MANDEL NGAN/AFP/Getty Images
U.S. investors have shrugged off fears of a China-U.S. trade war, but as tensions rise, investment economists and strategists are grappling with a new idea: The battle may not end any time soon.
The U.S.-China economic conflict will be long and ugly “with little chance of a deal anytime soon,” TS Lombard economists Larry Brainard and Charles Dumas write in a note to clients. While China was prepared in late May for talks on trade, that has changed given the events of the subsequent months, they say.
Now, the duo write, the leadership in Beijing has concluded that the “U.S. is determined to check the country’s rise via demands that strike at the heart of the economic model on which Communist Party power rests.” As a result, China is taking a harder line, in part to avoid the leadership being seen as negotiating with a gun to their head, they say. “The current mood in Beijing is to take a tough position on future talks by demanding that the US demonstrate its sincerity before agreeing to new meetings.”
The latest round of tariffs, on $250 billion of imports from China, begins at 10%, but is set to rise to 25% in January. The pair expect the conflict to escalate, so that the 25% rate covers the bulk of Chinese exports to the U.S.
That, they say, would drive a redirection of Chinese trade, ultimately serving as the catalyst for the rise of an Asian trading bloc with China at the center.
The good news: China’s trading partners in East and Southeast Asia should benefit over the medium term. Chinese companies have moved manufacturing to Malaysia and other Southeast Asian countries in previous U.S. tariff cases, highlighting what could happen in the near future.
The complexity of U.S.-China trade will likely lead to a multitude of strategies to cope, with larger suppliers better able to adjust. The Global X FTSE Southeast Asia ETF (ticker: ASEA) is down 3% so far this year, compared with a nearly 8% decline in the iShares MSCI Emerging Markets ETFindex.
The bad news: A trade realignment wouldn’t beso good for markets. The crumbling of a world based on multilateral trade and a shift toward regional blocs will in the long run reduce equity valuations, the duo write. As a result, they say, a bear market is a major risk over the next two to three years.
DataTrek Research’s Nicholas Colas says he hasn’t turned bearish yet, but is also watching the China situation closely, especially after comments in recent days about the trade war from two well-placed people. The first was an interview in the South China Morning Post with former White House senior advisor Steve Bannon, in which he said the Trump administration plans to make the trade war with China “unbearably painful” for Beijing as they try to reindustrialize America and halt China’s goal of achieving technological superiority.
Colas writes in a note to clients that while the remarks by President Donald Trump’s former chief strategist should be taken with a “big grain of salt,” the publication of the interview in a Hong Kong newspaper suggests it is the message the administration wants to give to Chinese leaders ahead of Trump’s speech Tuesday at the United Nations General Assembly.
Bannon’s interview comes on top of a prediction last week by Alibaba (BABA) Chairman Jack Ma that a trade war will “last long”—as in 20 years or more. Politically connected billionaires talking about issues in which they have expertise “do not typically wing it,” Colas writes.
Richard Bernstein Advisor portfolio strategist Dan Suzuki took a less gloomy view of the impact on China. In a note Monday, he writes that a 25% tariff on $250 billion in Chinese exports to the U.S. would represent 0.44% of China’s gross domestic product. The real cost would be lower, he says, because the yuan, China’s currency, has fallen 9% since a high it reached in February. A weaker yuan makes China’s exports less costly in dollar terms.
The takeaway: All eyes are on China.