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.

Trade and Economy

HNA’s Hilton stake. China’s heavily indebted HNA Group plans to divest some or all of its $6.3 billion stake in Hilton. HNA, which is Hilton’s largest shareholder with a 26.1% stake, announced the impending sale on Thursday through a regulatory filing with the U.S. Securities and Exchange Commission. Reuters

To hell with Wall Street. Trump’s recent trade tariffs will force China to address the issue of forced technology transfers, and are a strong signal that “the game of continual delay is over”, according to former White House Steve Bannon. “To hell with Wall Street if they don’t like it. It’s time somebody stood up to them and Donald Trump is the perfect guy. Wall Street is always short term,” Bannon added. CNBC

Freer free ports. Global business leaders and government officials will head to Hainan this Sunday for the annual Boao Forum, widely known as the Asian version of Davos. China president Xi Jinping is expected to present “the most authoritative interpretation” on China’s 40 years of economic reforms and opening up as part of h’s keynote speech, as well as announce the establishment of free-trade ports in Chinese provinces potentially including Hainan. South China Morning Post

Technology and Innovation

Bike pairing. Meituan-Dianping, one of China’s highest-funded startups offering services from food delivery to hotel bookings, announced it was buying Tencent-backed Mobike for approximately US$3.4 billion, the largest bike-sharing deal to date. The purchase instantly makes Meituan one of the two largest bike-sharing operators, along with Alibaba-funded Ofo. This is what it might mean for the bike-sharing industry. Financial Times

AI academy. Former Google China head Li Kaifu’s Sinovation Ventures has launched a new 5-year artificial intelligence training program in partnership with China’s Ministry of Education and Peking University. Under the program, Li will work with Cornell professor John David Hopcroft to develop an AI curriculum to train at least 500 teachers and 5,000 students at top Chinese universities over the next five years. Wired

Walmart gets wired. Walmart has opened its first high-tech supermarket in partnership with Chinese online retailer JD.com. The newly launched supermarket in the southern tech hub of Shenzhen stocks products that customers can purchase with their smartphones via JD.com’s JD Daojia platform or Tencent’s WeChat messaging app. Walmart first partnered with JD.com two years ago as both companies struggled to overcome the retail dominance of Alibaba, and Walmart last week announced that it would drop Alibaba’s Alipay services in stores in favour of Tencent’s WeChat payments. Reuters

Alibaba's growing appetite. Alibaba has purchased the remaining 57% stake of China food delivery app Ele.me it doesn’t already own, bringing the app’s valuation up to $9.5b. Tech companies such as Alibaba and Tencent, which has invested billions of dollars in Meituan-Dianping, are eager to cash in on China's growing online food delivery market, which is expected to grow 18% to 241 billion yuan ($38 billion) this year. Financial Times

In Case You Missed It

There's a Real Risk That Trump's Trade War With China Won't Change Anything TIME
The Case of Hong Kong’s Missing Booksellers New York Times
A Hong Kong Newspaper on a Mission to Promote China’s Soft Power New York Times
Was Letting China Into the WTO a Mistake? Foreign Affairs
Huawei flourishes despite perennial hurdles in US Financial Times
Inside Xiaomi: The perks and perils of startups that join its ecosystem Tech in Asia
This entire Chinese village is a shrine to Xi Jinping CNN
Only men loyal to the party can now donate sperm in China South China Morning Post

Politics and Policy

By invite. Kim Jong-un’s surprise China visit last week was initiated by North Korea and not Beijing, according to official media in Pyongyang. China issued an invitation to Kim after Pyongyang suggested the visit to Xi and the Chinese Communist Party leadership, the Korean Central News Agency (KNCA) said. South China Morning Post

Trade thief. The U.S. Justice Department this week sentenced Chinese scientist Weiqiang Zhang to 10 years in a federal prison on three counts of conspiracy to steal trade secrets and interstate transportation of stolen property. Zhang was arrest last year for attempting to steal genetically engineered rice seeds from an American research facility. Reuters

Bibles banned. China’s online retailers such as Taobao, JD.com and Amazon China have scrubbed its virtual shelves of the Bible, in an apparent move by Beijing to restrict its distribution. The crackdown comes as Beijing and the Vatican are negotiating a deal on the appointment of bishops in China, which could see both parties restore ties severed in 1951. New York Times

Busted for bribery. China-born media publisher Julia Wang of South-South News has pleaded guilty to a U.S. bribery probe involving a former U.N. General Assembly president. Wang had tried to buy diplomatic posts with Antigua’s government through former deputy U.N. ambassador from the Dominican Republic Francis Lorenzo and John Ashe, a former U.N. ambassador who was also General Assembly president. Reuters

Summaries by Debbie Yong. @debyong
debbie.yong@timeinc.com

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