Although we do not usually comment on politics, in the past few weeks many readers and friends have asked us “How do you think this trade war will end?”
Beyond politics, on the economic front, the trade war is impacting many. Chinese investors worry about being cut off access to US capital markets; American tech companies worried about stronger Chinese competitors if they were forced to become self-reliant; many factories in my hometown in Eastern China are becoming idle – with bosses rushing to Vietnam to explore relocation.
Just as many are expecting things to get better, with US granting Huawei an extension to buy from US suppliers, things took a drastic turn on Friday, when China announced additional tariffs on US soy, automobiles and oil. Trump went on a Twitter fury the same day, and US stock markets plunged.
Today, news came out that Trump admitted ambivalence towards the whole trade war situation at G7 Summit in France.
What is happening?
We think that Trump had many chances to definitely win the trade war during the first half of the year, and he squandered all of them.
China’s economy was suffering to a great extent back then, and the country had no real, immediate alternative to weather the impact. When Chinese Vice Premier Liu He rushed to the US in May, he was surely prepared to a deal which was face-saving but probably with a lot of concessions.
“I make this trip against the pressure because we want to show our highest sincerity,” Liu said then.
That was probably the best chance for Trump to score a big win.
He did not. Instead, he dragged the trade war into an unknown abyss, hitting business confidence repeatedly along the way.
Trump probably sensed weakness from China position and wanted to score a bigger win.
“It’s the economy, Stupid”
And then, US entered election mode. During this period, the incumbent president will face enormous pressure from key (swing) states, where the economy will become the most important factor.
Soy farmers and auto workers will worry much more about their jobs than any ideology. And it is impossible that China does not sense the weakness in recent US actions, including the unilateral extension for Huawei.
The pain has already been felt in China, but moving forwards Trump will become increasingly wary as he faces pressure left, right and centre.
The time is on China’s side now – and if they are willing, Chinese leaders can score more over the next weeks, causing increasing pain to the Trump administration.
This is ruthless, but could be dangerous as well – miscalculations are not probable, but nonetheless possible.
If Trump is rational, he will have every incentive to put the economy back on track ahead of the 2020 elections, which are not that far away.
Perhaps Trump should spend some time reading Henry Kissinger’s book “On China”, in which the great US strategist shared lots of wisdom through his decades of experience dealing with China.