a move that demonstrates their desire to draw a line in the sand for the US-Sino trade war and expose the US’s hubris detour into protectionism. Although the ~$50bn value of imposed tariffs from both sides looks comparable, the items and industries that China has targeted, including aircrafts, chemicals, cars and soybeans, will inflict much higher social and political pain than the high-tech focus of the US tariffs (for both countries). For example, the suggested soybean tariff will by nature target certain states, with 8 of the 9 largest soybean producers being in ‘Trumpland’, and those in the industry will really feel the cost of a 25% tariff. But this will also have a kamikaze effect on China’s own food costs, notably pork prices, which won’t be popular domestically. It’s all to demonstrate that they would rather endure more economic pain than be seen as inferior in the face of US intimidations.

Moreover, the speed in which Beijing has retaliated must have come as a shock to Washington – also clearly intending to make the US think twice about enacting on these protectionist threats or escalating them further. Yet China continues to call for an end to this brinkmanship – but now with an ever harsher tone: vice minister of finance Zhu Guangyao stated earlier today, ‘Those who attempt to make China surrender through pressure or intimidation have never succeeded before, and will not succeed now.’ Yet although the targeted sectors have been clearly delineated, China has yet to announce timelines for their tariffs – which may be seen as a gesture of goodwill for giving the US time to backtrack and rescind their threats.

Trump (or at least his administration) need to realise that Beijing see him more as a ‘Zhilaohu’ or ‘Paper Tiger’ in all this brinkmanship, perhaps rightly, and China’s latest retorts prove they themselves are nothing of the sort. With only an acting Secretary of State until Pompeo’s Senate confirmation and with the run-up to midterm elections this November, the US isn’t in the strongest of negotiating positions politically. Moreover, neither is it in the better negotiating position from a trade perspective; most analysts expect the US will suffer much greater relative loss from declining trade with China. As Guangyao reiterated in today’s press briefing, “External pressure will only make the Chinese people more focused on economic development.”

At the time of writing Dow futures are suggesting a drop of 500 points, or around 2%, on the back of all this rhetoric. This certainly carries significant expectation that these tariffs won’t be fully enacted and that a painful trade-war won’t come to fruition. If it did, one could expect a much bigger drop than 600 points. If history teaches us anything about trade wars it’s that they are very easy to start and very difficult to unwind.

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