Interesting analysis but I doubt China will be so willing "acknowledge US supremacy in the trade war conflict" as you predict. The Chinese government will be wary of appearing weak in the eyes of its own people in a conflict with the US. My guess is that the Chinese will be happy to stretch the game out past the November mid-term elections in the US to gage the ramifications on the Trump presidency. I believe the stand off can only be resolved by significant concessions on both sides so as neither leader will be seen to lose face in their own country. Interesting times ahead.
I agree with Alan.
Not sure how you jumped to the conclusion of 'relative state of disadvantage' on China? What's the logic behind it? Just because China exports more? Why would it be a disadvantage when considering if Trump for example imposes 25% on all the $500Bln of goods that China exports to USA, which equals US$125Bln just on tariffs alone, and the entirety of the imports from USA is US$129Bln which is comparable in size to the tariffs? China is determined to rise in global influence, and provided the measures will not cause an overturn of the Communist Party, China will do whatever it takes to win this trade war. Trump needs to back down, not China, because he was the one to instigate the trade wars. Happy Nash equilibrium can remain just a theory - it won't work in this trade spat between China and USA. Not sure also about your comments on EU trade with China. USA may be perceived as 'no longer a strong ally' by EU because Trump is also waging trade wars against EU nations. https://www.cnbc.com/2018/08/30/trump-rejects-eu-offer-to... So, EU may eventually join hands with China, China with Russia, China with India. At the end of the day, USA will isolate itself from the rest of the world as it seeks to win trade wars at all costs.
After 15 years working and living in Asia, I have repeatedly seen the Chinese Govt is worried mostly about one thing only. A popular uprising of the people. Control of the population is it’s no1 priority. If the person on the street, starts to suffer or is at risk of suffering, the Govt will act. The increasing volume of the criticisms of the US actions, is evidence the threatened US tariffs are seen as a very real risk to internal stability. It’s also clear from the numbers they will lose this battle, which is why they are loudly and vocally threatening ( when weak act strong, “Sun Tzu”) , but they will unlikely fight a battle that is already lost. “Every battle is determined before it’s fought”, Sun Tzu, again.
I'm surprised you haven't mentioned China's massive holding of US Treasuries & its associated ongoing flows which have effectively helped keep a lid on US interest rates. We'll all know that China isn't backing down when they start liquidating those holdings, forcing US yields higher (4% on 10 Yrs anyone ?) with the resulting recessionary impact. Then how will Trump & his supporters react ?