"Blow For Blow" US-China Trade Spat Expected To Become "War Of Attrition"

By Tyler Durden  /  ZeroHedge

Every investor and fund on Wall Street is trying to discern where the blossoming trade dispute between the US and China will go next now that the first punches have finally been thrown. The US has already threatened to issue another “tit” for China’s “tat”, which China announced on Friday by unveiling a slate of tariffs to be unveiled in two stages, not unlike the US tariff rollout. So, while we await the Trump administration’s next salvo, Bloomberg is reporting that most analysts are expecting the battle to be “a war of attrition” - meaning things will get much worse before they get better.

Analysts increasingly expect the confrontation to be a war of attrition. While China has shown a willingness to make a deal on shrinking its trade surplus with the U.S., it has made clear it won’t bow to demands to abandon its industrial policy aimed at dominating the technology of the future.

“The Chinese view this as an exercise in self-flagellation, meaning that the country that wins a trade war is the country that can endure most pain,” said Andrew Polk, co-founder of research firm Trivium China in Beijing. China “thinks it can outlast the U.S. They don’t have to worry about an election in November, let alone two years from now.”

Contrary to what the “analysts” have decided, it’s equally likely that the Trump Administration knows Xi Jinping would never cave and scale back the state-mandated “Made in China 2025″ initiative, and is hoping instead to use this demand as a tool to coax the Chinese into delivering a larger trade-deficit reduction…unless we misunderstand the precepts of Game Theory.

Whatever their expectations, it appears politicians, analysts and the media have united in their insistence that whatever is happening right now between the world’s two largest economies is ”not a trade war”. We are only ever “approaching” a trade war…because admitting that one has already arrived would seriously spook the market.

The two nations moved to the brink of a trade war on Friday after the Trump administration announced new tariffs on imports would take effect from July 6. A 25 percent tariff will be imposed on $34 billion in goods imports, with further duties on another $16 billion in imports under consideration. In response, China said it would charge tariffs of the “same scale and intensity” on goods from the U.S., adding that all trade commitments made during the previous weeks of negotiations are now off the table.

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“We could be dangerously approaching such a trade war,” Jack Reed, the ranking Democrat on the Senate Armed Services Committee, told Fox News Sunday.

Bloomberg also pointed out this morning that China’s “arsenal of potential retaliatory measures” to the US’s trade tactics is wider than the US’s. As stated above, Chinese politicians don’t need to worry about elections, and the Chinese people are largely united in their support of China beating back what they consider American aggression.

Aside from slapping tariffs on American products, China’s arsenal of potential retaliatory measures is formidable, and it could inflict heavy punishment on the more than $200 billion of investment by American companies in China. Increased safety inspections and delays in approving imports are possible tools, as is consumer boycotts of American goods sold in China’s rapidly growing retail market, or stemming a flow of free-spending tourists to the U.S.

China’s punishment of South Korea for allowing the U.S. to station a missile defense system on the peninsula cost that nation billions of dollars, and it has used similar tactics against the Philippines and Japan as well. China also has a pivotal role in Trump’s goal of disarming North Korea because without its participation, sanctions have little chance of success.

“We have very legitimate reasons to be concerned about China’s trade practices,” Susan Rice, former national security adviser to President Barack Obama, told CNN’s Fareed Zakaria GPS on Sunday. “But the way to resolve this is not at the expense of American workers and manufacturers and farmers, by getting into a trade war that has potential, real global ramifications.”

And, as we noted over the weekend, Chinese officials haven’t been shy about warning US corporations about the potential consequences of a trade war if the administration continues to ignore pleas from the business community. In addition to all of the tactics cited above, China could also follow Russia’s lead and sell a large chunk of its Treasury holdings.

In a longer-term, worst-case scenario, there also are actions such as selling down its massive stockpile of U.S. treasuries or devaluing the yuan, moves that would send shock waves through global markets.

But one factor that could complicate this trade “skirmish” (or whatever you want to call it) is the fact that, as one analyst who spoke with Bloomberg pointed out, the US’s aggressive trade policies are part of a larger “technology arms race” with China as the two countries compete on building better AI and more advanced communications technology (the race for 5G is probably the best example). 

Trade is just a way to contain China from moving up the technology ladder, according to Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. Trump’s ‘America First’ policy is against every nation, but it includes a tech arms race against China, and China will respond by trying to build ties with other nations, and buying technology from wherever it can, she said.

And when the issue is framed this way, it’s much easier to imagine it spiraling out of control into a second cold war…or possibly even a military conflict. Because while analysts have fixated on the trade dispute “tit for tat”, a much more alarming military “tit for tat” is unfolding over the South China Sea, as China and the US trade military exercises and provocative “freedom of navigation” operations. China recently carried out a live-fire anti-aircraft drill over the disputed area using dummy “target drones”.

https://www.zerohedge.com/news/2018-06-18/blow-blow-us-china-trade-spat-expected-become-war-attrition

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