“It’s Going To Get Ugly”

In a column published early this morning – shortly after the US’s first round of tariffs on imported Chinese goods took effect – Reuters’Breakingviews columnist Christopher Beddor declared that the trade war between China and the US will be “fought in the trenches, and it’s going to get ugly.” And while exporters might be the first to feel the squeeze, the trade tensions will likely dampen investment and impede China’s efforts to reform its economy. It also “marks a moment of mourning” for investors who had hoped that “the two largest economies could work things out.”

The U.S.-China trade war will be fought in the trenches, and it’s going to get ugly. The first round of tariffs hits on Friday, and U.S. President Donald Trump says they might come to cover more than $500 billion of goods.Exporters will feel the pain first, but uncertainty will also dampen investment, impede research and twist reform. It marks a moment of mourning for those who hoped the world’s two largest economies could work things out.

While the economic damage caused by the tariffs themselves is expected to be relatively limited, the true impact of the trade war will be felt as supply chains are rerouted, capital spending reduced and direct investment by the US in China slows to a trickle (just as Chinese investment in the US has slumped this year).

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The initial round of U.S. duties cover just 2 percent of China’s total exports, calculate analysts at JPMorgan. They reckon that even if the White House slapped a 25% tariff on every Chinese product sold in the United States, Chinese economic growth would slow by only around 0.5 percentage points.

More damage could come from economic aftershocks. Equity markets in China and the United States have swooned already, in part because investors worry that global supply chains will need to reroute. Some American businesses say they are already scaling back or postponing capital spending because of uncertainties around trade, according to minutes from the Federal Open Market Committee. In China, the government has been forced to moderate monetary policy to cushion financial markets.

The trade war is already straining the relationship between the two countries, as the US works to curb visas for Chinese students while China is expected to block Qualcomm’s buyout of NXP and search for other punitive measures since it has less room to impose tariffs than the US does, as the chart below shows.

China

Already, China’s bureaucracy has started throwing up roadblocks to US firms.

In the People’s Republic, Reuters reported the bureaucracy may have already started to move against American companies. Administrative punishments can range from approval delays to product boycotts to blocking deals – like Qualcomm’s attempt to buy NXP. In addition, China’s reform process might slow, as officials hold back liberalisations for use as concessions during future negotiations.

The root of the conflict is mutual mistrust between China and the United States, and waning confidence in the benefits of openness. Such suspicion may ultimately do more damage than tariffs.

As the fallout is felt across the US and Chinese economies (SocGen has calculated that US tariffs could ultimately wipe a percentage point of growth from the country’s GDP) it’s important to remember that the trade war is just beginning.

China

And it’s also important to remember that as the Pentagon grows increasingly wary of Chinese militarism in the Pacific, history has shown that often trade wars lead to real wars.

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via www.zerohedge.com

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