Narrative Shift on Trade War

Finance tends to be more level headed because there is money at stake. People have skin in the game and don't want to lose money.

Macrobusiness: China is overreaching in war with US

China is already playing with incendiary stuff by dropping the yuan. Not just as a provocation to Trump but in response to Fed tightening. If it continues then capital outflow will intensify and it risks setting alight its great pile of forex reserves. Trump could even weaponise the Fed. A few more tariffs and some infrastructure stimulus and he’ll entrench US inflation, driving US interest rates higher and blowing up the Chinese external account like some common emerging market. Financial crisis will ensue and China will be set back a decade or be pushed into a permanent Japanese-style stagnation and middle income trap.

I posted one article back in April: Chinese Media: China Loses All Out Trade War

Bloomberg: China Begins to Question Whether It’s Ready for a Trade War

I wrote China Walks Into Trade Trap and China Enters the Trade Trap because whether intentional or not, it is a trap for China. The United States has had a horrible economic policy for at least 20 years, if not 40 or more. China benefited greatly. As Trump saw it, they were probably wondering how they were getting away with everything and not facing any pushback. Now President Trump is pushing back. As shown in prior posts, he has deep support. A trade war probably will increase his popularity, not decrease it, because the public wants a fight on this issue. They care more about changing economic policy than the immediate impact of slower economic growth.

For China, the best policy is to avoid confrontation with the United States because as I laid out in The Logic of Strategy: Yuan Devaluation and the Road to Trade War, a trade war with China could escalate into a full-blown geostrategic containment policy. However it starts, the Logic of Strategy supports an emerging order, a new policy of containment for the U.S. and regional allies such as Australia, Japan and countries generally wary of China's rise such as Vietnam. It is in China's interest to short-circuit this process by defusing the situation.