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Features
The trade war is turning into a forever war
The escalating situation in Hong Kong means that an easing of tensions
between the US and China is looking less likely every day.
The escalating situation in Hong Kong means that an easing of tensions
between the US and China is looking less likely every day. The
escalating situation in Hong Kong means that an easing of tensions
between the US and China is looking less likely every day.
Garry white employee Garry white employee
by
Garry White
in Features
25.11.2019
Last week, the US Senate passed a bill that condemns the current
crackdown in Hong Kong, a move that Beijing regards as objectionable
interference in its own internal affairs.
The whole idea of a “phase one” deal was to ringfence the low hanging
fruit and resolve some issues so markets could breathe a sigh of
relief. The thornier questions of technology transfer, intellectual
property theft and the opening of Chinese markets could then be dealt
with at leisure. However, actions on Capitol Hill this week have made
this ringfencing more difficult.
The Hong Kong Human Rights and Democracy Act has been sent to Donald
Trump to sign into law and Chinese state-owned media have reacted with
fury. The People's Daily described the move as a “serious provocation
against the entire Chinese people”. The Global Times said the Act
should be renamed the "Support Hong Kong Violence Act.”
The Act requires an annual assessment that the freedoms in Hong Kong
are being maintained. If the US government decides that they are not,
Hong Kong’s special trading status will be withdrawn with significant
consequences for businesses that operate there.
China view
Hu Xijin is the editor of the Global Times and trade watchers pay close
attention to what he says on Twitter. He is regarded as an unofficial
conduit of the thoughts of senior members of the Chinese regime –
saying things that they could not say in public.
Following the Senate vote, he said that few Chinese now believe that a
deal can be reached soon. “Given current poor China policy of the US,
people tend to believe the significance of a trade deal, if reached,
will be limited. China wants a deal but is prepared for the worst-case
scenario, a prolonged trade war,” Mr Hu tweeted.
He also directly addressed US farmers, who continue to suffer from the
conflict. “Don’t rush to buy more land or get bigger tractors. Wait
until a China-US trade deal is truly signed and still valid six months
after. It's safer by then,” he warned.
However, Donald Trump might veto legislation designed to support
pro-democracy protesters in Hong Kong – despite its near-unanimous
support in the House and Senate – to pave the way for a trade deal with
China.
Also, elections in Jong Kong this weekend demonstrate that ordinary
Hong Kong citizens are not downing down to Chinese demands, making
unprecedented gains in the Chinese territory's district council
elections. Pro-democracy parties won around 90% of the vote. Prompting
one controversial pro-Beijing lawmaker, who lost his seat, Junius Ho,
to say that: "Heaven and earth have been turned upside down".
Phase one in doubt – or disappointing
All of this means that the phase one deal announced by Donald Trump on
11 October is now looking less likely to be signed this year. This is a
problem because the clock is ticking towards the 15 December deadline
when additional tariffs are set to be imposed. These new trade barriers
will hit the consumer technology sector hard, including mobile phones,
laptops and tablet computers. President Trump delayed tariffs on these
products earlier this year to avoid hitting American consumers in the
Christmas shopping season. Even if a deal is agreed, it is likely to
disappoint markets pricing in perfection.
One company that will be hit hard by the move is Apple. This week,
President Trump and chief executive Tim Cook toured a manufacturing
plant in Texas together. Mr Cook has been very canny in cultivating a
relationship with the mercurial president and Donald Trump said during
the tour that he was looking at whether to exempt Apple from the
December tariffs. However, he was also clear on what he really wants.
“When you build in the United States you don’t have to worry about
tariffs,” the president said pointedly.
The 15 December deadline will focus the attention of investors who have
been quite excitable in recent weeks that a trade resolution is just
over the horizon. Beijing feels insulted by the vote on Capitol Hill
and is unlikely to want to show signs of weakness at home by
capitulating soon after such affrontery.
The argument that Donald Trump needs to make some form of agreement to
boost the stock market ahead of the presidential election next year is
also running out of steam. Reducing tariffs to complete a deal that
does not address the core issue of the trade war – the theft of
intellectual property and technology transfer – will not be regarded as
a good deal for America. The Democrats will spin this as a surrender
during the campaign, claiming President Trump has been weak and
achieved little whilst talking big.
A forever war has started
There have been claims that the trade war is now a “forever war” and we
will need to get used to the consequences. It is clear that the events
of the last week have made a resolution more challenging from the
Chinese side and both Beijing and Washington are digging in because
they do not want to be seen as weak. This escalation is so serious that
former US secretary of state Henry Kissinger warned last week that
there could eventually be an armed conflict between the US and China if
they failed to resolve this dispute. "World War I broke out because of
a relatively minor crisis… Today the weapons are more powerful," the
former top diplomat cautioned.
Mr Kissinger’s view is obviously extreme – and actually unlikely to
happen. But the prospects of a long-term dispute between these two
great powers is now very real and could have serious consequences for
businesses all over the world. As investors send Wall Street indices to
new record highs, the approaching 15 December deadline is likely to
focus some minds, bringing a degree of realism back into the situation.
But even if a deal is agreed it will not represent much progress. It
will merely bring a tiny sliver of global trade back to where it was 18
months ago. We may not be in a forever war, but it is likely to rumble
on for years.
A version of this article appeared in Friday’s Daily Telegraph.
Nothing on this website should be construed as personal advice based on
your circumstances. No news or research item is a personal
recommendation to deal.
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