US vs. China: Who blinks first?

To understand the depth of the economic ties and imbalances, Diaspora Digital Media takes a closer look at the current trade figures between the U.S. and China.

The U.S. has a trade surplus with China in services, amounting to over $31 billion.

However, when it comes to goods, the trade deficit is a staggering $295 billion.

China alone exports nearly $200 billion worth of goods — such as machinery and electronic components — to the U.S., clearly highlighting America’s strong dependency on Chinese manufacturing.

If China gets hit with a 125% tariff, it will be a massive blow to China in the short term and also impact its GDP growth.

Most likely, US manufacturers like Apple and others will begin to move their supply chains to India and other promising markets with cheap labour.

This will take place in the long run, but what Donald Trump did is just speed up the process.

Who Bears the Greater Impact?

In the short term, if the trade war escalates, it will create a surplus of goods in the market. So, whenever there is a surplus, the prices drop.

According to a few media posts, China is already preparing to sell goods to countries like India at a 10% cheaper cost.

This can be positive news for countries like India, which is by far the largest market, but bad news for countries with manufacturing facilities like Taiwan, etc.

Some of the Chinese small and medium enterprises have started laying off employees and are announcing 50 yuan per labourer for the time being.

In the article published by The Economist, it says Chinese leaders think they can win the trade war with the USA because Trump needs help from China to end the war in Ukraine and to gain the support of TikTok — a famous app among American youth.

TikTok played a very important role in Trump’s election campaign, but this marks a big U-turn from Donald Trump, given that he had promised to ban TikTok during his first term.

Not to mention Trump’s biggest supporter and campaigner, Elon Musk — Tesla has a strong presence in China.

According to China, Americans cannot bear inflation and job layoffs, and eventually, Trump will come to the negotiating table.

But even with all the strategies that China can use from its playbook, it will massively affect China in the short run.

Importers in the USA will stop buying Chinese goods with this tariff, as it almost doubles the price to consumers.

So clearly, if this trade war escalates, it will be a nightmare for Xi Jinping. It will affect the USA as well, but the USA will ultimately be the winner — at least in the short run.

China’s Playbook Against the USA

Currently, China is only retaliating with tariffs, but if push comes to shove, China will use all possible ways to push back against the USA.

We all know about the unfair trade practices that China engages in, like dumping its cheap goods into other countries — Vietnam is a good example in this case.

Piyush Goyal, who is currently in charge of the Ministry of Industry and Supply of India, cautioned Indian industries about the unfair trade tactics of China in a Bloomberg Television interview.

This is going to become more prominent if the trade war escalates further, and eventually, various European and Asian countries will impose duties on China as well.

The second option China has is with the US bond market. Some estimates suggest that China owns ~$760B worth of US treasuries.

So, if China starts selling these bonds, the price of these bonds drops and the bond yield goes up. Some estimates suggest China is already selling the bonds.

China is also devaluing the Yuan against the tariffs so that the impact could be reduced. Donald Trump is isolating China, and maybe — by looking at the dynamic nature of Donald Trump — he could even impose tariffs on countries that trade with China if this trade war escalates.

Possible Events That Could Unfold

Let’s discuss what are the most likely things that can happen. In my opinion, I don’t see the trade war continuing. At some point, Trump will involve a third party to be included at the negotiating table, and Russia and Saudi will be the negotiators.

Trump cannot afford to do something massive anymore after the widespread protests in the USA across the country, the negative impact on stock markets and bond markets. And unlike Donald Trump, Xi Jinping does not have to address Congress or his party.

Xi Jinping does feel the heat in the short run, but he is not likely to panic unless there is a revolution in China.

Historically, in an authoritarian regime, the power remains with a person as long as people are happy — and Xi understands this very well.

We could see how the Chinese government is twisting the facts through Chinese media, and the Chinese people will oppose the USA in this regard.

Most likely, the USA and China will come to the negotiating table in one way or another. I do not think China will ever agree to talks first — it will either be Donald Trump, or he will likely request Russia or Saudi to be included in the negotiation talks.

To the outside world, it might seem like third parties are bringing the USA and China to the negotiating table, but it will be a request from the United States.

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