Trade war game of chicken

Trade war game of chicken | Daily Tribune

The sweeping tariffs applied by the US on the world continue to roil countries without apparent regard to relationships, whether foe or friend, ally or non-ally. The stock market, which is the traditional barometer of how investors view the prospects of industries, has begun its descent into what could likely be uncharted territory for most listed stocks in the coming weeks, if not days.

As of last week, the Dow Jones Industrial Average has seen a drop of about 5.5 percent, wiping out more than a year of gains. The S&P 500 has entered a bear market down 14 percent from its recent high. The Nasdaq Composite slid by almost 6 percent. More than $5 trillion in market value in the MSCI all-country index of world stocks has been lost since Trump’s Liberation Day.

The US bond market has also been volatile with market prices of long dated US debt securities facing selling pressures because of continuing inflation concerns but probably more so because of investors’ perceptions that the rates of US Treasury issuances will likely have to be priced higher as the borrowing requirements of the US government further intensify, which in turn could trigger a recession.

What follows next is a depression, a doomsday scenario of prolonged economic decline until finally an economic armageddon —stagflation — which is when rising prices coincide with a period of slowdown or even a contraction of economic growth.

This twin combo of market uncertainties triggered by the looming tariffs tit-for-tat posturing of countries is the tragic consequence of a trade war. Nobody knows how this current scenario will eventually pan out, leaving investors and businesses in a state of limbo and chaos.

And apparently it is precisely this scenario that seems to be the negotiating ploy being employed by Donald Trump to pressure America’s trading partners to give in to his demand to start shifting the balance of trade in favor of the US. This seems to be Trump’s favored strategy as described in his bestseller, The Art of the Deal.

His opening gambit in negotiations is to initially push hard, ask for something atrocious, almost impossible to be accepted by the other party; spot a weakness in the opposition, then dig in to negotiate a deal from a position of strength. From there, the negotiations turn into a waiting game of chicken to see who blinks first.

In this high stakes drama the world is currently witnessing between the two biggest economic and military superpowers, the US and China, it is clear that China is not taking Trump’s tariff hardline strategy sitting down.

More than $5 trillion in market value in the MSCI all-country index of world stocks has been lost since Trump’s Liberation Day.

Chinese leader Xi Jinping has countered with their own tariffs in equal measure, slapping a 125-percent tariff on all US imports entering China. Trump, not to be out-trumped, responded with an additional tariff of 34 percent, ramping up the tax barricade on China to 145 percent, which for all intents and purposes is equivalent to a blockade on all China-made products.

This tit-for-tat Russian roulette tariff contest has taken a critical turn and is dangerously evolving into an irrational “face and honor” pissing contest between Trump and Xi, who apparently is taking to heart Mao’s admonition that China will never give in to Western powers in the aftermath of the Korean War in the 1950s. This is quite possibly bringing these two behemoth protagonists dangerously to the brink of an armed confrontation.

We can only look back to the events of 85 years ago that preceded WWII, particularly the raw materials trade blockade of Japan by the US that forced Japan to attempt to unseat the US as the dominant power in Asia, which sparked the armed hostilities.

Although Trump has shown signs of blinking with his recently announced 90-day pause ostensibly to allow for negotiations with countries looking for a compromise and tariff exemptions for smart electronic products and semiconductors, the USA’s primary antagonist, China, remains to be a formidable hurdle for Trump to reach a deal. The world can do nothing but hold its collective breath and hope that cooler and more rational thinking will prevail for both China and the US.

Until next week… OBF!

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