The trade war between the U.S. and China, instigated by President Donald Trump, has been roiling markets for many months. Things are now a touch calmer than they were in late 2019, thanks to a “ceasefire” hammered out in December by Trump and Xi Jinping, his Chinese counterpart. But the temporary truce will soon be tested during the next round of negotiations.
This raise an important question: If the trade war continues, who will win?
The war will continue after this brief intermission
The truce made sense to both Xi and Trump. The economic consequences of the world’s two biggest economies, which also happen to be deeply intertwined with one another (as well as with the global economy), engaging in a prolonged trade conflict could prove dire. So domestic economic weakness gave ample reason to press pause.
It bought Xi some breathing space, a vital outcome given the mounting signs that China’s economy is weakening. Manufacturing reportedly fell in China last month, adding to a myriad of indications that the Chinese economy is faltering. The government is expected to resort to more aggressive stimulus to keep growth from stalling out completely.
The U.S. economy has so far proven to be more resilient. But all is not well in the land of the free either. Something as banal as a modest interest rate hike sent markets tumbling, even sparking fears of a full-blown bear market. Likewise, the recent profit warning issued by Apple Inc. (AAPL, Financial), sent further shivers down the spines of markets. It is fairly clear that, despite the relatively strong economic indicators, the American economy is also poised in a precarious position.
The trade ceasefire did little to address the underlying grievances aired by the Trump administration. Investors should make no mistake, the trade war is far from over.
Who can win this fight?
In any conflict, there will be powerful asymmetries at work. In a trade war between the U.S. and China, this is no exception. Trump and Xi face very different domestic political realities, and their objectives are ultimately quite different.
For Trump to win, he must wring significant concessions from Beijing during the limited time left in his four-year term. It must needs be a personal victory, since the vast majority of Republican leaders detest tariffs and trade wars, while the Democrats would call restoring normal trade relations a win. Trump is embroiled in a lonely fight and, with less than two years to the next election, time represents a serious challenge.
For Xi to win, on the other hand, a restoration of the pre-conflict status quo (or giving up some tawdry concessions). There are many paths to that victory. Trump could cave (an admittedly unlikely event at this stage). More likely, a Democratic victory in 2020 would put an end to the trade war virtually overnight. Even if Trump wins reelection, the trade war would likely drag on the economy and stock market, heightening public opposition. That could force him to back down, despite his instincts.
Verdict
Reviewing the potential outcomes in light of the distinctive political and economic pressures driving the presidents (and the political establishments) of these two countries, we must conclude that China has a distinct edge at this point. That could change, of course. A sharpening economic slowdown could result in civil unrest that might threaten the inherently brittle power structure of the Chinese authoritarian state. The more labyrinthine (and often less efficient) American republic is blessed with a more supple governing structure. Even so, Americans do not like losing money in the market or paying more at the store. The average American’s tolerance for inconvenience (especially when it is in service of the state) is far lower than that of the average Chinese citizen.
The outcome of the trade war has yet to be decided. At present, China enjoys the upper-hand thanks to Trump’s diminished political capital and electoral vulnerability. So long as these conditions remain, China can probably afford to wait out the Trump storm. A major economic shock, Trump’s reelection in 2020, or other significant exogenous event could shift the balance, but for now the ball is in Beijing’s court.
Disclosure: No positions.
