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The Week Trump and Xi Learned to Stop Worrying and Love the Trade War—CEO Daily

Last Saturday in this space I cited a Bloomberg headline noting that, in the week prior, U.S.-China trade tensions had morphed "from uncomfortable to scary." In the week since we have proceeded at warp speed to a new risk threshold. Call this the shift "from scary to Strangelovian."

Dr. Strangelove, of course, was the protagonist of Stanley Kubrick's dark Cold War satire, How I Learned to Stop Worrying and Love the Bomb. In threatening this week to expand the trade war into a currency war, President Trump and Chinese leader Xi Jinping, too, are toying with weapons of mutual assured destruction.

Tensions ramped up on Monday, four days after Donald Trump took to Twitter to threaten a 10% tariff on an additional $300 billion of Chinese imports. Beijing struck back by ordering state-owned companies to suspend imports of US farm products, and allowing China's currency, the renminbi, to sink below the psychologically significant level of 7 yuan-to-the-dollar. Trump responded by directing his treasury secretary, Steven Mnuchin, to formally declare China a "currency manipulator"—inviting a barrage of indignant criticism from Beijing.

On Thursday, the president took to Twitter to goad Federal Reserve chairman Jerome Powell into retaliating against China by weakening the dollar. “One would think that I would be thrilled with our very strong dollar. I am not!” Trump declared. “The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers” to compete." Later the White House seemed to backpedal a bit and talk up the dollar.

But by Friday Trump was roiling markets again, this time by boasting that it would be "fine" with him if the next round of U.S.-China trade talks, scheduled for September, is cancelled.

What's insane about all this is that further tariffs and especially competitive currency devaluations won't benefit either economy. The risks for China, already suffering from its slowest growth in 27 years, are particularly acute. As the Financial Times explains here, a weaker yuan might help boost Chinese exports a tad by making them cheaper in dollar terms. But the downsides of devaluation are that it will: encourage capital flight (a huge problem in China); put more pressure on Chinese property developers and other companies struggling to repay dollar-denominated debts; and undo Beijing's efforts to shift away from exports in favor of domestic consumption as the driver of economic growth.

And any benefit devaluation might confer to China's exporters would be more than offset by the increased cost of Chinese imports, especially in the two biggest product categories: semiconductors and oil. China already is grappling with record high food prices driven in part by a raging epidemic of African swine flu.

Devaluing the dollar would increase prices for American consumers in much the same way. As former Treasury secretary Larry Summers observed in an interview on CNBC, "no nation can devalue its way to prosperity."

Trump has famously declared that "trade wars are good and easy to win." The reality is that trade wars, much like shooting wars, are dangerous and unpredictable—and in both the U.S. and China, the cost of allowing the conflict to escalate and expand will be disproportionately born by those who can least afford it.

Clay Chandler
– Clay.Chandler@fortune.com
– @ClayChandler

Economy and Trade

Economists declare “war.” 87% of economists polled in an August survey by the Wall Street Journal said that the U.S. is in a “trade war” with China. A survey of the same group a year ago found responds evenly split between those who said “trade war” was appropriate and those preferring other terminology such as “trade skirmish,” “trade tensions,” or “trade battles.” The survey was conducted in the wake of Donald Trump’s Aug. 1 announcement that the U.S. will impose 10% tariffs on an additional $300 billion in Chinese imports. Wall Street Journal

License limbo. The U.S. has delayed a decision on whether to allow U.S. companies to resume doing business with Huawei Technologies, the Chinese telecommunications giant. The delay follows Beijing’s Aug. 6 suspension of  U.S. agricultural imports, which itself was a reaction to President Trump’s declaration of new tariffs on imports from China. Huawei is a mammoth client to American companies like Qualcomm, Intel, and Broadcom, all of whom sent their chief executives to the White House last month to ask for licenses to resume dealings with the company. Bloomberg  

Rebound? Chinese exports rose 3.3% in July in a bounce back from June’s 1.3% decline, thanks to larger shipments to China’s top two trading partners, Europe and Southeast Asia. But most economists concur that the increase will be short-lived, and predict a downward trend in the next few months as the effects of the US-China trade war start to make themselves seen. Wall Street Journal 

Pricey pork. Data released Friday showed mixed shares for Asia Pacific, with Japan’s economy growing more than expected and mainland Chinese stocks dipping lower, backtracking on earlier gains. Chinese data also showed a 9.1% surge in food prices, reflecting the toll of swine fever on the country’s pork. The People’s Bank of China fixed the yuan’s midpoint at 7.0136 against the dollar. CNBC

Innovation and Tech

There’s a new OS in town. Huawei, the world’s second largest smartphone vendor, is launching its own operating system. Richard Yu, CEO of Huawei’s consumer division, unveiled HarmonyOS, at the Huawei Developer Conference on Friday in Dongguan, China. Harmony will be rolled out for use in “smart screen products” like televisions in a few months, with expansion into wearables and other devices over the next three years. The announcement comes after the tech giant’s April announcement that it was developing its own OS in case trade tensions with the United States disrupted access to Google’s Android OS. South China Morning Post

Brain drain. China has set its sights on transforming into a hub of innovation and research for artificial intelligence. Although it’s succeeded in expanding AI-focused undergraduate programs, and the number of research papers authored by China-educated scientists have risen, the plan has hit a snag in postgraduate retention rates. Only one in four researchers work within China, and most of the rest work for American companies like Google and IBM or in American universities like UCLA. MIT Technology Review

No one is immune. China’s tech sector proved itself another casualty of trade war uncertainty as stocks in telecommunications company ZTE dropped almost 8% on Friday, and social media and gaming company Tencent dropped 0.7%, despite receiving approval from regulators to sell two new games in China, in what should have been a boost to stock prices. CNN

 

In Case You Missed It

Trump’s Trade War is Breeding Patriots in China New York Times 

Mexico is Finally the US’s Number-One Trading Partner Quartz

NBA 2K League, Tencent Team up to Bring the Phenomenon of e-Sports Basketball to China Fortune 

China’s AI Chip Startups – How Many Will Survive? TechNode 

Malaysia Charges Goldman Directors Over 1MDB Scandal Wall Street Journal

The Other Amazons: E-commerce is Booming in the Developing World Axios 

Politics and Policy

Do you hear the people sing? Hong Kong is entering its tenth week of demonstrations, and shows no signs of letting up. Roughly a thousand black-shirted protestors staged a peaceful sit-in at Hong Kong International Airport on Friday evening, distributing flyers to bemused travelers and chanting an iconic song from the musical Les Miserables. Citywide rallies are planned for this weekend. Reuters

Swapping insults. The U.S. State Department condemned China as a “thuggish regime” for leaking the identity of an American diplomat who met with anti-government protestors in Hong Kong. China’s CCTV called the diplomat “a behind the scenes black hand creating chaos in Hong Kong” while a State Department spokeswoman said of China, “This is not how a responsible nation would behave.” CNN

Oil change. Sinovensa, a joint venture between Venezuelan and Chinese state-owned oil companies, is expanding to boost output to 165,000 barrels a day to sell in Asian markets. Venezuelan President Nicolas Maduro thanked China for “all of this effort and all of this cooperation” in a televised broadcast on Thursday. Since Trump administration sanctions have shut Venezuelan oil from the U.S. market, the country is increasingly sending its product to Asia. Reuters

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