The US – China trade dispute is right now the biggest risk factor weighing on global financial markets. The key question right now is what is our call on how this dispute will play out.
We will examine geopolitics, negotiation, finance and wrestling in order to arrive at what I think is the most likely outcome.
To understand this dispute, there is one existential question that needs to be answered: Is this actually a trade dispute in the first place?
This may sound obvious to the untrained, but it actually there is more than meets the eye.
Initially, this dispute started when President Donald Trump imposed a 25% tariff on imported steel and a 10% tariff on imported aluminium. Those tariffs are expected to kick in next Tuesday on July 03, 2018.
However, things got really interesting when the Trump changed his negotiation position and threatened to impose tariffs on Chinese technology exports as well as impose export restrictions on US high technology exports to China. This is where it gets interesting as the agenda is to throttle China’s made in 2025 ambition to be a leading technology player. The idea is that by then China will be able to challenge US pre-eminence in the tech space. This comes on the heels of a statement by the Defense Department labelling China as a “strategic competitor.”
This reveals to me that Trump is not just thinking about trade but about achieving geopolitical aims as well. And the recent upheaval in China’s capital markets have just given him the perfect ammunition to essentially declare an economic war on China.
Now, on the converse point of view, there is the US Stock Market whose frequent gyrations can cause a political reaction. For example, the Dow Jones is currently at 24,000 and the Nasdaq is currently above 7,400.
Everytime there is a selloff in the markets, and I mean a 500 point sell off, Whitehouse officials appear in front of CNBC.
Furthermore, this is the midterm election year. The last thing Republicans need is the stock market collapsing by 2,000 – 3,000 points. That may leads some to believe that Trump actually wants a deal with China and all of this is part of the “Trumpian” negotiation style.
To answer this, we have to dive into a key formative part of the Trump psychology which takes its roots from the feuds prevalent in the rough and tumble world of wrestling. Remember, Trump’s early foray into media was on the World Wrestling Entertainment (“WWE”) circuit. It was here when Trump was exposed into the “art of the feud.”
To blend this together is to recognise that Trump has no actual strategy or end game in this dispute. Tun Mahathir gave the most apt description when he called a Trump a person who changes his mind everyday. What matters is which deal appeals to his ego.
Lets put this way. The US has made an unreasonable demand on China, similar to what Commodore Matthew Perry had attempted to do when he appeared in Tokyo Bay in July 1853. The Trump negotiation position is akin to the United States dictating Chinese Economic policy, something no world leader, let alone a leader of a nuclear superpower will ever agree.
However, at the same time, the Chinese negotiators are trying to figure out what is that Trump wants. They have probably figured out by now that Trump really has no end game in mind but he will double down and make even more unreasonable demands if China shows any sign of fear.
The US could very well afford to have China endure a severe recession as its banks are relatively well capitalised, (or that is what they think).
But China is not playing from a position of strength. The last point deserves some explanation.
China’s banking system is a $40 trillion Ponzi scheme. The actual Non Performing Loans in the banking system are high – nobody actually knows because these loans get refinanced without any real recovery in the asset. For the non-zombie loans, there is the concentration to the property sector ,share market and manufacturing. At the same time apart from banking loans, there are corporate bonds, with a sizeable foreign exchange exposure . All these sectors will be hammered if the US declares an outright trade war with China.
That means, China could even enter a 1998 style recession, which could take the entire region down the Asian Financial crisis. Trump’s current battleplan more or less has the entire elements to effect this strategy.
This leads me to believe that what Trump wants is a “deal when he sees it.”
Which leads me to believe the following course of events
- Tariffs will go into effect next week on Steel products. China will respond with tariffs of like.
- Trump will then double down and impose tariffs on technology products. China will respond likewise.
- Trump will then triple down and impose tariffs on all of China’s imports to the United States. China will respond and restrict US businesses in China.
- The Dow Jones will probably tumble 2,000 points to about 21,500. China will be on the verge of a financial meltdown.
Then there will be a deal