China and America – The Cold War

There’s been plenty of noise over Trump and how the relationship will evolve with China, Trump’s campaign trail leaving few with hopes of the Republican building stronger ties with China and the Orient.

We don’t have to cast our memories too far back into 2016 to recall Trump’s intentions to impose punitive trade tariffs on China, which could go as high as 45%.

His Election Day victory speech suggested that the campaign trail rhetoric was just that, some tough talk for the voters, the president-elect talking of a willingness to work with any nation willing to deal fairly with the U.S.

Earlier in the month, China was certainly pleased with Trump’s decision to appoint Terry Branstad as the U.S Ambassador to China. Branstad had first met the Chinese head of state more than 30-years ago and the appointment was considered an olive branch in what had been a tough period for relations between the two super powers.

The gesture back in early December is likely to be one of very few the U.S will extend to China over the near-term however, Trump appointing Peter Navarro as the lead for a newly created trade council inside the White House, a clear intent by the U.S to handle trade with China once and for all.

The debate over whether the chicken or the egg came first springs to mind. The appointment of Navarro, a fierce critic of U.S – China relations reflecting Trump’s clear intentions, which appear to have been unwavering since the start of the election campaign trail, suggesting that relations are about to get ugly. The appointment of Branstad as the Ambassador to China had initially left the markets relieved that the rhetoric was just that, rhetoric. Now it seems that Branstad will be China’s punching bag, a familiar face for the Chinese to face off to, while Navarro and the team look to go about their business.

Navarro and Trump have continued to accuse China of currency manipulation, with the president-elect and his new partner in crime, accusing China of waging an underground trade war with the U.S, since China joined the WTO over a decade ago.

Year-to-date, the Yuan has fallen 7.02% against the Dollar and down 0.01% on the day and, while the Chinese government is at least optically doing its best to stem the tide, further declines are expected, which are likely to further increase tensions between the two nations. We don’t expect China to look to strengthen the Yuan any time soon, despite threats from the president-elect and the team.

Navarro will be looking to cut the U.S trade deficit and China is the main target, though history suggests that any punitive trade tariff on China will not only adversely impact global economies, but more importantly that of the U.S.

It’s not just about trade however, and the Trump administration seems hell bent and going about its business with little regard, the president-elect having contacted the Taiwanese Prime Minister directly, in defiance with protocol, in the aftermath of the election victory

In response, China has intercepted a U.S Navy Drone in international waters, while also reportedly flying a nuclear bomber off the coast of Taiwan as warnings to the Trump administration, though any significant action by China will likely be on ice until the U.S makes its first move, the Chinese expected to be retaliatory for now and let’s not forget, China is the U.S government’s 2^nd largest lender, any threat of a call on its debt a certain negative for global financial markets and the U.S government.

The U.S have decided on entering into a new cold war, though this time with the Chinese, the Trump administration continuing to build ties with the Russian’s, despite the clear risks of dealing with the Russians and the head of state.

Time will tell, but ultimately it will boil down to which of the super powers is more self-sufficient and as things stand, China certainly looks better positioned than the U.S, the U.S economy in no position to live off the land. The U.S monthly goods trade deficit with China remains by far the largest, $28.9bn in October, with the deficit with the EU a distant 2^nd at $12.9bn and with U.S consumption where it is today, it would take some time before the U.S is able to replace goods manufactured in China and that’s before considering cost.