Neither president seems to know his adversary particularly well.
On their current trajectory, by the end of this month the world’s two largest economies are likely to have imposed punitive tariffs on manufactured goods and commodities worth $360bn — an amount equivalent to two-thirds of their bilateral trade last year.
It could well escalate. Like many combatants on the eve of an epic contest, Mr Trump and Mr Xi are both confident that they will prevail. They cannot both be right.
The Trump administration wrongly thinks China’s economy is on the ropes, in part because of the escalating trade war. For their part, Chinese officials are fixated on November’s congressional midterm elections, naively believing that Republican losses will force Mr Trump to back down.
On August 16, Mr Trump’s top economic adviser endorsed a view that has grown popular in Washington. “[China’s] economy is just heading south,” Larry Kudlow told reporters. “Right now, their economy looks terrible.”
Some US officials also seem to believe that Mr Trump’s imposition of tariffs on Chinese exports worth $34bn in July — and on another $16bn in August — is why investment and overall economic growth are slowing in China.
The man primarily responsible for slower investment and economic growth has, in fact, sat opposite US officials at three of the last four rounds of trade talks: vice-premier Liu He.
In the spring of 2016, Mr Liu, Mr Xi’s most trusted economic adviser, convinced his boss that the country’s mounting debts constituted a clear and present danger to national security. Since then, Mr Liu has been the brains behind a campaign to rein in some of the riskiest practices in China’s financial sector. One consequence of this drive has been slower economic growth.
But a $12tn economy growing at 6.7 per cent and creating 10m or more urban jobs a year is hardly an economy in crisis.
While it is true that Chinese officials did not anticipate — and do not welcome — a trade war with the US at the same time they are “de-risking” the financial sector, their response so far has been moderate.
They have taken steps to accelerate infrastructure investment and ensure that the renminbi does not fall too far too fast against the dollar, but stopped short of measures that would suggest panic. On August 27, Mr Liu reiterated that “deleveraging and risk prevention are the top financial development priorities for this year”.
Chinese officials, unfortunately, are as bad at reading the US as the Trump administration has been at reading China, as they hope a Republican rout in November’s midterms will provide them with a deus ex machina from an all-out trade war.
The Republicans may well lose the House of Representatives and perhaps the Senate as well. But if they do, Mr Trump will only be more likely to sharpen his China trade strategy ahead of his own re-election campaign in 2020.
Trade is one of the rare “crossover issues” that appeals as much to Bernie Sanders’ Democrats as it does to the president’s core political base.
Chinese officials have failed to appreciate that the one thing the US president and Chuck Schumer, the Senate Democratic leader, agree on is the administration’s China trade policies. Regardless of whether Mr Trump turns out to be an eight, four or two-year president, trade wars across the Pacific are the new normal.
Source: Financial Times, September 4, 2018 | Tom Mitchell