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September 22, 2018

Monday is T-Day in the escalating trade war between the US and China—as in T for tariffs. That’s the day when President Trump’s threat to impose duties of up to 25% on more than $200 billion in Chinese imports to the US will morph from tough-guy negotiating ploy to blunt legal reality.

The Chinese, for their part, have vowed that if those US levies are imposed, they will immediately call Trump’s bluff by slapping equivalent duties on more than $60 billion of US imports to China. Trump, anticipating that retaliation, has promised an even bigger tit-for-tat response. He’s threatened tariffs on a further $267 billion of Chinese-made goods, which would impose penalties on virtually all Chinese exports to the United States.

The bottom line: We’re about to go from a little pushing and shoving, in which tariffs affect only $50 billion of goods on each side, to an all-out slugfest in which each economy tries to hit the other with everything they’ve got. Where does it stop? Tariffs on iPhones? A permanent shift in Chinese agricultural imports? Chinese consumer boycotts on US products? The stakes are huge, and things are about to get very ugly very fast.

What’s especially scary about this confrontation is that Monday feels like a crossing of the Rubicon. Once this new round of tariffs has been imposed, it’s almost impossible to envision how either side will to step back.

In the US, China-bashing is political catnip—one of the few things on which leaders from both parties agree. As Trump girds for mid-term elections in November, he knows that taking a hard line on trade with China has little downside. True, it may risk undermining his support among US-based Fortune 500 businesses. But who cares? China-bashing is guaranteed to play well with ordinary voters as well as his conservative base.

Similarly, China’s president Xi Jinping can’t afford to be perceived as surrendering to US pressure. China’s state media has, for the last several weeks, pushed the idea that there’s no point in trying to negotiate with the US on trade because Trump’s tariffs are part of a broader “containment” strategy. Even private sector executives like Alibaba founder Jack Ma now feel compelled to parrot the party line that Trump’s tariffs aren’t about establishing a level playing field on trade but part of a wider plot to thwart China’s rise as a global power.

No wonder, then, that Beijing has scuttled plans to send Vice Premier Liu He to Washington next week for trade negotiations with US Treasury Secretary Steven Mnuchin. Xi seems to be betting that he’ll be in a stronger bargaining position in late November after Trump and the Republican Party have taken a drubbing in mid-term elections. That’s a dangerous gambit. Relations between the world’s two largest economies may yet get worse.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com
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Economy and Trade

War wages on. President Trump went ahead with another round of tariffs on Chinese goods this week, slapping a 10% levy on a $200 billion basket of imports. The fee is set to increase to 25% on January 1, 2019. China was quick to retaliate, placing fees on $60 billion of U.S. imports. China doesn't import enough from America to match each tariff tit-for-tat. Beijing filed a formal complaint against the latest tranche of tariffs with the WTO, tacking it onto a separate complaint regarding anti-dumping levies. Roberto Azevedo, director general of the WTO has pledged to mediate between the two countries. New York Times

Jack weighs in. At an investor meeting on Tuesday, Alibaba chairman Jack Ma warned that the trade war between the U.S. and China could last for 20 years. The next day, Ma walked back a promise to help create one million jobs in the U.S. Ma said Alibaba could no longer meet that pledge, which he had made after meeting with President Trump in 2016, because it rested on the premise of a "friendly U.S.-China trade partnership and rational trade relations," neither of which exist today. BBC

Up in arms. China responded strongly to sanctions placed on its military by the U.S. warning that if the sanctions weren't lifted, America "must take all the consequences." China recently purchased fighter jets and a missile system from Russia, which the U.S. says contravenes a 2017 law. NPR

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Innovation and Tech

Chip off the block. Alibaba announced it will create a subsidiary to develop semiconductors. China's reliance on foreign computer chips has become a bugbear for the nation and its companies, especially since U.S. sanctions against telecoms manufacturer ZTE brought the company's operations to a complete halt earlier in the year. Alibaba's new subsidiary, Pingtou Ge, is named after the honey badger because, like honey badgers, computer chips are small but powerful. Alibaba has invested in five semiconductor companies over the last year and aims to turn out its first AI-capable chip next year. South China Morning Post

Tuned down. Tencent Music is expected to raise $2 billion in its upcoming IPO; half the $4 billion figure that was previously rumored. Reportedly, the company will sell fewer shares than originally planned but has not changed its forecast $30 billion valuation. Financial Times

Meituan delivers. Shares of Chinese superapp Meituan shot up 7% during its first day of trading, Thursday, pushing the company's valuation to $51 billion, higher than 42 of the 50 companies included in the Hang Seng benchmark index. Shares closed 5% on the first day. South China Morning Post

Dragonfly net. Google is suppressing a memo circulated among employees that details the developments of its censored China search app. The memo reportedly shows that the project, codename Dragonfly, has advanced further than Google execs will admit. The Intercept

Huawei banned? Last week the Economic Times of India reported that Huawei, China's leading telecoms equipment manufacturer, and ZTE had been blocked from participating in the construction of India's 5G network. The ban would come on the heels of the two Chinese companies being blocked from Australia and the U.S. as well. But Huawei later responded to the report, describing it as "inaccurate" and claiming that the Indian government has been open and welcoming to Huawei. ZTE did not respond. Caixin

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In Case You Missed It

How a Hostel Dispute Became a Diplomatic Row Between China and Sweden The Local

An Algorithm is Learning to Detect Whether Patients Will Wake From a Coma Quartz

Tencent investment executive quits amid Chinese gaming industry turmoil Reuters

U.S. tech giants eye AI key to unlock China push Reuters

China's Foot-Dragging Creates ‘Reform Deficit' in Opening Markets: EU Chamber Caixin

Italy aims to be China's first G7 partner on Belt and Road SCMP

There's a song about cybersecurity from the Chinese government Abacus

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Politics and Policy

Summer Davos. The Annual Meeting of the New Champions, also known as the Summer Davos conference, convened in Tianjin this week. The World Economic Forum, which organizes both ‘Davos' events, announced it would open a Beijing office of the Center for the Fourth industrial Revolution. The center provides space for government officials, academics and businesses to devise and test policies for emerging technologies, such as AI. Wall Street Journal

Pakistani pressure. Pakistan has asked China to lighten restrictions on ethnic Muslims in Xinjiang province. It is one of the first public criticisms from a majority Muslim country over China's treatment of Xinjiang Uighur people. The Guardian

Korea compromise. China's Foreign Ministry said it strongly supports and warmly welcomes the agreements reached by North and South Korea during their historical summit in Pyongyang. In a press conference with President Moon Jae-in, Kim Jong-un pledged that international inspectors would be welcome to witness the destruction of a major nuclear test site in the North, provided that the U.S. took unspecified "corresponding measures." South China Morning Post

Forcing tech transfers. The former head of China's central bank, Zhou Xiaochuan, has said that China must close loopholes in the way it permits subsidies and forces technology transfers. Speaking at a seminar in Geneva, Zhou accepted that Chinese authorities at a state level might occasionally break rules but asserted there was no national policy of mandatory technology transfers. The comments seemed to affirm some of the complaints President Trump has made to justify imposing tariffs on Chinese imports. Reuters

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.

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