Issue of the week: trade war or just a skirmish?

The market has concluded that Trump’s tariffs are nothing to worry about. Are they right?

Last week, US stock markets suffered their “worst week in more than two years” amid fears of a ruinous trade war between America and China, said Gunjan Banerji and Georgi Kantchev in The Wall Street Journal. But this week there was a powerful “rebound”. After officials on both sides softened their rhetoric, Wall Street reacted with delight, notching up its biggest one-day gain since 2015 on Monday, and sparking a global rally in stock markets. The US Treasury Secretary, Steve Mnuchin, said he was “cautiously hopeful” that an agreement could be reached on trade imbalances. China, meanwhile, pledged to ease restrictions on American businesses operating in the country and to buy more microchips. War is over, it seems – at least for now. Blackstone boss Stephen Schwarzman summed up the feelings of many when he described the whole incident as “a skirmish”.

It didn’t feel like that last week, when the “tit-for-tat battle on trading levies between the world’s two largest economies” threatened to spiral out of control, said James Dean in The Times. If President Trump’s threat to impose $60bn in tariffs on ten key Chinese industrial sectors (including IT, robotics and aerospace) “was intended as a hammer blow”, China’s reaction “was akin to a surgical strike”. Beijing went straight for America’s agricultural heartlands, “communities that helped put Trump in the White House” – threatening to impose $3bn’s worth of tariffs focusing on US farm produce imports. Rural America reacted quickly, with farming spokesmen warning of job losses. Moreover, Beijing had other strings to pull. By leaving out aircraft (the top US export to China by value, worth $16.3bn last year), “China was keeping its powder dry should the dispute escalate”. And lurking in the background of every discussion is the fact that China is “the largest foreign owner of US government debt”, holding some $1.2trn in Treasury bonds.

Even so, it’s probably true that “exportdependent China has far more to lose than the US” from a trade war, said Nils Pratley in The Guardian. And it’s also true that America has a real grievance when it complains about China’s aggressive flouting of intellectual property rules. “You will struggle to find a chief executive of a large multinational that does not think China plays fast and loose.” Indeed, Washington’s agenda is far “more complex” than that of a simple trade war, said George Magnus in the FT. And the “potential instability” it could bring to China is the last thing President Xi wants. Calling this a trade war is premature: it may, in fact, be the prelude to talks. No one has unleashed the dogs of war. “At least not yet.”