Of all the macro trends business is trying to navigate through - the rise of authoritarian nationalism, deepening populism from the left and right, growing suspicion of globalism's benefits - none has the potential to undermine market stability more than the sharpening of the U.S.-China strategic rivalry.
- As one author noted recently, the near-daily headlines about tariff moves and counter-moves are "not just a trade war; this is a long-term struggle about how the U.S. deals with the rise of China as a technology power and strategic rival."
- We are in the early stages of a generations-long economic cold war with China, an adversary that has clear strategic goals and plans to achieve them. Beijing is moving its chess pieces; we're struggling just to put pieces on the board.
What's at stake, and what are the moves so far?
- China goals? Displace the U.S. militarily in the western Pacific, and subordinate the U.S. to China technologically, diplomatically, and economically by the 100th anniversary of the founding of the PRC in 2049.
- U.S. goals? it's still far from clear what the Administration wants: ultimately to separate the U.S. from the China trade entirely, or to use tariffs to leverage major changes in China's mercantilist and protectionist economic policies? The president's UN General Assembly speech this week certainly didn't clarify.
As the dollar value of tariffs continues to ramp, U.S. firms are increasingly asking, "Is there an end to the tariff spats? Are there off-ramps?"
- Some have speculated on the "Hail Mary:" Trump and China President Xi meet on the margins of the G20 in November and work "the deal." Even if it as empty as the Singapore announcement with North Korea, Trump has shown the ability to sell anything.
- But for a November "Hail Mary" to work, there must be signs now that the two sides are sitting down to begin fabricating the deal contours; so far there's no indication that's happening.
- More likely might be an actual deal that achieves some of that Trump wants: some market opening by the PRC, especially in financial services; some scaling back of their "Made in China 2025" industrial policy, to allow greater participation by U.S. hi-tech firms in the 10 sectors China is walling off; and more purchases of U.S. goods, to cut the trade deficit.
- China appeared to be inching toward a solution along these lines a few weeks ago; no longer.
- Most likely? The tariff moves and countermoves continue beyond the mid-terms and into 2019. The president is buoyed by what he sees as his success with the 2017 tax cut, and he's driving the messaging and substance of the China dust-up.
- A strong economy and a strong stock market only give the president increased confidence he's on the right path.
In the end, and to repeat: the U.S. and China have entered a new era of strategic competition, one that will not be resolved in the short term, even with a Hail Mary or more U.S. soybean exports. Business adjustments are likely to be tectonic as the emerging and disappointing new reality of the "China business case" slowly sinks in.
- If there is a silver lining to the deepening U.S.-PRC tariff spats, it's that they have awakened both U.S. business and the broader U.S. and western diplomatic community to China's goals. The inexorable push by Xi and his team to achieve them - through a muscular industrial policy and a disturbing "civil-military fusion" business strategy - need to be far more clearly understood and acted upon.
- It's time for the U.S. to put its chess pieces on board, starting with Rooks and Bishops called "U.S. allies!"
