Think the China-US trade war will take days to fix? Think again

Ideas

Think the China-US trade war will take days to fix? Think again

It was always ridiculous to expect it to be wrapped up quickly - here are are the three reasons for that

Matthew Lynn


A deal could be reached by the end of this month. A signing summit between President Trump and China’s Xi Jinping had been pencilled in for the end of June.
It was widely assumed the simmering trade war between the two most crucial players in the global economy, the US and China, was close to a resolution. So when the US president announced a dramatic escalation in the conflict it was no great surprise markets were rocked.
The Shanghai index witnessed its steepest fall in two years and markets around the world followed it down. On Sunday, Trump delivered a stinging rise in tariffs on Chinese goods into the US, taking the levy up from 10% to 25% on more than $200bn (£153bn) of imports.
When he first announced the escalation on Sunday night – typically in a late-night tweet, with lots of exclamation marks – the market response was brutal.
The Shanghai Composite index was down 6% over a few hours of frenetic trading, its worst performance in two years, and emerging-market currencies around the world took a beating. There has been a modest recovery since but the mood among investors remains fragile and could easily crack any day.
Of course, it is possible that a quick settlement might be reached. The new tariffs will only be applied on goods leaving China from Friday lunchtime and since it usually takes a month to cross the Pacific they could have been lifted by the time anything reaches US ports. Even so, hopes that a trade deal would be struck this month have been dashed. Is that a disaster? Not really. In fact, the markets need to learn to live with this.
The US-China trade war is going to take years – perhaps decades – to fix. It was always ridiculous to expect it to be wrapped up quickly. There are three reasons for that:
It’s working for him
First, with a buoyant economy and with the Democratic Party veering off to the extreme Left, Trump is very likely to be re-elected next year. Unemployment at 3.6% is its lowest in 50 years, the stock market is close to record highs, real incomes are growing and interest rates remain at near-record lows. With that backdrop, it is no great surprise Trump has an approval rating of 45% on an average of recent polls and is back to the level when he moved into the White House.
As a general rule, it takes a recession to evict US presidents. Despite calls for impeachment, and scandals over his personal life, the economy is working for him. There is little incentive to change strategy now.
Tariffs and blue collars
Next, tariffs may be having an impact. Sure, the cost is mainly paid by US companies and consumers. But the trade deficit is coming down.
March, the latest month for which data is available, showed China’s share of total US imports down to 15%, from a peak of 23%, and at an eight-year low according to research from ABN Amro (Europe, including the UK, has benefited most from making up the difference).
Tariffs may not work in the textbooks. But if they can restore some vigour to blue-collar America, they are going to be popular.
A haggle is not a war
Finally, many of the gambits in this conflict are purely negotiating tactics. Trump is not nearly as good at working out a deal as he likes to claim – his business career has been mixed, to put it politely – but he is not completely hopeless either.
In truth, any US president in 2019 would be rattling sabres with the Chinese as the two biggest powers try to work out a way of living together. There are going to be bluffs, walkouts, threats, cancelled deals, bans on technology and blocked takeovers, because that is all part of the haggling to reach an agreement.
It might look bad on the surface but it doesn’t always mean a full-blown trade war. There is no point in investors reacting to every twist and turn in the drama with a sudden rise or collapse in the market.
China and the US are engaged in a long battle for dominance of the 21st century economy. That isn’t going to be resolved this month, not this year and probably not even in this decade. It will carry on to the end of this president’s term and perhaps well in to the next one. Like the Cold War, it will ebb and flow and it will drag down equity prices every time it flares up. One day it will be settled. Simple demographics mean China will likely be the ultimate winner.
– © Telegraph Media Group Limited (2019)

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