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Tit-for-Tat: Trump and Xi Both Think the Other Guy is Bluffing

Most days, writing about trade is pretty boring. But on Friday, economic correspondents the world over got to don helmets and flak jackets and deploy all their favorite military metaphors in reporting President Trump’s announcement that the United States will slap a 25 percent tariff on $50 billion worth of imports from China.

China immediately hit back with penalties of the same rate on imports of high-value U.S. goods including farm products, cars and crude oil. The two lists of dueling duties will go into effect July 6, which doesn’t leave much time for negotiating a resolution.

The New York Times said Trump’s tariffs “escalated a trade war” between the world’s two largest economies. The Financial Times and Wall Street Journal agreed China’s retaliation brought the U.S. and China to the brink of a “full-scale,” “all-out” trade war.

Global investors aren’t panicking—yet. On Friday, the Dow tanked 280 points in the morning, then bounced back to close the day down just 85 points. But there are almost surely more fireworks to come.

Trump has promised he’ll retaliate to any Chinese retaliation, and threatened that the next round of tariffs will penalize $100 billion in Chinese goods. How the showdown might play out from there is anyone’s guess. China doesn’t import enough from the U.S. to match a second tariff round of that magnitude. But there are all kinds things Beijing could do to restrict U.S. investment in China and make life miserable for U.S. multinationals already operating in China. Things could get ugly fast.

Both sides seem supremely confident the other is bluffing. Trump and his aides are betting that, because China exports so much more to the US than the US exports to China, by definition Beijing stands more to lose from a protracted trade war. The White House may also be betting that business cycles in the two countries put the U.S. in a stronger bargaining position. The U.S. economy, in its second longest expansion on record, is running at close to full capacity with unemployment at its lowest level since the 1960s. Meanwhile China’s economy in recent months has shown signs of slower growth.

Xi Jinping clearly is calculating that China’s carrot-and-stick approach will prevail. Beijing’s tariffs targeting sorghum, soy beans and other agricultural exports have been designed to inflict maximum pain on the states that helped put Trump in the White House. Chinese negotiators have made clear that if the U.S. imposes tariffs on Chinese goods, China’s previous offer to dramatically ramp up purchases of U.S. farm goods is off the table. Xi also knows that Trump needs China’s help to enforce any meaningful agreement to dismantle nuclear weapons in North Korea.

The danger here is that both leaders are over-estimating the strength of their position. Keep those helmets buckled.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

Economy and Trade

Back to business. ZTE’s Hong Kong-traded stock plunged 42% after trading reopened on Wednesday, following a two-month hiatus. The embattled firm’s Shenzhen-listed stock also fell, by the permitted maximum of 10%. ZTE’s overall operating losses, due to its temporary suspension and fine, are expected to total $3 billion. Fortune

Taking a short course. Muddy Waters, a hedge fund famous for shorting Chinese companies, has a new target: TAL Education Group. The fund published a report on Wednesday that claimed TAL had been overstating profits since at least 2016. Shares in TAL fell 8% on the NYSE after the report was released. Financial Times

Big but slow.  Multiple economic measures showed decreased rates of growth for May, with many key indicators hitting their slowest growth rate in years. Year on year growth for fixed-asset investment was 6.1% in the first five months, its lowest level since 1998. Some economists described the performance as “shockingly weak”. South China Morning Post

Innovation and Tech

Chipped windscreen. China is developing a system for tracking cars. Starting July 1, when an owner registers their vehicle, a radio-frequency chip will be implanted in the windscreen. Roadside sensors will pick up the chip’s signal and transfer data to the Ministry of Public Security. Installation of the chip will be voluntary at first but will become mandatory by 2019. Wall Street Journal

Foxconn folly. Following a report from China Labor Watch, Amazon confirmed that thousands of workers had been illegally hired and unfairly paid. The workers are hired by manufacturer Foxconn. Amazon said it had conducted its own labor investigation in March and had flagged the same issues raised by China Labor Watch’s recent report. The Guardian

Electric Avenue. China is testing out “solar highways”, replacing asphalt with solar panels on a route frequented by heavy logging trucks. Although currently more expensive than asphalt, the durability of solar highways would save costs on maintenance, not to mention the obvious benefit of generating electricity. The New York Times

Inflight intrusion. Chinese flight information app Umetrip has courted controversy with its latest feature that allows passengers to view the personal details of those sitting around them. In the app’s “virtual cabin”, users can select a seat, view the particulars of the person sitting there and even send them a direct message. Sixth Tone

In Case You Missed It

ZTE’s Near-Collapse May Be China’s Sputnik Moment The New York Times

China’s Giant Radar Is a Defense System Masquerading as Science Popular Mechanics

Vietnamese Protest an Opening for Chinese Territorial Interests The New York Times

China’s Master Plan: Exporting an Ideology Bloomberg News

China’s “Kingdom of Women” BBC

Politics and Policy

Met, with competition. Last weekend, as the G7 summit ended in turmoil, Chinese state media praised the successful conclusion of the Shanghai Cooperation Organization summit. The SCO is a China-led security bloc of Asian nations. State media claimed that its contrast to the G7’s tumult marked “an important change”. Reuters

Pension plan. The central government plans to pull funds from province-level pension schemes and reroute them to poorer, rural areas. In 2017 there was a national pension surplus of Rmb4.1 trillion, meaning the funds had collected more than they had remitted. Two-thirds of the surplus was in just seven provincial areas. Caixin Global

Mekong money. Thailand is proposing to its neighbors that they form a new fund to counter China’s Belt and Road Initiative. The fund, aimed at decreasing dependence on China, will be used to back infrastructure and development projects in Thailand, Myanmar, Laos, Cambodia and Vietnam. The fund is expected to start operation next year.  Nikkei Asian Review

What’s in a name? America opened its new de facto embassy in Taipei, the capital of Taiwan. The One China Policy prevents states from having official embassies in both China and Taiwan, so the new complex is officially called the American Institute in Taiwan. The opening ceremony was attended by US officials, prompting China to lodge a formal complaint. CNN

This edition of CEO Daily was edited by Eamon Barrett.

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