Is there an end in sight for Trump’s trade war with China?

Andrew Macken

Montaka Global Investments

The tit-for-tat trade war between the US and China is ramping up, with neither country showing signs of backing down. This is a major global issue, and it looks like it’s getting worse before it gets better.

On June 18, President Trump stated the following:

“On Friday, I announced plans for tariffs on $50 billion worth of imports from China… However and unfortunately, China has determined that it will raise tariffs on $50 billion worth of United States exports… Therefore, today, I directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs… If China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200 billion of goods.”

It doesn’t get much more tit-for-tat than that. In response, the Chinese Commerce Ministry stated that: “China will take actions to defend its interests” and that if the US releases a new tariffs list, then China is fully prepared to respond with “qualitative and quantitative” tools. According to Chinese analyst, Bill Bishop, those “qualitative” measures may include more inspections, production delays, administrative penalties, encouragement to use non-US products and a nasty nationalist backlash against the US and its goods.

The ongoing breakdown in the relationship between the US and China has been a key source of market volatility this year. And there is now a strong argument to suggest the situation will get worse before it gets better. Why?

In the days following President Trump’s announcement of new potential tariffs on Chinese imports, the White House Office of Trade and Manufacturing Policy released a damning and inflammatory report, titled: “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World.” One paragraph gives an accurate flavour for the tone and content of this explosive report:

“Chinese industrial policy seeks to ‘introduce, digest, absorb, and re-innovate’ technologies and intellectual property (IP) from around the world. This policy is carried out through: (A) State sponsored IP theft through physical theft, cyber-enabled espionage and theft, evasion of U.S. export control laws, and counterfeiting and piracy; (B) coercive and intrusive regulatory gambits to force technology transfer from foreign companies, typically in exchange for limited access to the Chinese market; (C) economic coercion through export restraints on critical raw materials and monopsony purchasing power; (D) methods of information harvesting that include open source collection; placement of non-traditional information collectors at U.S. universities, national laboratories, and other centers of innovation; and talent recruitment of business, finance, science, and technology experts; and (E) State-backed, technology-seeking Chinese investment.”

Now, irrespective of whether or not one agrees with the contents of this report, what appears undeniable is the notion that the Trump Administration is readying for a serious fight with China. And this report follows the strongly worded 2017 report to Congress of the US-China Economic and Security Review Commission, published last November and has received bipartisan support in the US.

As a result of these actions being observed in the US, the probability that the Trump Administration backs down in the near term is low.

So, will Beijing back down instead? The probability is also low, at least in the near term. President Xi is planning for decades ahead, a period over which he effectively cannot be contested or questioned. (Recall, the National People’s Congress voted in March to end term limits for President Xi Jinping). President Trump, on the other hand, has until November this year when the Democrats could potentially regain control of the House of Representatives. Should the Democrats take control of the House, we can all but be assured that the President’s freedoms to pursue his aggressive style of diplomacy will be materially restricted. President Xi knows this and will surely opt to wait it out, rather than back down. And this means things could get worse, before they get better.

Andrew Macken
Chief Investment Officer
Montaka Global Investments

Andrew is responsible for managing all investments at Montaka, including the ASX-quoted Montaka Global Long Only Equities Fund (ticker: MOGL) and Montaka Global Extension Fund (ticker: MKAX).

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