On a sunny midsummer day about six months ago, two prominent figures encountered each other under challenging circumstances. These two individuals share quite a few similarities.
Each possesses a considerable ego and harbors ambitious visions for the future. They excel at persuasion and bring forth causes and convictions that attract followers.
They are both known for their frequent proclamations of greatness and historical references delivered with certainty and style. Each asserts that fate is on their side.
Does one read The Wall Street Journal? It remains unclear.
What is evident, however, is a significant difference between them—one that extends beyond their control.
One of these leaders gazes back at the past, yearning for a return to former glory, while the other looks ahead, driven by a fierce ambition to seize the future. This distinction represents a journey from decline to ascendance, and where their paths intersect lies a potential conflict.
As one figure’s prominence diminishes while the other ascends, their inevitable convergence becomes unavoidable. Once their meeting occurs, retreat is not an option.
The First Day of War
Recall July 6, 2018, when President Trump’s initial tariffs on Chinese imports came into effect. These included a hefty 25 percent tariff on $34 billion worth of goods from China. In retaliation, Chinese President Xi Jinping imposed tariffs on U.S. soybeans and automobiles.
Billionaire investor Ray Dalio marked this development by tweeting: “Today is the first day of the war with China.”
Was Dalio exaggerating? Or was he delivering a sober warning? Perhaps he recognized that a trade conflict could escalate into a real confrontation if Trump and Jinping push their agendas too far.
Almost a year prior, Trump had commented that “trade wars are good, and easy to win.” Thus far, the trade war has been marked by loud threats rather than decisive actions. Following the initial skirmish, several additional rounds of tariffs were either imposed or threatened. Eventually, during a dinner at the G20 summit in Buenos Aires, Trump and Jinping opted to delay planned tariff increases for 90 days, shifting the deadline to December 1, 2018.
Now, as the negotiation period reaches its halfway mark, little progress in forming a new trade agreement seems evident. If an accord isn’t achieved by March 1, 2019, a 25 percent tariff will be placed on $200 billion of Chinese goods.
What’s next? Can additional tariffs lead to a decisive victory for Trump?
At Economic Prism, we hold reservations about that outcome. The sought-after economic victory may remain elusive, and after inflicting damage on trade and business, a clear resolution may not emerge.
Presently, it appears that Trump has some leverage over Jinping, primarily due to fortunate circumstances rather than exceptional skill.
Taking Advantage of Xi Jinping’s Weakened Position
Recent reports from China indicate a slowing economy. Specifically, Chinese exports declined by 4.4 percent year-on-year in December 2018, while imports dropped by 7.6 percent during the same period.
Are Trump’s trade policies to blame for this economic slowdown in China, or is it merely a coincidence? It’s also possible that two decades of debt-fueled growth have created an inherently unstable economy. According to Bloomberg:
“A trade pact, if achieved, may appease investors and promote economic growth—albeit temporarily. However, it won’t resolve the deeper issues plaguing China’s economy. While tariffs are an inconvenience, the underlying financial structure carries more significant problems.”
“What often goes unnoticed is that China is already in crisis. This isn’t a catastrophic collapse akin to the U.S. recession in 2008 or the dramatic downturns seen in the Asian Tiger economies in 1997. Nevertheless, it is a crisis marked by bankrupt companies, troubled banks, and state bailouts. Since China characterizes its version of state capitalism as ‘socialism with Chinese characteristics,’ we might refer to this as a ‘financial crisis with Chinese traits.’”
“This crisis transcends the present slowdown in growth; it has been in motion for some time and shows no signs of resolution. The outcome—whether capably managed or not—will have consequences far greater than a few quarters of weak performance. This is about China’s economic evolution and its ability to adapt for a successful future. It will determine whether China becomes a vital source of global growth or poses a risk to worldwide financial stability.”
As President, Trump has a knack for taking advantage of his opponents when they’re vulnerable. Unquestionably, he will capitalize on Jinping’s weakened state during the trade talks. This approach, coupled with the slowing U.S. economy, risks escalating the trade conflict towards something more severe than mere trade disagreements.
Sincerely,
MN Gordon
for Economic Prism
Return from Kicking Xi Jinping While He’s Down to Economic Prism
