It makes sense for China to allow the cycle of trade tensions with the U.S. to persist
By Nathaniel Taplin
A year and a half into the Sino-U.S. trade war, a pattern is emerging. President Trump threatens new tariffs on China. Beijing retaliates, announces modest measures to support the economy and lets the yuan weaken. Mr. Trump castigates the Chinese. And both economies slow further.
More recently, Mr. Trump has also brought the Federal Reserve into the fray, berating the central bank for not doing more to help.
Unfortunately for investors, this cycle could well persist until at least the next presidential election, in November 2020. There are three reasons that could make sense from Beijing’s point of view.
China can likely weather another year of President Trump. Photo: Olivier Douliery/Bloomberg News
First, China appears increasingly skeptical that Mr. Trump is a reliable negotiating partner, giving it more incentive to try to wait him out. Second, it has the tools to blunt, if not entirely offset, the damage from U.S. tariffs: Chinese growth is slowing but not collapsing. Third, China brings more weapons to the trade fight, even if its big trade surplus with the U.S. makes it look like the more vulnerable of the two.
That is because China’s political leadership has ultimate control of national monetary and currency policy; the U.S. president doesn’t. The American system works to the U.S.’ advantage over the long run by deterring wasteful investment binges ahead of elections and keeping inflation in check. For now, though, it means the prospects for countering American economic weakness through aggressive interest-rate cuts or a weaker dollar are muddy at best—even if U.S. manufacturing is looking shakier than it did, thanks in part to weakening exports.
August illustrates this perfectly. Mr. Trump unveiled a round of tariffs on Aug. 1. By midmonth, Chinese policy makers rolled out a change to its interest-rate mechanism that amounts to a modest rate cut, building on other low-key easing measures.
On Friday, China introduced retaliatory tariffs, and Mr. Trump responded in kind. The yuan depreciated by close to 1% on Monday, bringing its total fall against the dollar since Aug. 1 to about 4%.
Later on Monday, the U.S. president said his officials had received calls from China saying, “Let’s get back to the table.” Investors should be skeptical. The long-run damage to China’s economy from slower trade growth will be significant, but the nation can most likely weather another year of Mr. Trump.
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