T-Day: US-China Trade War Is An Echo Of What Happened Between The US And Japan In The 1940s

Submitted by Michael Every of Rabobank

Today begins a week pregnant with historical memories of events that are uncomfortably close to our own in some worrying respects, even if we seem to be getting our memories all wrong as we get older. We will also be seeing some key data and events that many will no doubt also get wrong if recent form is any guide.

After all, as we lead up to the annual memorial of D-Day US President Trump will be in London for ‘T-Day‘; and reports suggest there will be a vast number of protestors to show their displeasure, while the Mayor of London has already publicly compared his visitor to 20th century fascist leaders. Oddly, when Chairman of the Chinese Communist Party and Chinese President Xi Jinping arrived for his state visit, there were no such protests or declarations, just the same tea with the Queen. Trump will, of course, press the UK hard to drop Huawei on national security concerns, which will immediately mean that there won’t be any more Chinese state visits to the UK anyway, which is putting the consequences of that decision mildly.

Will the US president get further involved in either the Tory Party leadership contest or Brexit though? Against protocol, he’s already come put to back Boris and a Farage-ist Hard Brexit. Combine that with the strained trade relations between the EU and the US even before Trump moves on the continent later this week, one social media commentator yesterday wondered if we shouldn’t start imagining the US putting tariffs on EU car exports and NOT doing so for the UK…and German auto production shifting to the UK post-Brexit rather than the other way round. Don’t rule it out in the current febrile state of the world.

Underlining the context of the Trump visit, this weekend saw China increase tariffs on some US products again, just as the US begins actually physically taking tariffs on Chinese goods that are only now arriving by sea. We also saw a Chinese white paper on the trade issue underline its fundamental position that core US demands over subsidies and IP and genuinely open markets cannot be met as they conflict with China’s sovereignty. (And, from their own historical perspective of unequal treaties, of dignity.) China will fight to the end rather than submit.

Indeed, China is fighting back. Besides the rare earth threat, China has just announced it will be creating a list of “unreliable" firms, institutions, and individuals to target who “don’t obey market rules, the spirit of contracts, and who carry out a block or cut in supply for Chinese enterprises for non-commercial purposes and who severely harm Chinese enterprises’ rights and interests.” It shouldn’t be hard for China to spot that pattern of behaviour given how critics allege it’s standard practice by Chinese entities vs. foreign firms; yet this takes us into the realm of revenge attacks - as if the two Canadians being held in China weren’t evidence of that already. What happens if a firm has to both comply with US sanctions vs. Huawei and yet then faces Chinese punishment?

Moreover, the weekend’s Shangri-La defence summit in Singapore saw blatant evidence of US-China tensions: China declared its militarization of the South China Sea followed provocative naval intrusions by the West, rather than vice versa; that it had never invaded another country (Vietnam and India might disagree on that); and that, if necessary, it would not hesitate to invade Taiwan. With the political atmosphere in China already being VERY carefully monitored as we approach tomorrow’s second ‘T-day’ of the week, the 30th anniversary of Tiananmen Square, the overall atmosphere has now deteriorated so rapidly that instead of writing about tariffs as the big threat, or of China selling US Treasuries, the UK Telegraph’s Ambrose Evans-Pritchard is talking about a Chinese rare-earth boycott being met by a US oil embargo to China, and the historical echo of what happened between the US and Japan in the 1940s. (Note, it was related to what Trump will be commemorating in Europe later this week.)

If that isn’t enough to focus on for today for the markets, we also have some “throw-aways”. The US is withdrawing GSP trade privileges for India, arguing that if the country can run a space program it doesn’t deserve GSP status, which is a slap in the face diplomatically if a small hit economically; Mexico’s president is suggesting that he might be able to accommodate US demands over immigration controls at the border to try to avoid looming tariffs a week today; suggestions of US tariffs on Australia were shot down by Trump; Syria (or perhaps Iranian proxies in Syria) shot two missiles at Israel, who responded in kind; and the Wall Street Journal says Alphabet/Google is being investigated for a possible anti-trust charge by the US Department of Justice.

Against all that backdrop you can make a bullish case for oil, and a very bearish case too, and the latter is clearly well ahead in that struggle, and inflation expectations are tanking; you can’t see anything wrong with the signal that global bond markets are sending; and you can’t make any argument for anything other than a strong USD.