China, US Trade War a duel of brains and brawn
Article 5 minute read

China, US Trade War a duel of brains and brawn

11 January 2019

You want to avert your eyes, but you can’t. China and America are the main event. The world’s two largest economies battling for supremacy.

In England, Germany and some other parts of the world, there’s an unusual sport where competitors face off in alternating rounds of chess and boxing. Getting checkmated is the same thing as getting knocked out.

I find chessboxing, a combination of brains and brawn, analogous to the trade war between China and the United States. The Trump Administration has resorted to naked hardball tactics to gain the upper hand. President Trump has also engaged in psychological warfare with taunts and insults on Twitter that some might call hitting below the belt.

China counterpunched with its own trade barriers, but in a more strategic way. It hit America in the midsection by imposing tariffs on soybeans, the nation’s largest agricultural export, and has been meeting most of its demand by sourcing from different trade partners. U.S. soybean prices have tumbled, hitting farmers directly in the pocketbook. These are the same rural areas in the Midwest that helped Trump get elected.

The trade war has made markets cringe. You want to avert your eyes, but you can’t. China and America are the main event. The world’s two largest economies battling for supremacy. The confrontations between the U.S. and Mexico and the U.S. and Canada were just the preliminaries, and the NAFTA redo is considered by most as a draw on points. 

In the nearly yearlong trade dispute, the first signs of a thaw emerged at the Group of 20 summit in Buenos Aires when the two countries called a temporary truce. They’ve given themselves 90 days to negotiate a new trade framework.

Some are skeptical that a deal can be reached in three months. The problem is there’s very little trust on either side. Trump keeps egging on the Chinese. He boasted after the G-20 that the Chinese has made commitments to resume buying soybeans and other goods. But Chinese officials have been notably quiet, and details about what was agreed to in Argentina have been sparse. 

Chinese Xi Jinping wants to come to the table because there are no winners in a trade war. The Chinese economy also is showing signs of slowing down. The export machine that has transformed the Chinese economy in the last 20 years has to keep humming. But the U.S. keeps punching. 

The latest jab: Canada’s arrest of a senior executive of China’s Huawei Technologies Co. at the request of the U.S. The U.S. has alleged that the telecommunications giant, one of China’s biggest companies, improperly took payments from Iran in violation of sanctions against the country. The executive, Meng Wanzhou, is the daughter of Huawei’s founder.

The Chinese are tough competitors, and they don’t always play by the rules. China has long been accused of unfair trade practices, including stealing intellectual property through joint ventures, counterfeiting goods and outright theft through cyberespionage. Former president Barack Obama even presented Jinping with top-secret evidence of state-sponsored hacking. 

But Obama chose a different strategy to deal with his rival. He chose to participate in a broad trade agreement that included several of China’s neighbors, such as Japan, Malaysia, Singapore and Vietnam. The idea was to fight strength with strength – and friends.

But one of the first things Trump did after he was elected was withdraw from the proposed Trans-Pacific Partnership Agreement. He has continued down this path of isolationism by imposing tariffs on steel and aluminum imported from Canada and Mexico and threatening to withdraw from the North American Free Trade Agreement. For 150 years, Canada has been America’s most steadfast ally, as Prime Minister Justin Trudeau reminded everyone. It has fought with America in the Vietnam, Afghanistan and Iraq wars.

Keeping your political and economic allies close when negotiating with a rival is desirable.  The world economy is highly interconnected. It’s the height of arrogance to think you can go it alone. Historically, multi-front wars have not turned out well for the standalone, aggressive player.

To be sure, Trump’s unpredictable behavior can be seen as an asset throughout this dispute. Tariffs were an unpopular choice to use against China. Many in his own party warned him against tariffs because they could hurt his voting base and the economy. It remains to be seen what impact the trade war will have on economic growth. Fortunately for Trump, low unemployment and a strong domestic economy provide him some breathing space for continuing his tough stance on trade with China.

His hardline tactics have gotten China’s attention. Since the Argentina summit, China appears to be moving to address U.S. concerns, including reducing auto tariffs. Trump also may be more motivated to strike a deal with the recent sell-off on Wall Street wiping out the year’s gains. He also needs keep in mind the possible consequences of long-term frictions with China. This could lead to permanent shifts in global trade. For example, China is buying most of its soybeans this year from Brazil and Argentina, a sign of its growing trade relationships in Latin America. Why would they shift purchasing again to the U.S. if they can fulfill their needs from other countries at the same quality and price?

It’s unclear what outcomes Trump seeks. For example, if China relaxes requirements about technology transfers in joint ventures, U.S. companies might be encouraged to invest more there. More investment in China could jeopardize jobs in the U.S.

The uncertainty over how the trade war will play out is clouding the capability of businesses that operate in China to confidently map out their next moves. They are spectators as these two combatants duel. But unlike chess or boxing, trade is not a zero-sum game. Let’s hope the rivals keep that in mind.

This article originally appeared on CFO.com 

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Written by

Jason Gerlis

Sub-Regional Director
Jason

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