China's Total Recall

Daniel Shainberg

September 23, 2018

Just as we were expecting the Trump pattern of "bluster" followed by a "dial-back," we get the exact opposite with an apparent "double-down." 

Sometimes things don't go as planned, and that is precisely what the market may be underestimating with regards to the China-U.S. trade dispute that now seems headed for a trade war or even worse.

China was set to send two delegations, but as of Saturday morning, according to the Washington Times, both delegations have been "recalled."

The talks have been in play for weeks, but China blamed President Donald Trump's new round of tariffs as "undermining efforts." The latest U.S. tariff salvo was in reaction to news that China was buying Russian weapons, notably the purchase of Russian fighter jets and surface-to-air missile (SAM) equipment. 

Foreign Ministry spokesman Geng Shuang said China "is strongly outraged by this unreasonable action by the U.S. We strongly urge the U.S. to immediately correct its mistakes and revoke the so-called sanctions. Otherwise, it must take all the consequences." The U.S. says China's purchase of the weapons from Russia violated a 2017 law, the Countering America's Adversaries Through Sanctions Act.

For now, Trump has an incentive to talk tough and support the farm-belt voters that China threatens with their agricultural counter tariffs. With the rise in nationalism globally, the tough talk of threats and warnings of "dangerous escalations" seem more and more likely to become a self fulfilling prophecy. Russia was always ruled by an iron fist. Recently Chinese leader Xi Jinping performed a surprise "power grab" condemned by the West as a step towards tyranny after scrapping the two-term limit that was designed to guard against Mao-style rule. 

The weekend headline of the latest ramp up in tariffs and threats is noteworthy after a bullish week in the equity markets and timely after Ray Dalio's recent warning that history suggests we could be entering a hot-war. Dalio likened the current wave of nationalism to the pre-war period stating "I think that the 1935-1940 period is most analogous to the current period and that it is worth reflecting on what happened then when thinking about US-Chinese relations now. To be clear, I’m not saying that we are on a path to a shooting war, but I am saying that we have to watch what path we are on, given these cause-effect relationships that history has taught us."

Dan Shainberg
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