The trade war is turning into a forever war

The escalating situation in Hong Kong means that an easing of tensions between the US and China is looking less likely every day.

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  1. Garry White

Last week, the US Senate passed a bill that condemns the current crackdown in Hong Kong, a move that Beijing regards as objectionable interference in its own internal affairs.

The whole idea of a “phase one” deal was to ringfence the low hanging fruit and resolve some issues so markets could breathe a sigh of relief. The thornier questions of technology transfer, intellectual property theft and the opening of Chinese markets could then be dealt with at leisure. However, actions on Capitol Hill this week have made this ringfencing more difficult.  

The Hong Kong Human Rights and Democracy Act has been sent to Donald Trump to sign into law and Chinese state-owned media have reacted with fury. The People's Daily described the move as a “serious provocation against the entire Chinese people”. The Global Times said the Act should be renamed the "Support Hong Kong Violence Act.”

The Act requires an annual assessment that the freedoms in Hong Kong are being maintained. If the US government decides that they are not, Hong Kong’s special trading status will be withdrawn with significant consequences for businesses that operate there.

China view

Hu Xijin is the editor of the Global Times and trade watchers pay close attention to what he says on Twitter. He is regarded as an unofficial conduit of the thoughts of senior members of the Chinese regime – saying things that they could not say in public.

Following the Senate vote, he said that few Chinese now believe that a deal can be reached soon. “Given current poor China policy of the US, people tend to believe the significance of a trade deal, if reached, will be limited. China wants a deal but is prepared for the worst-case scenario, a prolonged trade war,” Mr Hu tweeted. 

He also directly addressed US farmers, who continue to suffer from the conflict. “Don’t rush to buy more land or get bigger tractors. Wait until a China-US trade deal is truly signed and still valid six months after. It's safer by then,” he warned.

However, Donald Trump might veto legislation designed to support pro-democracy protesters in Hong Kong – despite its near-unanimous support in the House and Senate – to pave the way for a trade deal with China.  

Also, elections in Jong Kong this weekend demonstrate that ordinary Hong Kong citizens are not downing down to Chinese demands, making unprecedented gains in the Chinese territory's district council elections. Pro-democracy parties won around 90% of the vote. Prompting one controversial pro-Beijing lawmaker, who lost his seat, Junius Ho, to say that: "Heaven and earth have been turned upside down".

Phase one in doubt – or disappointing

All of this means that the phase one deal announced by Donald Trump on 11 October is now looking less likely to be signed this year. This is a problem because the clock is ticking towards the 15 December deadline when additional tariffs are set to be imposed. These new trade barriers will hit the consumer technology sector hard, including mobile phones, laptops and tablet computers. President Trump delayed tariffs on these products earlier this year to avoid hitting American consumers in the Christmas shopping season. Even if a deal is agreed, it is likely to disappoint markets pricing in perfection.

One company that will be hit hard by the move is Apple. This week, President Trump and chief executive Tim Cook toured a manufacturing plant in Texas together. Mr Cook has been very canny in cultivating a relationship with the mercurial president and Donald Trump said during the tour that he was looking at whether to exempt Apple from the December tariffs. However, he was also clear on what he really wants. “When you build in the United States you don’t have to worry about tariffs,” the president said pointedly.

The 15 December deadline will focus the attention of investors who have been quite excitable in recent weeks that a trade resolution is just over the horizon. Beijing feels insulted by the vote on Capitol Hill and is unlikely to want to show signs of weakness at home by capitulating soon after such affrontery.

The argument that Donald Trump needs to make some form of agreement to boost the stock market ahead of the presidential election next year is also running out of steam. Reducing tariffs to complete a deal that does not address the core issue of the trade war – the theft of intellectual property and technology transfer – will not be regarded as a good deal for America. The Democrats will spin this as a surrender during the campaign, claiming President Trump has been weak and achieved little whilst talking big.

A forever war has started

There have been claims that the trade war is now a “forever war” and we will need to get used to the consequences. It is clear that the events of the last week have made a resolution more challenging from the Chinese side and both Beijing and Washington are digging in because they do not want to be seen as weak. This escalation is so serious that former US secretary of state Henry Kissinger warned last week that there could eventually be an armed conflict between the US and China if they failed to resolve this dispute. "World War I broke out because of a relatively minor crisis… Today the weapons are more powerful," the former top diplomat cautioned.

Mr Kissinger’s view is obviously extreme – and actually unlikely to happen. But the prospects of a long-term dispute between these two great powers is now very real and could have serious consequences for businesses all over the world. As investors send Wall Street indices to new record highs, the approaching 15 December deadline is likely to focus some minds, bringing a degree of realism back into the situation. But even if a deal is agreed it will not represent much progress. It will merely bring a tiny sliver of global trade back to where it was 18 months ago. We may not be in a forever war, but it is likely to rumble on for years.

A version of this article appeared in Friday’s Daily Telegraph.

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