By Clay Chandler
April 7, 2018

 

Last week in this space I noted that global investors had shrugged off the prospect of a U.S. – China trade war. What a difference a week makes.

On Tuesday, the Trump administration rattled market bulls by calling for 25% tariffs on $50 billion in imports from China. The proposed tariffs, which targeted 1,300 Chinese products, including industrial robots and telecommunications equipment, dramatically raised the stakes in Trump’s effort to punish China for alleged theft of American technology. The next day, China fired back, matching Trump dollar-for-dollar with a plan to impose import duties on $50 billion worth of American products. Among the products singled out for retaliation: soy beans, cars and airplanes. Trump immediately doubled down. On Thursday he proposed a fresh round of tariffs on an additional $100 billion in Chinese imports and promised to protect American farmers hurt by Chinese tariffs, a move sure to rile other U.S. trade partners.

The tit-for-tat among the world’s two largest economies sent global investors scurrying for cover. By Friday morning, markets the world over were in full retreat. White House officials including national economic adviser Larry Kudlow, Treasury Secretary Steven Mnuchin and White House press secretary Sarah Huckabee Sanders, took to the airwaves to offer reassurance. It didn’t work. By the end of trading, fear of an all-out trade war had knocked more than 2% off the Dow Jones Industrial Average.

Why are investors so spooked? Part of the problem was that the reassurances of Trump’s advisors weren’t particularly reassuring. Mnuchin, for example, stressed that it would take time for the announced tariffs to take effect while at the same time acknowledging “there is the potential of a trade war.” Comments by Trump himself didn’t help. “I’m not saying there won’t be a little pain,” he said Friday during an interview on WABC Radio. In fact, many of Trump’s recent comments on trade seem designed less to inspire confidence than sow confusion. Over the past two weeks, the president has declared: that “trade wars are good and easy to win“; that there is no trade war between the U.S. and China; that “we’ve already lost the trade war” with China but that defeat happened under his predecessors.

The curious thing about Friday’s selloff is that the global trade outlook rarely has much influence, positive or negative, on stock prices. As the New York Times points out, investors typically prefer to obsess about interest rates and financial risks. At times, markets also have been swayed, for better or worse, by new narratives about technology, productivity and “paradigm shifts.” The challenge for Trump—and global markets—is that, at the moment, the storylines for trade, financial risk and technology are beginning to fuse, and not in a good way. A protectionist standoff between the U.S. and China would drive up consumer prices in both economies, raising the likelihood central bankers will raise interest rates to head off inflation. U.S. technology firms would be caught in the crossfire of a trade war, darkening the outlook for a crucial sector already under attack for accelerating the dissemination of “fake news” and failing to safeguard users’ personal data.

Officials from both countries say they’ll allow two months for debate and discussion before implementing any tariffs. So for now, we’re still in the bluff and bluster phase; technically speaking, the current conflict is better described as a war of words than a trade war. We may well end up with a last-minute deal.

Still, it’s getting increasingly difficult to envision how either side will climb down. Political analyst Gordon Chang argues Trump holds the “high cards” in dealing with China on trade issues. In this essay in the Daily Beast, he predicts that in a test of wills with the U.S., China will quickly fold. But that’s a minority view. Most China analysts believe Chinese president Xi Jinping feels increasingly confident of his ability to withstand economic pressure from the U.S. and predict the Chinese leader will do almost anything to avoid domestic perceptions that he has surrendered to American bullying. Moreover, they note, Xi knows he has a host of measures at his disposal for inflicting substantial economic and political pain on Trump. None of that augers well for a negotiated settlement.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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