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Who will blink first, Trump or China?


As the 11th round of trade talks between the United States and China concluded last week, markets eagerly anticipated an announcement that an accord was in its final stages and that soon both Chinese President Xi Jinping and President Donald Trump would soon set a date for a signing ceremony.

All hopes for a trade accord were dashed when President Trump signaled that he would authorize the increase in tariffs on $200 billion of goods imported from China to 25 percent.

President Trump went on to explain that China had backpedaled on its previous commitments and that President Xi had fundamental disagreement with some of the most important provisions of the trade document, including:

changing China’s laws to offer increased protection to American companies regarding intellectual property rights;

the demand for specified increases of U.S. goods and services; and

stipulations related to a proposed enforcement mechanism should China fail to live up to its commitments.

China has made clear through the words of its senior trade negotiator, Vice Premier Liu He, that they reject the language contained in the trade document and that “China cannot make concessions on matters of principle.”

Realizing the United States was being trapped in a sort of Chinese mind game, President Trump doubled-down on tariffs by rejecting the moratorium on tariff escalation while the trade talks went on.

On Monday, President Trump authorized the Office of the U.S. Trade Representative to formally announce the imposition of tariffs on a further $300 billion of Chinese imports, to take effect in the months ahead.

In essence, President Trump is reaching for the trade version of the "nuclear option." The Trump administration has signaled its intention to impose tariffs on all Chinese goods coming into the United States.

In response to President Trump’s latest salvo, China announced Monday that it will increase tariffs on over $60 billion of U.S. imports to China. China’s authorities also indicated that it will take whatever countermeasures it has at its disposal to respond to American threats.

Financial markets in the United States reacted to the news with indigestion; the Dow Jones Industrials Average closed with a drop of more than 600 points.

Moving forward, China will respond to the latest escalation in the trade wars and dig in its heels as the Trump administration continues ratcheting up tariffs on goods emanating from China. One can expect China to target certain American industries and increase non-tariff restrictions on American companies.

Specifically, the American agricultural sector will be hit hard. The farm belt, already reeling from the withdrawal of Chinese buyers, will continue to feel the pain of sanctions from China.

Other companies likely to suffer include:

consumer electronics companies, such as Apple;

capital goods companies, such as Caterpillar, John Deere, Boeing and United Technologies;

technology companies, such as IBM and Microsoft;

consumer product companies, such as Proctor and Gamble; and

service industries, such as Starbucks, McDonalds and KFC.

The energy sector also will be targeted as China directs more of its energy purchases to non-American sources. Ultimately, China will signal that it will not respond to ultimatums and that it will demand that it be treated with respect and dignity in the trade negotiations. Anything less will be viewed as a humiliation and an affront to the world’s second-largest economy.

The United States will continue to ramp up pressure on China. In a rare show of bipartisan support, there is growing consensus that China is not only an economic rival but a military one as well.

The view that American firms and interests are placed at a disadvantage in China is reflective of China’s policies toward intellectual-property protection, unfair competition by way of state-sponsored entities and regulatory barriers that restrict the ability of American firms to compete on a level playing field.

It is one thing for American firms to compete against Chinese firms. It is quite another for American firms to compete against the coordinated efforts of the Chinese state.

The competitive advantages that American multinationals enjoy in global markets are no match to the resources that a mercantilist state like China can bring to bear in a market setting.

As the trade war continues to escalate, both the United States and China will put to the test which side has the superior bargaining position. President Trump will continue to tweet about the weakness of China’s position and the fundamental weakness and risks growing within its economy.

President Xi will continue to assert that China's economy is on firm footing and that the loss of the American marketplace is of no great concern, as China’s massive population will continue to power its economy forward.

With an election year fast approaching, it will be interesting to note which position will prevail, as intended and unintended consequences begin to mount with this latest round of trade conflict between the United States and China.

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