While logic says it is not in anyone’s interest to escalate a U.S,-China trade war as both sides suffer, it may come down to which side is willing to absorb the short-term pain to achieve a long term goal.
Conventional wisdom, or at least the Trump administration perspective, is that China will suffer more and will therefore be more willing to negotiate on U.S. terms.
What happens if China takes the long-term view?
One school of thought is if China waits it out and Trump loses in 2020, a Democrat president would be less likely to take a hardline in trade negotiations. One can assume this has been discussed in Beijing as trade talks have dragged on for more than a year, putting the next U.S. presidential election closer on the radar. .
What happens if China takes it a step further and meddles in the election?
Assuming China sees it in its interest that Trump loses in 2020, it could meddle in the election but not in the way you would think. It could take the view that if it forces Trump to levy tariffs on the remaining $300+ billion in imports from China it would hurt his chance of being re-elected.
The rationale would be that despite events that would derail any other president, Trump has been cushioned by a strong economy and buoyant equity markets. Should the cumulative effects of tariffs impact the U.S. economy and thus U.S. stocks, it would then undercut Trump’s support and hurt his chance of being re-elected.
Despite Trump’s claim that China is paying for the tariffs, it is U.S. corporations that pay the bill and in turn, pass it on to U.S. consumers. So in effect it is like a tax on U.S. consumers who pay more for goods made in China.
Under this scenario it is like a high stakes game of election meddling where China is willing to absorb the short pain to achieve long-term gains by hurting Trump’s chance for a second term. The Chinese view was expressed in the following:
An editorial in Monday’s China’s Global Times entitled, US’ maximum pressure policy is useless,stated that “the perception that China cannot bear it is a fantasy and misjudgment…., nothing is unbearable for China in order to safeguard its sovereignty and dignity as well as the long-term development rights of the Chinese people. “
I am not saying this is what will happen but keep an eye on the forex market and whether China forces Trump’s hand to levy further tariffs. Then watch the CNY to see if China tries to offset the economic drag by weakening its currency further. In addition keep an eye on currencies such as the AUDUSD, USDKRW and USDSGD as signs of trade tensions escalating and/or sentiment over whether they might be an agreement. .
To sum up, while logic says it is both sides interest to come to a trade agreement, if China digs in its heels it may be a sign that it is taking a longer-term view and meddling in a way that goes beyond just fake news on social media.
Jay Meisler, co-founder
Founder The Amazing Trader