The trade war between the United States and China has been chugging along since the early days of Donald Trump’s presidency. Negative effects are rippling through global markets, including China’s Asian neighbours, but neither the United States nor China is showing any signs of relenting.
Let’s suppose that this trade war stretches out for months or years to come, like many trade wars throughout history. Which economy, China’s or the United States’, is best prepared for a long term trade stalemate? Experts and reasonable people have different answers to this question but we think there are certain realities that anyone can agree upon.
Isolation and Independence
Of the two nations, the United States seems more able to survive economic isolationism, though recent ripples in the Dow Jones show stress. This is surely President Trump’s belief, as tariffs and other methods make it difficult for China to trade, not just with the United States but with its own regional neighbors. The United States has many allies and trading relationships that China lacks.
The United States has vast oil reserves and domestic production systems. And, while China produces a great deal, and imports what it doesn’t, much of its oil must be imported, arriving by ship, road, and rail. If China is forced into prolonged isolation, its ability to keep the lights on could be challenged. This is one of the many reasons why President Xi Jinping has pushed so hard for his One Belt infrastructure expansion into other nations and continents. The more connected it is, the longer China can survive and thrive during a trade war.
No matter whether you’re China or the United States, investors are wondering what the “next big thing” is. The tech bubble that was the investment story of the past decade is cooling off in the United States, and no one is quite sure what new business forces will replace it, or if it will recover to new heights. There is plenty of red in the recent Dow Jones charts, and investor confidence in a Dow Jones recovery is increasingly tempered with caution.
The same is largely true in China but the country has the benefit of having invested in domestic corporations for decades. It’s a much more closed system. And, while this restricts China from the inputs of competition and cooperation, it also makes it easier for its government to pull the strings, perhaps even stifling a recession that could get out of hand in an unplanned capitalist economy.
One major challenge for China is that, as wealth and standards of living have increased, its role as the world’s manufacturing hub has started to shift to other, lower wage nations, like Mexico. China is still very much a developing economy, a middle wealth nation. Domestic products and services, combined with increased economic input from Asia and Africa, could make up the difference, but only time will tell.
Both the United States and China are digging in their heels for a long trade war. It’s possible that it will never end, and that the world order will simply adapt to the new status quo. From our vantage point, this seems more likely than a cooling of tensions, at least in the short-to-medium term.