Investors had managed to cling on to optimism that the 'trade skirmish' between the US and China would reach a swift conclusion - and that the US would ultimately be better off, as China would be forced to curtail practices like its IP theft from US companies.
But as downbeat markets observed on Monday morning, hope of a harmonious resolution died when Beijing cancelled plans to send two delegations to Washington. The delegates would have engaged in the fifth round of talks since the trade conflict - war, whatever you want to call it - began earlier this year.
Meanwhile, the US formally imposed 10% tariffs on roughly $200 billion in Chinese goods just after midnight on Monday morning, pushing China to impose tariffs on roughly $60 billion of goods. Even before the tariffs took effect, US stock futures and the yuan tumbled after the start of trading Sunday night, leading European and Asian stocks lower (to be sure, these moves took place with holidays in China, Japan and South Korea, which led to much thinner trading volumes).
Those losses were exacerbated when Beijing-run Xinhua news wire published a white paper where Chinese officials revealed that they would not engage in any further negotiations while the US continues to threaten further tariffs, per Bloomberg.
"The door for trade talks is always open but negotiations must be held in an environment of mutual respect," according to a white paper carried by the state-run Xinhua News Agency. Negotiations "cannot be carried out under the threat of tariffs."
This confirms that "the trade war is now a reality," according to Fitch chief economist Brian Coulton.
But to make matters more complicated, traders woke up on Monday to a new piece by Axios claiming that the Trump administration is planning to unveil "a major, 'administration-wide,' broadside against China" during the coming weeks. The broadside will reportedly include revelations of further Chinese malfeasance regarding China's "hostile actions" against the public and private sector involving China's "cyberattacks, election interference and industrial warfare (the Trump administration's term for China's IP theft practices)."
Step aside Russia: the US is preparing to accuse China of election tampering, meaning that there will soon be another "bogeyman" to whip up public hysteria about untoward foreign influence just weeks before the midterm vote.
The push will be led by senior officials on the National Security Council, as well as representatives from the Treasury, Commerce and Defense departments. "We're not just going to let Russia be the bogeyman," one White House official told me. "It's Russia and China."
"The push is coming from the national security apparatus," the source added. "Cyber theft has been appearing more often in the PDBs [President's Daily Brief]."
Here's more on the plan, courtesy of Axios:
- The White House plans to unveil new information about China's hostile actions against America's public and private sectors, and to act on it.
- Administration officials will call out China for its "malign activity" in cyberattacks, election interference and industrial warfare (e.g., intellectual property theft), an administration source told me.
- The administration has marshaled tons of data to support its charges against China. "We are going to show how the Chinese have infiltrated the U.S. and what we are doing to counter it," the source said.
Fortunately, Trump will reportedly "keep saying positive things" about Chinese President Xi Jinping to try and protect their relationship. Still, China has been engaged in many shady practices involving trade and cyberattacks for years. The question Axios asks is 'why press these issues now?'
It could be that Trump believes taking a hard line on China will win Republican votes during the midterms (after all, it worked the first time).
According to the Wall Street Journal, the Chinese white paper cited above accused the US of being a "trade bully", adding that the US abandoned many important channels of communication. Though, perhaps notably, the Chinese stopped short of making additional trade threats (which is unsurprising considering that China is running out of US goods to tax) only saying they wouldn't negotiate:
The white paper from China’s cabinet stopped short of making new trade threats against the U.S., according to the summary. It pushed back on some specific concerns from the Trump administration but said China said it always answers American concerns with the greatest patience and good faith.
The report described the Trump administration’s “America First” policy as an abandonment of norms of mutual respect and consultation.
"Rather, it has brazenly preached unilateralism, protectionism and economic hegemony, making false accusations against many countries and regions, particularly China, intimidating other countries through economic measures such as imposing tariffs, and attempting to impose its own interests on China through extreme pressure," the white paper said.
In the report, China argued that US firms that "voluntarily" turned over IP to Chinese companies have reaped massive rewards on their investments in China (which should make the IP thievery all okay):
"American companies in China have received huge returns through technology transfer and licensing, and are the biggest beneficiaries of technical cooperation," the report said.
And as China scrambles for every bit of leverage that it can use in a trade war that would allow it to avoid weakening its currency or selling its Treasury holdings at a loss, Axios added that China Daily, an English-language publication owned by the Chinese government, took out four pages of "sponsored content" in Sunday's Des Moines Register highlighting the negative repercussions of Trump's trade war (to wit, the bulk of the negative impact from the tariffs has been borne by US farmers).
With Trump headed to the United Nations General Assembly on Monday, expect these tensions to fester for the coming six weeks until a G-20 meeting in November.
So where does trade war with China stand currently? Edward Alden, senior fellow at the Council on Foreign Relations, told Bloomberg there was a chance the trade war could spiral out of control but that there is “a window for serious negotiation.”
“The Trump administration must get its position straight though -- what does it want from China, and who is empowered as a negotiator by President Trump to bring the deal home? Unless that happens, serious negotiations will be impossible and the likelihood of continued escalation increases,” Alden said.