Trump trade war collides with domestic discontent in China

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Associated Press

Donald Trump greets Xi Jinping during a June meeting on the sidelines of the G-20 summit in Osaka, Japan.

Five hundred days into the U.S.-China trade war, after a dozen unproductive high-level meetings between the two countries, expectations are low for October’s talks in Washington. But the mercurial nature of President Donald Trump’s political decision making means anything can happen.

Here are three considerations that could affect whether a deal is reached:

Trump has upped the ante: The U.S. has now levied tariffs on half a trillion dollars’ worth of Chinese goods — nearly all of the products Beijing ships to America (with exemptions for certain items). As little room remains to squeeze Beijing with further tariffs, the Trump administration is considering banning all U.S. financial investments in Chinese companies, reports last week claimed, citing anonymous sources.

See: Trump’s plan to restrict U.S.-China investment: a negotiating ploy or harbinger of a longer-term battle?

Market Pulse: Treasury official says Trump administration has no plan to bar Chinese stock listings in U.S.

What does this mean for a trade deal? The easy answer is that Trump is attempting to increase pressure on Beijing to give up more than it has agreed to in past meetings. The tariffs have stung China tremendously, and investment restrictions would cripple many Chinese companies.

Also: Tariffs cited as ISM gauge of U.S. manufacturing hits lowest level since 2009

But it can’t be ruled out that hawks within the administration are satisfied with the pain the tariffs have wrought for China and are seeking to simply increase that pain for the sake of further damaging China’s economy — which is already experiencing its lowest growth rate in decades.

Read: U.S.-China talks in October won’t stop tariff hikes, but more progress could arrive in November, Morgan Stanley says

About that Chinese economy: China’s slowing economy could influence the talks either way. as well. With the country’s growth rate at risk of going as low as 5%, President Xi Jinping will be increasingly worried about unrest, and may seek a deal that could resume the unfettered flow of exports to the U.S., which could give a modest boost to the Chinese economy. Alternatively, at a time of unrest, leaders tend to stoke foreign disputes and take tough positions — which could mean Xi may want to show his exceedingly proud population that he hasn’t given in easily to his country’s biggest rival.

U.S. elections: On the surface, this one is more clear cut. The business community, farmers and economists in the U.S. came out against the trade war months ago. But polls are increasingly showing that the average U.S. citizen opposes the protectionist measures as well. A recent New York Times poll found that 63% felt Trump’s trade policies were bad for the U.S. economy, and an NBC News/Wall Street Journal poll found overwhelming support among Americans for free trade.

If this sentiment deepens, and Trump listens to the polls, a deal would become more likely.

Yet Trump is the wildest of wild cards. He is a master of spin and misdirection, and seems to get away with more than any president before him. And he knows this.

Opinion: Trump will soon end the trade war with China because he doesn’t really care about winning it, writes Center for Economic and Policy Research co-director

So, in short, bet on nothing. A lukewarm deal reached at the upcoming Washington meetings? Maybe. Another frustrating round of failed talks? Easily possible. The world’s two largest economies are in a game of chicken, and neither’s leader, so far, appears prone to flinching first.

But game theory tells us that the best way to win a game of chicken is to rip your steering wheel off and throw it out the window, showing your opponent that you have no way to swerve and miss him, forcing him to turn away first. If the trade war comes to this, it may take the shape of intensified conflict, with leaders giving the impression of near-mad determination and an unwillingness — something approaching an inability — to give in first.

It would be entertaining to watch if it didn’t have potentially dangerous implications for the global economy.

Read on: People’s Republic of China at 70: What comes next?

Tanner Brown is a Beijing contributor to MarketWatch and Barron’s and is the producer of the Caixin-Sinica Business Brief podcast.

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