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A Different View on the US-China Trade War

by Giles Coghlan, Chief Currency Analyst at HYCM

When you watch the markets for long enough, you can start to gain a certain detachment from real-life events. It’s not intentionally cold or callous, in many ways markets demand this type of thinking as an essential part of remaining unattached and objective. But you can end up viewing global events not for what they mean in and of themselves, or what they might mean to history, but just what they’ll mean to “the market”. How will the bids and asks react? 

The financial media can also fall into the same trap. After all, people care most about how these things affect their pockets, so why not just focus on that? The past seventeen months of US-China trade coverage have been a case in point. Ever since Trump inaugurated the spat by slapping 25% tariffs on $34 billion of incoming Chinese goods, the coverage has been a weekly soap opera with a recurring “will they, won’t they?” cliffhanger. 

We’ve had heart-warming moments of conciliation, where it looked as though a deal was imminent. We’ve also had this snatched away with a mean tweet and an increase in tariffs on both sides. All the while, we watch the US stock market climbing in the face of mounting evidence that things are getting toppy.

Trump’s fondness of expressing his every errant thought via Twitter has not helped matters. Bloomberg even has a page dedicated to pairing Trump’s tweet history with the DOW’s closing price for that day. You can swipe through his tweets from 2017 and watch the DOW going from strength to strength. Another invaluable online resource allows you to search through that history. Availing yourself of it when bored will reveal that he has tweeted the word “China” 724 times and the phrase “best economy” just 20 times. 

Speaking about the phenomenon to CNBC, author Michael Lewis seemed visibly perturbed by the turn the public discourse has taken since Trump got into office.

“It’s like the president has taken it upon himself to just make the market go up and down for fun… I have no idea if any of what just got said is meaningful or meaningless, I don’t know. And I certainly wouldn’t be trying to trade on it in any way. I view it almost as spectacle rather than information.”

What’s getting lost in all the headlines and short-term speculation, is just how momentous these events could actually prove to be. In the short term, seeing whether or not Trump and Xi strike a deal has almost become another tradable event on the calendar for NFP and Fed Funds watchers. Meanwhile, zooming-out to the longer-term view reveals that what’s taking place between the US and China could be the initial stirrings of a type of conflict that’s as old as civilization itself.

Political scientist Graham Allison has coined the phrase “Thucydides’s trap” to describe the tensions that inevitably arise when an established power and a rising power have to coexist. The established power rightly wants to maintain order and protect disruptions by unruly upstarts. The rising power rightly wants room to grow and to renegotiate rules that were put in place long before it arrived at the table. The term itself refers to the ancient Greek historian Thucydides, who observed that: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” 

According to Allison, avoiding Thucydides’s trap is crucial for global stability and involves both the incumbent and the disruptor managing to negotiate terms of peaceful coexistence. 

The reason it’s a trap, is because in the past five hundred years there have been sixteen such cases of a rising power threatening to displace an existing one. 

In all but four cases, the result was war. The four times the conflict didn’t end up in all-out war were: Spain eclipsing Portugal in the 15th century, the US gaining dominance over the United Kingdom at the beginning of the 20th century, the ascent of the Soviet Union after WWII and Germany’s rise to prominence within Europe since 1990. It sort of puts the tweets and the fawning over the S&P into perspective, doesn’t it?

Trump has done a sterling job in his campaign to denounce China’s “unfair trading practices” and convince people that it’s a matter of national security to fight this trade war. However, it’s his tactics that many find questionable. The discussion suddenly veered from intellectual property theft to tariffs, which is a huge escalation as tariffs are one of the bigger guns available in international affairs. 

It’s almost as if he really were trying to goose the markets into doing his bidding. We saw increasing tariffs in the second half of 2018. Then at the depths of a stock market downturn that was starting to look like a reversal, a more positive period prevailed after the December meetings in Buenos Aires. That’s when Trump and Xi agreed to not raise tariffs any further for 90 days until a new deal could be brokered. 

By April it was looking as though a deal could be in sight, but then Trump started tweeting about raising tariffs again and placed Huawei on a blacklist in May. In June he: “Had a good conversation with President Xi of China,” and in August he tweeted that he’ll impose tariffs on the remaining goods. You can almost see these plot twists described in that distinctive upward cresting wave that is the US equity markets. 

As 2019 draws to a close, we again find ourselves in limbo, with a possible partial deal, a December deadline and Trump making comments about being comfortable to leave it until after next year’s election. A more biased observer might use the words “brinksmanship” and “cavalier”, and perhaps they wouldn’t be too strong or out of place here. But then, there’s a lot at stake, and everybody knows it.

Students of history will recall that Germany was the rising upstart at the turn of the previous century and how that tension led to two great wars. They may also sense a similarity between today’s rising nationalism and isolationism, and the “beggar thy neighbour” policies resorted to in the wake of the Great Depression. When Trump publicly lambastes the Federal Reserve for not cutting rates quickly or far enough and calls for negative rates and QE to keep pace with Europe, what is this other than a call for competitive devaluation?

If the last crisis has taught us anything, it’s just how inextricably connected today’s global markets are. It just so happens that we also find ourselves at a point in history when a rising power with four times the population of the current superpower is starting to make its presence felt. If one thing is certain, it’s that only by negotiation, compromise and a willingness to de-escalate tensions, can we move forward without recreating the errors of the past. 

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