How will the Sino American Trade War End?

The trade war between China and America seems to be getting worse every day. When negotiations between Trump and Xi Jinping were happening, the entire world was waiting with bated breath. A stalemate seemed like the most likely outcome, and that seemed to be the best result that all the concerned parties could have hoped for. However, the negotiations between the two largest economies in the world quickly fell apart. Both Donald Trump and Xi Jinping upped the ante when it came to nationalistic rhetoric.

The entire world once again looks on as the two biggest economic giants in the world prepared to collide. Experts are actually divided as to how these power games will finally play out. There are some who believe that a stalemate will be reached whereas others are of the opinion that a full-blown trade war is absolutely inevitable. This article will explore these different possibilities in greater detail.

Possibility #1: All out Trade War

This is the least likely of the outcomes. However, if this scenario actually plays out, the impact will actually be quite significant. The manner in which the current negotiations have been terminated suggests that it is quite likely that both American and China begin to believe that negotiation is not really an option. Both sides have already started the narrative of hyper-nationalism. It is likely that both these nations decide to have a full-blown go at each other.

The outcome will be disastrous for both economies and for the world in general. An all-out trade war between China and the United States will see tariffs escalations being implemented by both countries. In many cases, market access may also be cut off. This is likely to disrupt entire supply chains, and the business interests of multinational companies are also likely to be impacted. Both countries will see lost trade opportunities, lost jobs, and rising inflation. However, the cost incurred by the Americans will be greater than the Chinese.

Some countries are also likely to benefit from the trade war between these two nations. For instance, if America decides to side-line Chinese companies, it will have to shift its supply chains to other nations. Other South East Asian nations where the labour and manufacturing costs are low may suddenly see their economies grow rapidly since American companies would want to divest out of China. Similarly, the Chinese will also like to have their own captive markets where they can sell their products. China has already been investing heavily in Latin American as well as African countries. It may also try to sell goods to European countries where consumers tend to have high disposable incomes.

The bottom line is that an all-out trade war would lead to the creation of cold war type camps. This would disrupt trade and commerce all over the world, leading to sub-optimal economic growth.

Possibility #2: Strategic Retreat

This is the most likely outcome of the current Sino American trade war. It is likely that both China as well as America will realize that their current aggressive positions are unnecessary and will only harm their own economic interests. Hence, both countries may agree to a strategic retreat.

This means that both America and China will take down the sanctions that they have levied on each other. Hence, for the moment, trade and commerce would continue as usual. However, behind the scenes, both nations will continue their national rhetoric. As a result, American companies will start looking for alternative supply chain routes. This would enable them to reduce their reliance on Chinese companies. Similarly, China would also start developing alternate markets where it can sell the products that it manufactures. At the same time, it would also try to reduce its reliance on American research and development.

Both countries will be able to achieve their objective of reducing reliance on the other. There will be no theatrics, no stock market crashes, and no economic turmoil in the short run.

Possibility #3: New Deal

Both the United States and China are hell-bent on sticking to their own terms and conditions. Hence, it is unlikely that a new deal will be agreed upon. However, this possibility cannot be ruled out completely either.

In order for this to become a reality, both countries will have to compromise a little. America will have to tone down its aggressive posture and treat China with respect and dignity that the second largest economy in the world deserves. At the same time, China will also have to make changes to its controversial intellectual property rights policies. It may also have to provide more market access to American companies. Both countries will have to concede to some demands of the others in order to make this approach work. This is unlikely to happen because both sides want to score a public relations victory as well. This means that it will not really be able to soften their stance given the hyper-nationalist rhetoric that they have already whipped up.

Hence it is most likely that both the United States and China will choose a strategic retreat. This means that they will pretend to have reached an agreement with the other party when in reality, they will be making arrangements to reduce reliance in the long term.