US TRADE WAR: Trump adopts Cold War-era ‘ESCALATE TO NEGOTIATE’ strategy in China battle
But the longer the trade dispute drags on, the more unpredictable the future will become, with the risk of damage to the economies of both countries, as well as others, market analyst John Kemp has said.
The US President Donald has reportedly rejected a plan to levy tariffs of 10 percent on an additional $200 billion of imports from China and ordered aides to prepare a proposal for tariffs at the higher rate of 25 percent.
The levies are in addition to the tariffs on $34 billion of imports that have already gone into effect and the $16 billion of tariffs announced but not yet implemented.
The Trump administration's approach to China was the same one it has employed in dealing with North Korea, Iran, the European Union and NAFTA partners, Mr Kemp wrote for Reuters.
He explained: “The basic strategy, including the risks and opportunities, will be familiar to anyone who has studied the Cold War confrontation with the Soviet Union.
“The administration's decision to escalate the confrontation dramatically at this point, threatening significant tariffs on a wide range of imports, including consumer items, is likely to stem from a combination of strength and fear.
“So far, the trade war appears to have hit China's economy and financial markets harder than the United States, which has given the administration confidence that it is escalating from a position of strength.”
Mr Kemp pointed out the US S&P500 equity index was up by more than five percent since the start of 2018, and 25 percent since the start of 2017, while China's Shanghai composite index has fallen by 13 percent and seven percent respectively.
Additionally, the US dollar has strengthened by five percent against China's yuan since the start of the year, and has risen by around three percent on a trade-weighted basis against the currencies of other major US trading partners.
China's economy has shown signs of slowing, with the central government resorting to fiscal and monetary stimulus to offset the slowdown in external demand and boost confidence.
By contrast, the US economy expanded at an annualised rate of 4.1 percent in the second quarter, while US manufacturers have reported a broad-based upturn in business activity in recent months, while consumer confidence is close to multi-decade highs.
Mr Kemp, who said Mr Trump had one eye on the crucial November mid-term elections, added: “The asymmetric economic and financial performance of the United States and China has convinced the White House it has "escalation dominance" and should press home its advantage.
“The White House strategy has been to escalate pre-emptively, secure in the belief China has more to lose than the United States on each of the next few rungs up the escalation ladder.
“Until now, China has matched US tariff moves but not sought to escalate them, which has also probably also emboldened the White House to think it holds a stronger position on the escalation ladder.”
However, Mr Kemp also said the White House also feared the strong position could erode the longer the trade dispute dragged on.
He said: “Rapid US GDP growth in the second quarter was mostly the result of tax cuts, which stimulated consumer spending, as well as a race to export soybeans and beat the tariffs.
“Growth in the third and fourth quarters is likely to be slower as these temporary effects unwind and the baseline for quarter-on-quarter comparisons becomes more challenging.
“Economic expansions tend to be cyclical, and even within each expansion there are spurts of rapid growth followed by more sluggish intervals, so the administration cannot count on the recent spurt to be sustained.
“Businesses are already starting to report widespread increases in input costs, in part as a result of steel and aluminium tariffs. Consumer price inflation is also rising and starting to erode the real value of wage rises.”
Up to now, the Trump administration has tried to avoid imposing tariffs on consumer items in order to avoid politically controversial price rises at retail level.
But Mr Kemp warned: “If the United States is forced to carry out its threat and actually imposes 25 percent tariffs on $200 billion worth of additional items from China, hitting consumer goods will become inevitable.
“Part of the strategy seems to be to intensify the pressure on China quickly through rapid escalation in the hope it will force an early restart of negotiations on advantageous terms and permit de-escalation quickly, before the economic damage becomes too great.
“For the White House, the economic and political cycles favour rapid escalation in the hope of being able to claim an equally quick victory before the costs start to rise.
“By bringing the conflict to a crisis (in the Greek sense of "a moment of decision") the administration hopes to end the dispute or at least de-escalate before the damage grows.
“China's reaction remains uncertain, however, which introduces a dangerous element into the escalation strategy and means it could backfire.
“China's economy is under greater pressure in the short term but its policymakers may conclude that it is better to absorb the short-term costs and wait for the pressure to start to mount on the United States.
“If the United States chooses to escalate rapidly while China elects to ride out the attack and wait for the costs to rebound on the US and global economies, the damage to both as well as third countries could be extensive.”