Trade War Between US and China Benefits No One

吳肖莉

The trade war isn't a passing blip， but a long-term headwind.

There are several ways to protect your portfolio.

Watching Chinese-American relations especially in the tech sector will be a key.

The U.S.-China economic tensions have risen significantly， as our BlackRock Geopolitical Risk？Indicator shows. This has coincided with a rise in the performance of quality stocks relative to the broader market （green line）. Investors appear to be heeding risks， trade included. Trade risks are not limited to China. The prospects of a North American Free Trade Agreement （NAFTA） deal have deteriorated. The European Union （EU） and others have retaliated against U.S. steel and aluminum tariffs， while the U.S. has threatened to impose tariffs on cars imported from the EU.

In a trade war， countries impose tariffs and other barriers on imported products， often in retaliation for actions taken by a trading partner. That can slow down business activity around the globe by crimping international trade. In a worst case scenario， trade wars can lead to a global depression. Protectionist trade polices are one of the primary factors economists cite for deepening the Great Depression. So if there's one thing that most economists agree upon， it's no one wins a trade war. But President Trump doesn't believe that. He tweeted out that for the United States， a trade war is "good" and "easy to win."

The trade deficit that President Trump decries is one of the reasons for those holdings. It gives foreign countries a powerful incentive to buy that debt， since they have to do something with the dollars they get back on those sales. If the trade gap shrinks， for whatever reason， China won't have as much incentive to buy US debt， and interest rates could rise significantly.

Tech rivalry is key

Prolonged tit-for-tat actions could affect the economy through two channels： First is the impact on confidence， which could lead companies to delay investment and spending. Second is the direct impact of tariffs as they push up costs and depress demand. The breadth and depth of global supply chains will amplify this impact. China-U.S. tensions run deep， with the U.S. trade deficit as the headline issue. Ultimately， a full-blown trade war is in neither party's interest. A limited agreement to reduce the U.S. trade deficit with China looks feasible. Yet we see rivalry in the technology sector as a more fundamental issue that could lead to enduring tensions.

China is unlikely to compromise on its key strategic goals in developing its high-tech manufacturing sector. A key event to watch： The U.S. government is expected to announce restrictions on inbound investments from China on June 30. These restrictions could affect the Chinese supply chain and harm the ability of its "national champion" companies to import critical technology-mostly from the U.S. What may lie ahead？

We highlight three key signposts

1. Will there be deal discussions between senior officials of the two countries？

2. How much pressure to retreat will the White House get from Republican legislators and U.S. firms？

3. To what extent will U.S. companies in China be pressured by local authorities？

The answers to these questions may provide some guidance as to whether the next move is toward a deal or more bouts of tit-for-tat. Yet some form of investment restriction is likely to come first.

Doing so while calling them “friend” is typical of Trumps near-incoherent positions on the issues. This move， like so many others since his inauguration， feels like a desperate attempt to stay relevant on the world stage. As for the US products listed by the Ministry of Commerce， Chinese consumers have plenty of alternatives to choose from. The migration of China massive customer base to European or domestic fruit， nuts and pork will do severe harm to an already struggling US agricultural sector. There is little to gain and everything to lose in a trade war.

It is sad that Trump has chosen this path， but it is not shocking. After all， he spent half the campaign going on about how the trade deficit was “the greatest theft in the history of the world”. He never really offered specifics on this， of course – Trump was never one for details or facts when it came to the US-China relationship. It was more important to rile up his xenophobic base with long-debunked myths and falsehoods about a country few Americans have seen for themselves. And， to his credit， it worked.

While Trump's rhetoric has largely been directed at China， he has also placed tariffs of 25% on steel and 10% on aluminium for the EU. The EU is currently trying to push Trump to suspend these tariffs， following similar exemptions for Canada and Mexico.

It's hard to predict what impact a trade war between China and the US will have on their economies， social life and politics. But there are a few things that are clear.

First， Chinese society will be more united than American society in the face of the trade war. Most Chinese will firmly support every countermeasure the Chinese government makes because they know this is essential to safeguarding their interests. The US is already divided on the issue. This opposition will rise when the US suffers more from the trade war. Second， China has a system advantage that enables the country to be more resilient to the impact of a trade war than US society. China doesn't fear a long trade war with the US and will never be the first one to retreat. Third， China has been well prepared for possible rising tensions with the US brought about by the trade war. China has the strength to resolutely hit back if the US uses non-economic means to aid the trade war.

China doesn't support a trade war， but it is determined and prepared not to be the defeated side. To have a trade war or talks， that's the US' call.