Who can win ‘deranged game of chicken’?
The US and China are on a combustible escalation path that can end only when there is economic blood on the floor. Both think they can withstand the longer siege, and neither can retreat easily.
“I don’t see any off-ramp. There is going to have to be a lot of pain before anybody backs away,” said Patrick Chovanec from Silvercrest Asset Management, an ex-professor at Tsinghua University.
Donald Trump boasts that “tariffs are working big time” and it is easy to win a trade war against predatory rivals running a structural surplus. It is a false lesson from the 1930s before the advent of global supply chains.
“The trade hawks around Trump seem to think that China’s economy is now so wobbly that sanctions will push the country over the edge, and the Chinese will coming begging for mercy,” said Chovanec. “They seem to have no idea what it would mean for the global financial system if they did succeed in taking down China.”
In reality, Beijing would slam the door closed on capital flows, recoil inwards and flood its internal economy with stimulus.
“I am still looking for a credible explanation of how the mechanics of collapse might actually work in this unique political and economic system,” said Bill Bishop, a China veteran and founder of Sinocism.
China is clearly digging in. Bishop said the secret “summer summit” of the Communist leadership in August saw a fateful shift in the strategic thinking of President Xi Jinping and the party hierarchy. They concluded the real goal of Trump’s trade war is to “thwart China’s rise”, part of a multipronged campaign targeting the military technology complex in a superpower struggle for hegemony.
This goes beyond the Trump White House, an “unhinged” menagerie, led by a man with “the IQ of an inbred tanning bed”, in the description of Bob Woodward’s expose Fear.
Hostility to China is becoming a “Washington view” reaching deep into both parties on Capitol Hill. The Cold War character of this conflict is clear in the US National Security Strategy Report, which names China for the first time as a strategic rival that seeks to “challenge American power, attempting to erode American security and prosperity”.
This theme has been picked up in the editorial pages of China Daily, the voice of the Politburo. It accuses America of trying to “suck the lifeblood” from the Chinese economy.
But the immediate threat for China’s leaders is the brinkmanship of Trump himself. Beijing will be aware of the passages in the Woodward book in which he talks of blowing up the world trade system, betting that “in six months, they’ll come running back to the table”.
The “game theory” logic is for Beijing to retaliate pari passu and let a market correction unfold until he blinks. This does not require active financial intervention. If Trump goes ahead with sanctions on US$200 billion ($307b) of
Chinese exports this week, followed by
the final US$267b already threatened, he will be shutting down the Sino-American nexus of Pacific trade. The havoc for US corporate supply chains would lead to Wall Street contagion by mechanical effect.
It is a treacherous political backdrop for equity markets already at the Himalayan peak of the business cycle, against a background of quantitative tightening by the big central banks.
Exactly where Trump’s pain threshold lies is anybody’s guess. His behaviour is so erratic one easily slips into thinking there is no strategy. But in the words of former White House chief of staff Reince Priebus, he is like a “dog with a bone” when it comes to China. For a while China’s leaders sought to defuse the conflict. Beijing went along with the idea that Trump is a “dealmaker” who uses threats to gain leverage, but can ultimately be assuaged by a publicity victory. They hoped pledges to buy fungible US grains, oil, and liquefied natural gas would be enough. It was a dead end. China has brought this diplomatic crisis on itself. The Party’s “Made in China 2025” blueprint is an aggressive attempt to dominate 10 strategic sectors in violation of WTO principles. Beijing has belatedly woken up to the dangers of such provocation. It has dropped its Amazing China propaganda documentary. State censors have told the media to stop talking about the China 2025 plan. This comes too late to mollify the child-president in the White House. China has in any case stated already that it will match each round of US tariffs with a riposte in kind. Beijing must carry out this threat or lose face, and Trump has already vowed to escalate further when it does. It is hard to see how asset markets priced for perfection can ignore this deranged game of chicken for much longer. The mystery is they have not crumbled yet.