By John Cassidy
The Dow Jones averages fell nearly three hundred points on Thursday, which, in itself, wasn’t a big deal. (It amounted to a fall of about 1.1 per cent.) But the dip was another indication of the increasing nervousness on Wall Street about the trade war between the Trump Administration and China. After assuming for months that the two sides would eventually reach a deal to avoid a full-scale conflict that would inflict considerable hurt on both countries, investors and analysts are now reassessing the situation.
Following the breakdown of talks between the two sides, during the past two weeks, the Trump Administration has raised tariffs on roughly two hundred billion dollars’ worth of Chinese imports and threatened to impose similar duties on another three hundred billion dollars’ worth of other goods. In another escalation, the Administration, citing national-security concerns, placed China’s leading telecommunications company, Huawei, on a blacklist that could prevent it from buying the components it relies on from American companies. The Commerce Department subsequently announced that, to avoid supply disruptions, it would give U.S. companies that do business with Huawei a ninety-day exemption. But in a possible sign of things to come, reportsemerged on Monday that Google was suspending some updates for Android phones made by Huawei.
The Chinese government has retaliated against the U.S. moves by raising its tariffs on American goods, and it has also indicated that it is preparing for a lengthy conflict. In a speech this past week, the Chinese President, Xi Jinping, said that his country must face “various difficult challenges.” On Monday, he exhorted the Chinese people to engage in a contemporary version of the “Long March”—a reference to the arduous cross-country trek that the forces of the Chinese Communist Party took, in 1934, during their prolonged and ultimately victorious conflict with the nationalists. An official at the Chinese Ministry of Commerce said on Thursday that the Chinese wouldn’t resume trade negotiations unless the United States took steps to “adjust its wrong actions,” CNBC reported.
On Wall Street, analysts have been warning that an early resolution to the dispute is unlikely and that the economic fallout could be significant. “We now think it is more likely than not that the Trump administration will move ahead with the final tranche of tariffs targeting roughly $300bn in imports from China at a 25% rate,” Lewis Alexander, the chief economist at Nomura Securities International, said in a research note. A gloomy Morgan Stanley circular warned, “If talks stall, no deal is agreed upon, and U.S. imposes 25% tariffs on the remaining U.S. $300 billion of imports from China, we see the global economy heading towards recession.”
That is a dark scenario; other analysts were more sanguine. “Our model says that an across-the-board 25% tariff on China with a limited amount of retaliation would hit US GDP by 0.5% and Chinese GDP by 0.8%, all over a three-year period,” the economics team at Goldman Sachs said. By itself, a hit of this nature wouldn’t be enough to tip the world economy into a recession. However, the analysis from Goldman warned that the reaction of the financial markets was “potentially the most important transmission channel” and also the most uncertain. Sentiment in the markets “might well deteriorate significantly if the newsflow remains negative,” it said.
The White House has said that President Trump and Xi will meet in late June at a G-20 summit in Osaka, Japan. If this meeting goes well, the two leaders could agree to restart trade talks, which were aborted after the U.S. side accused the Chinese negotiators of reneging on earlier commitments they had made, including—U.S. officials claim—a pledge to enshrine in new legislation changes to Chinese policy regarding issues like industrial subsidies and the treatment of foreign firms that do business in China. Chinese officials have accused the U.S. side of being unrealistic in its demands.
An optimistic reading of the situation is that the Trump Administration’s aggressive moves are merely negotiating ploys designed to increase its leverage in advance of the meeting in Japan, and that the President, with at least one eye on the stock market, is still keen to make a deal. During a press conference on Thursday, Trump called Huawei, which is a leader in the construction of 5G wireless networks, “very dangerous,” and he went on, “You look at what they’ve done from a security standpoint, from a military standpoint, it’s very dangerous.” This was the strongest language that Trump has used about Huawei, which is privately owned but maintains ties to the Chinese government. However, after making this statement, Trump went on to imply that the new sanctions against the Chinese firm could be reversed. “If we made a deal, I could imagine Huawei being possibly included in some form or some part of it,” he said.
But what kind of deal? An alternative reading of where things stand is that Trump and Robert Lighthizer, the U.S. Trade Representative, are now determined to force the Chinese into submission and won’t settle for anything less than a thorough overhaul of its mercantilist policies, no matter what it takes to achieve that aim. “It should now be clear that the war with China is not limited to the trade war—that it is open to other types of wars,” Ray Dalio, the founder and chief executive of Bridgewater Associates, the world’s biggest hedge fund, wrote in a newsletter to clients after the U.S. government blacklisted Huawei. “Wednesday’s actions by the Trump administration show that cutting off items that are needed by the other country (‘sanctions’) is now on the table so that we must imagine all the ways that might occur and assign them probabilities and assess their implications for companies, markets, and economies,” Dalio went on. “We also must imagine the other types of wars (e.g., capital, military, etc.) that might be brought to bear on the US-China confrontation over the near term and over the longer term.” (Yahoo Finance published Dalio’s newsletter in full.)
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