It's like a duel with blindfolds ...... Why the trade conflict may not get better anytime soon

ref :- " US and China's trade battle is based on false assumptions " , GLOBAL INSIGHT by Tom Mitchell, The Financial Times

The US administration has picked fights on trade issues with a lot more nations than just China .... right at this moment Canada springs to mind as talks resume today on whether it will be part of the expanded new deal with the US and Mexico. The atmosphere between Washington and Brussels is hardly the healthiest either, but the biggest battle in what is arguably now a genuine trade war (potentially the worst since the 1930s) is being fought between the two largest economies on the planet.

Its very size alone is enough to make it the single most important issue in this whole unhappy saga, and while one may still hope that Washington might be better disposed to some of its other trading partners ("allies", we used to call them), what happens between the US and China is likely to set the tone for other battles.

It's often suggested that Mr Trump's bellicose approach is just part of his negotiating strategy : asking for the moon and bringing out the heavy artillery to demonstrate your determination to get it, thus winning concessions from your opponent and being prepared to settle for something a little less than you first demanded. The problem with that strategy is that it helps to know how far you can push things without going so far that all-out warfare is inevitable. To do that, you need to understand your opponent's position. Whether the Trump administration even has any interest in understanding China's position is a moot point .... the fact is, according to Mr Mitchell, that they are misreading current situation and basing their own approach on mistaken assumptions. What's worse is that China's reading of the political situation in the States, which is guiding their own response, is equally wide of the mark.

If things carry on the way they're going at the moment, and there's no particular reason to think they won't, by the end of September punitive tariffs will have been placed on $360 billion worth of manufactured goods and services -- that's about 60% of the bilateral trade between the two countries in 2017. The prospect of things getting even worse is a distinctly uncomfortable one, and also a particularly unfortunate one if it's true that both sides are basing their gameplan on a misinterpretation of the facts.

Washington believes that they are in a much stronger position and are already winning the battle, evidenced by the slowing of the Chinese economy. "Right now, their economy looks terrible" says the President's top economic advisor Larry Kudrow. Apparently, the slowdown in investment and economic growth in China are a direct result of tariffs already imposed by the US. But this FT article argues for a different reality : it's not Mr Trump that is primarily responsible for reduced investment and growth, but China's own top presidential advisor , vice premier Liu He.

Mr Liu has persuaded the authorities in Beijing, all the way up to and including President Xi Jinping, that the biggest threat not just to the economy but to China's national security is the nation's huge mountain of debt. The way to tackle that is to de-leverage the economy by clamping down on the highly-geared and riskier activities that had become so commonplace. It's Mr Liu's perfectly sensible campaign to address that issue that has been the prime factor in slowing investment and growth .... and to keep things in proportion, a $12 trillion economy growing at 6.7% is "hardly an economy in crisis".

But China too is guilty of what could turn out to be a very costly misinterpretation: it is likely that the Republicans under Mr Trump will lose control of the House of Representatives in November's mid-term elections. At a push, they may even lose the Senate. That would mean a reining back of Mr Trump's more extreme and confrontational policies, and Mr Trump's loss of clout on the domestic political scene would deliver China from the worst of his intended trade measures.

Mmm .... they may be right in their prognosis for the US elections, but it's perfectly possible that such an outcome will cause Mr Trump to pursue even stronger trade policies rather than watering them down. It may not be reflected in the liberal democrats at the top of the modern party, but the Democratic Party (with a capital D) has a long history of protectionism. Those at the more populist end, such as a significant number of Bernie Saunders' supporters, might support the kind of strong action Mr Trump embodies as the best way to save American jobs.

Assuming for a moment that things don't go so well in November, if Mr Trump is to win the Presidential election in 2020, which is more about the individual and less about party politics than it is in many other nations, he'll need crossover support -- and even stronger tactics in trade conflict may well be the thing he uses to get it.

So there you have it .... an enormous game of "Chicken" being staged by two players with entirely the wrong understanding of their opponent. If it's true, it's a mighty worrying scenario. If it's not .... well, it's still pretty worrying.

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