Recent events have once again thrust the trade relationship between the United States and China into the center of public debate. Both countries are preparing for some sort of economic combat. China announced plans to impose strict export controls on rare earth minerals, a move that coincided with new tariff threats from U.S. President Donald Trump. As China implements U.S.-China Trade War 2.0, analysts are reevaluating the realities. Specifically, they are concerned about the protectionist tenor of some of these actions and how these will hurt both countries’ economies.
China’s announcement that it will impose new export controls on rare earth minerals is alarming. American industries that rely on these critical materials are especially concerned. In retaliation, President Trump has pledged to raise tariffs even higher, demonstrating his readiness to play a dangerous game of chicken. Some analysts believe that the two countries will enter a “limited trade war.” This situation will usher in years of contentious litigation but no immediate victory.
While things continue to play out, the risks are clearly starting to edge toward a downside scenario. This sudden change is expected to have catastrophic effects on both countries’ economies. U.S.-China trade tensions have heated up once more. Yet today, they are arguably the single greatest concern voiced by both policymakers and economists. This past weekend, in a stunning reversal, the right and the left did an about face. In turn, an artificial sense of permanence settled in. The November 1 deadline for China’s new export restrictions and U.S. tariff increases is fast approaching. This last development has been raising alarms of a further deterioration in bilateral ties between the two countries.
The clock is ticking. The next few weeks will be extremely important. Between mid-October and November 1st, we should experience several surprising twists and turns in the still ongoing negotiations. Fitch and other analysts are looking at different scenarios to determine how China’s economy – and by extension, its currency – would fare. They are thinking about scenarios in which relations with the U.S. go bad, get better or stay hunky dory.
The base case scenario shows a limited trade war. In this premise, the two countries trigger a series of economic antagonisms, avoiding open warfare. The likelihood of falling into a downside scenario is growing by the day. It’s critical that our stakeholders stay engaged and informed through the process. A few abrupt turns would radically transform the picture of U.S.-China trade relations.