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China Gets the Upper Hand in Trade War with the U.S.

May 25, 2018

 

Despite the powerful trade disputes that put China in a vulnerable position, Beijing has played their hand far better than the United States. Last weekend, the U.S. agreed to temporarily suspend tariffs up to $150 billion in Chinese imports. The strategic play by President Donald Trump has economic, political and strategic logic that his confrontations with Canada, Western Europe and Japan lack. However, China still appears to have a stronger hand as it successfully escaped the bulk of U.S. tariffs while giving up almost nothing of substance. With the temporary pause in the trade war, China agreed to buy more energy and agricultural products. This is not a disadvantage for the leading nation because buying more commodities from the U.S. will likely just redirect some sales that would have happened anyways.

 

China has successfully dodged a bullet by shrewdly exploiting President Trump’s weak points like his low threshold for political pain and his hopes for a breakthrough with North Korea, a Chinese client. The promised amount of purchases from the U.S. might successfully trim its trade surplus with the U.S., but tariffs of up to $150 billion is a bit too high.

 

U.S. officials say, “If we don’t get what we want, the president can always put tariffs back on.” The U.S. Treasury is finding ways to restrict Chinese investments in the U.S. while China has said it would allow foreign car manufacturing companies to take on their manufacturing needs moving forward. However, China has found subtle ways to promote its domestic champions over foreign rivals. The problem for the U.S. is that China has been buying more of the products that it needed to buy no matter the case.

 

Though the U.S. depends much less on exports to China than the reverse, China targeted farm exports from Republican states important to the outcome of midterm elections. This could be one reason why officials have prioritized avoiding Chinese retaliation. President Trump still claims that the actions taken against China in a trade war might “entail a little pain”, but the current conditions with China and the U.S. beg to differ. The important question for investors is whether China will be able to hold up against the highly disputed trade war with the United States or give in like other developing nations.

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