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  • Writer's pictureARI Media

Is Recession Key to Ending Trump’s Trade War?

Is a global recession now the best chance of forcing a resolution to the escalating trade conflict between the United States and China?

If there was any hope of a negotiated solution to the dispute between the world’s two largest economies, then U.S. President Donald Trump probably extinguished it last week.

Trump reacted to China’s imposition of new tariffs on $75 billion in annual imports from the United States by ratcheting up his own tariffs to 30% on $250 billion of Chinese goods, and to 15% on the remaining $300 billion in annual imports.

Up until recently many investors and corporates had clung to the view that a deal would eventually be agreed between Washington and Beijing, as it was logical that the two powers would rather compromise than risk lasting damage to their own, and by extension, the global economies.

Such optimism ignored the path of the trade dispute, where both sides appear to have woefully misread the intentions and motivations of the other.

This has led to a cycle of imposing tariffs, negotiate, fail to agree, exchange condemnatory statements, raise tariffs and then repeat the process all over again, with the occasional optimistic note from Trump’s Twitter feed or Beijing’s tame media to fuel hope that all will end well.

Trump has shown that compromise isn’t a concept he understands and that for him to win, you must lose.

His Chinese counterpart Xi Jinping has also failed to understand that Trump may well be prepared to keep doubling down on tariffs and the subsequent economic fallout long beyond the point where compromise would have been the more rational option.

While Trump’s bombast and Twitter tirades gather more of the media attention, Beijing also has been inflexible on legitimate U.S. concerns over intellectual property and market access, and can share the blame for the failure to reach a deal.

Financial and commodity markets are now coming to the realisation that the trade war is likely to be prolonged and may well get considerably worse before it gets better.

A reflection on the realistic options now available to Trump and Xi makes for sober reading.

The best, but probably least likely option, is that two leaders could use their supposed friendship to strike a “captain’s deal” whereby they reach a deal amid the fanfare of a one-on-one summit that makes everybody look like a winner, irrespective of the actual content of the agreement.

The second option is that tariffs and other non-trade barriers continue to be raised, until they reach a level where the Chinese and U.S. economies are completely divorced from each other.

Trump may well be prepared to go down this road, whether he can will depend on whether enough centres of power in the United States could join together to thwart such a destructive path.

Given the craven reaction by Trump’s fellow Republicans to the escalating trade dispute, it’s hard to see Congress acting to rein in the president, give the president’s party controls the Senate.


The corporate sector may be prepared to ramp up its opposition to the tariffs, but whether enough chief executives have the gumption to risk Trump’s ire is a question.

If the stock market continues to post losses and the tariffs start to make an impact on the real economy through job losses in manufacturing and agriculture, it’s possible that Trump may move to end the trade war because his chances of re-election in November next year would be falling.

It’s also possible that U.S. voters will end the Trump presidency before the trade dispute is resolved, leaving negotiations to the next leader.

There is also a chance that Washington and Beijing could agree to at least de-escalate the tensions by rescinding some of the tariffs and agreeing to re-open negotiations.

But for now there is little sign that an easing of tensions is likely, meaning both the United States and China will likely have to experience more economic pain before fresh moves are made.

The problem for the rest of the world is that it is collateral damage.

For crude oil exporters already struggling with low prices, the trade conflict is further bad news as the increasing chance of recession, or at least weak global growth, will weigh on demand.

The same applies to other energy producers, such as liquefied natural gas companies and coal miners, not to mention miners of industrial metals such as copper and iron ore.

Only gold producers are likely to see any benefit, with the precious metal enjoying more gains in early trade on Monday, climbing as much as 1.9% to a fresh six-year high of $1,554.56 an ounce.

While gold is the silver lining of the trade dispute, perhaps another is that last week’s escalation should finally put to rest the market hope that this conflict will be resolved and that the extended recovery from the 2008 global recession can continue on its merry way.

A realistic assessment of the dispute is that neither the Trump administration or its counterpart in Beijing has yet realised what virtually every economist and business leader already knows, namely that nobody will win the trade war.

The only question that remains is how bad will matters have to get before both sides realise that to keep bashing your head against a brick wall isn’t a winning strategy.

via HSN

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