US-China trade threats escalate, but who has more to lose?

The trade tiff with China has captured investors’ attention over the last several days. The stock market, which originally brushed off the news as blather, is beginning to take the threat of an outright trade war with the world’s second-largest economy seriously. What was particularly striking was the Administration’s bombast, given our desire to engage President Xi’s assistance with the evolving North Korea denuclearization negotiations.

The S&P 500 is off a little more than 1 per cent over the last five trading days on tariff  concerns. The NYSE Steel Index is off more than 5 per cent in the same timeframe.  Soybeans, the target of Chinese tariffs, have plunged 14 per cent since May.

The likelihood of an outright trade war with China remains heightened. To be clear, the dispute with China isn’t so much about steel or soybeans as it is about protecting America’s intellectual property, an issue about which both Democrats and Republicans can agree.  Policymakers fret that “Digital China 2020”, China’s plan to become the world’s technology leader, is built on stolen US intellectual property.

Trump & Company are increasingly comfortable with their inimical stance, believing that near-term pain may be worth longer-term gain for a couple of reasons. First, thanks to Democratic insouciance, the Republican lock on the midterms appears solid. Second, when it comes to trade, China needs the United States far more than the other way around.  According to the US Census Bureau, China exported nearly $600 billion worth of goods to the US over the last 12 months, nearly four times the $154 billion the US exported to China over the same period.

As badly as the US markets are suffering from the drumbeat of trade threats, Chinese markets are suffering far worse. The Shanghai Composite Index is off nearly 5 per cent over the  five days, China’s credit default swaps have widened, and Chinese bond yields have plunged.  This dispute is all about intellectual property. Steel, soybeans and the equity markets are the collateral damage.