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Asia
Trump May Have Overplayed His Hand on China Trade War
What Happened
Faced with tumultuous equity and bond markets, Donald Trump walked back the global ‘Liberation Day’ tariffs for a 90-day pause. There was one notable exception – China – for which the tariffs were not only kept in place but increased. Beijing has responded in kind, and as it stood going into the weekend, Washington had levied a tariff of 145% on China exports, and Beijing a tariff of 125%. Then, on Saturday, Trump announced an exception on smartphones, computers, semiconductors, and other technical components, though he subsequently noted that these items are still subject to the 20% fentanyl tariffs (imposed in February), and that they may be raised once again in the months ahead.
While this latest exception will come as a lifeline to China-heavy producers like Apple, the fact remains that the US-China trading relationship is effectively grinding to a halt.
Why It Matters
This iteration of the US-China trade war is wholly different from the 2018 iteration, which saw lower tariffs that were targeted at certain sectors (for example, a ‘steep’ 30% tariff on solar panels). 2018 can be thought of as seeking an adjustment in trade relations; these latest tariffs on the other hand, if sustained, will topple one of the central pillars of the post-Cold War economic order. Here’s what to monitor in the weeks ahead:
- Market Turmoil Isn’t Over: The question of what the markets will bear with regard to US-China trade tensions will be answered in the days ahead, but early indications are not entirely positive. US Treasury Yields remain elevated, suggesting an ongoing selloff of US debt; the greenback is in free-fall, rattling investor confidence in US assets; consumer confidence is lower than at any time since the early 1980s; and these macroeconomic convulsions are beginning to be felt at the grassroots level in spiking mortgage rates.
- Will China Blink? Mounting domestic economic pressures suggest less negotiating leverage on the US side than is typically assumed. This is not to say that the China economy doesn’t have its own problems; they have been covered extensively here and elsewhere (one new twist is that the trade war could accelerate a Japan-like deflationary malaise as US-bound goods are diverted to the domestic market). But these are two very different political contexts, and China’s authoritarian model, lived memory, and information control could give it an edge when it comes to 吃苦 (enduring hardship), speak nothing of the propaganda tailwinds emanating from Washington (a bullying attitude toward ‘peasants’) and the fact that the Trump administration has alienated many of the allies that would have otherwise been useful in isolating China. This is all to say that it appears unlikely that China will blink first. Thus the question becomes: What kind of economic carnage will be needed for the Trump administration to back down, far more dependent as it is on the public perceptions and ground-level economic realities of US citizens?
