China’s trade war strategy moves up a notch

China’s trade war strategy moves up a notch

The phrase ‘Don’t say we didn’t warn you’ may be a cliché in English, but the Chinese equivalent is anything but.

The Chinese used this phrase in 1962, just before they went to war with India.

They used it again in 1979, just before they went to war with Vietnam.

And they just used it for only the third time in over 50 years, this time against the United States.

CBNC noted recently that the People’s Daily — the official newspaper of the Communist Party of China (CPC) — wrote an article with the headline ‘United States, don’t underestimate China’s ability to strike back’, saying:

We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you![1]

The context, of course, was the US-China trade war.

Events are moving so quickly in this war that it’s hard to keep up with the news.

The threat was used in the context of an ominous warning about China’s ability to retaliate against US tariffs on Chinese exports, imposed by the Trump administration.

A threat not seen since 1979

China cannot match the US tariff for tariff for the simple reason that the US imports far more from China than the Chinese import from the US, so they’ll simply run out of room to put on tariffs.

China is already there.

Trump can still tariff another US$200 billion of Chinese goods (and has threatened to do so) and China has nothing left to tariff.

But China has many non-tariff responses, including dumping US Treasury notes, cutting off exports of rare earths, restricting US foreign direct investment in China, and diverting import orders to competing suppliers in Europe and South America, among other tactics.

The real meaning of the threat is that the trade war has far to run and will end up affecting more than just trade.

Let’s hope the threat doesn’t extend all the way to a shooting war as it did in the cases of Vietnam and India.

Think the trade war is over? It has only just begun…

We’ve heard a lot about the US-China trade war from the US side.

President Trump and Vice President Pence have strongly criticised the Chinese for subsidised Chinese exports, theft of intellectual property, requiring US companies in China to hand over trade secrets, currency manipulation and other unfair trade practices.

In his landmark speech on 4 October 2018, Vice President Pence laid out these and many other violations of international agreements by China.

Pence’s speech is generally understood as not being limited to the trade war, but being a declaration of a new cold war if China does not improve its behaviour.

After these well-publicised critiques, what is China saying in its own defence?

The news here is not encouraging.

China is showing no signs of a change in posture.

In fact, China is digging in for a long struggle in which it rejects US claims as an infringement of China’s ‘core interests’.

China has pivoted from talk about trade to discussion of territorial issues such as Taiwan and the South China Sea.

China also rejects US efforts to alter the behaviour of China’s state-owned enterprises (SOEs), which compete in the private sector but are government owned, controlled and subsidised.

Both the US and China are escalating their countervailing claims and rhetoric. The end of the trade war is not in sight.

In fact, it is rapidly turning into a deeper competition that will slow global growth for years to come.

Some investors are turning to cash, US Treasury notes and gold as safe havens while these two global giants fight it out.

I believe that fight will continue and get worse.

We warned Australian investors about the impacts of the trade war last year. There is still time to prepare yourself for an adverse outcome.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia