The trade war between the United States and China has been a defining feature of the economic and financial landscape during the past year. U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, have been the principal actors in the drama. They have engaged more than once in blistering exchanges fiery rhetoric, only to walk back from the brink each time with words of diplomatic conciliation.
This time it is different. With China calling Trump’s latest bluff earlier this month and escalating its own retaliatory tariffs in response, the White House has dug in for a fight that has little prospect of ending anytime soon.
As the U.S. presidential election draws ever closer, an increasingly isolated Trump may find himself in a no-win scenario. That could be bad news for investors.
Raising the stakes
Earlier this summer, Trump seemed to be moving toward a somewhat stable trade conflict posture. He was not ramping up tariffs aggressively, but the war continued to simmer. Then, in early August, he set the pot boiling once again with a raft of new threats.
If Trump’s latest aggressive turn was surprising, China’s response was downright shocking. As we discussed in a previous research note, Beijing opted to allow its currency, the yuan, to float. The result was a brief bout of financial turmoil. Trump initially struck back hard, rhetorically speaking, apparently abandoning the advice of his closest trade advisors in favor of his own intuitive approach.
Evidently, no one in the White House believed the Chinese government could be so intransigent. Stephen Moore, a trusted ally of the White House who served as Trump’s economic adviser during the 2016 presidential election, gave voice to the administration’s increasingly obvious state of perplexity:
“We’re learning that maybe China has a higher pain threshold than we