[Source / Columnist of Observer Network: Xinhuai Mei]
First, release the "Position Paper on Several Issues in Sino-US Economic and Trade Relations", then announce additional countermeasures against the US, on April 9th, China completed the second round of sparring in response to Trump's tariff war in a "courteous but firm" manner, demonstrating the demeanor of a major country. In contrast to the US approach, this also enhanced China's credibility.
Trump then announced further increases in tariffs on Chinese goods and suspended new tariffs on economies that do not retaliate against the US for 90 days.
In response, there have been various interpretations in public opinion. Some say Trump is backing down, while others believe China's situation is precarious. In my view, these differentiated suspension measures may seem like a "good move" in the short term, but in the medium to long term, they are a complete blunder. The marginal damage of increasing the tariff rate from 104% to 125% is already close to zero. The differentiated suspension also indirectly opens up opportunities for China to alleviate the impact. Changing policies frequently and inconsistently does not help Trump's longed-for return of manufacturing and long-term investment.
American financial markets are Trump's Achilles' heel
After Trump announced the differentiated suspension of the tariff war, the effect was immediate: on April 9th local time, the US stock market surged dramatically. The Dow Jones Industrial Average soared nearly 300 points, with gains nearing 8%; the S&P 500 index rose by over 9.5%, and the Nasdaq gained over 12%. Key stocks such as Tesla saw comprehensive gains.
After being caught off guard by China's first round of retaliatory measures and a severe drop in the US stock market, Trump indeed showed a strong ability to find ways out of difficult situations. This measure benefits the American financial market and alleviates the current impact of the tariff war on the entire US economy in the short term.
After all, the financial sector accounts for a much larger share of the US economy than China. The proportion of securities in American household assets far exceeds that in China, and the US stock market has repeatedly set new records in recent years, while the Chinese stock market remains relatively weak. Financial markets are highly dependent on confidence and are particularly fragile under panic. All of this makes the US financial market one of the biggest vulnerabilities in Trump's tariff war:
While both the Chinese stock market and the US stock market suffer due to the tariff war, the Chinese market is like jumping from the second floor, possibly spraining an ankle but unlikely to fracture or be fatal; the US market is like jumping from the tenth floor, survival depending on divine mercy.
For this reason, as early as March 23, 2018 (local time in the US Eastern Time Zone), I proposed in the article "China Should Wage an Epic Trade War Against Trump" that we should focus on targeting the American financial market as a key area for economic retaliation:
"China's economic counterattack should not be limited to the goods trade sector but should also cover the financial sector. The weapons available to us in the financial sector include not only the long-discussed sale of US Treasury bonds but also the targeting of the US stock market. Given that the US stock market has repeatedly reached new highs, the Dow Jones Industrial Average refreshed its closing record more than 60 times last year, the most since 1995, which is also Trump's favorite 'achievement' to boast about to voters. Striking this area could hurt Trump significantly.
Indeed, a series of trade disputes has already pushed the US stock market into danger this year: since the end of 2016, the US Consumer Price Index has remained above 2%, making inflation pressure a significant reason for the Federal Reserve to tighten monetary policy. However, tightening monetary policy could burst the US stock market bubble, repeating the fate of Japan's bubble economy collapse. Now, if Trump imposes large-scale punitive import tariffs, it will further increase inflation pressure in the US, thereby increasing the probability of the Federal Reserve accelerating interest rate hikes and causing a hard landing of the US stock market.
On this basis, government fund investors or private fund investors can further carry out targeted strikes, using legal methods to short sell target enterprise stocks that meet the principles of precise strikes, triggering 'herd behavior' in the market, leading to a sharp drop in their stock prices."
The Art of Timing in China's Asymmetric Strike on the US Stock Market
In the first round of the all-encompassing tariff war, we witnessed China's timing art in announcing countermeasures targeting the US financial market, as well as Trump's arrogance and lack of preparedness for possible Chinese retaliation and the vulnerability of the US financial market.
Trump announced the all-encompassing tariff war on Wednesday afternoon, April 2nd, local time in the US Eastern Time Zone, at 3 PM, or Thursday morning, April 3rd, Beijing time, at 4 AM. The timing itself caused an asymmetric impact on the stock markets of both countries and even the entire East Asia and US stock markets.
Historical record decline in US stock market
Because normal trading hours for US stocks are from 9:30 AM to 4:00 PM Eastern Time, extended trading hours include pre-market trading from 4:00 AM to 9:30 AM and after-hours trading from 6:00 PM to 8:00 PM Eastern Time.
As a result, even considering only regular trading hours, US stocks would need to withstand impacts from 3:00 PM to 4:00 PM on Wednesday, April 2nd, and the entire trading days on Thursday, April 4th, and Friday, April 5th, before stopping trading over the weekend to digest the impact. In contrast, A-shares and H-shares only needed to endure one trading day on Thursday, April 3rd, followed by three consecutive days of holiday starting April 4th to digest bad news.
This choice of timing indicates that he never considered the asymmetric impact of the tariff war on the stock markets of China, East Asia, and the US. He did not consider how timing could maximize the damage to his opponent's financial market while minimizing the damage to his own market. He didn't even consider the possibility of China's retaliation.
If he wanted to inflict a heavier asymmetric blow on China's stock market, he should have officially announced the tariff war on Sunday evening in the US Eastern Time Zone, or Monday morning in Beijing time. This way, China's stock market would open within two or three hours and face the first wave of panic selling, while the US would have an extra night to digest panic emotions and might even enhance confidence in its own market by observing the panic in China and East Asia's stock markets.
In comparison, China's first round of countermeasures demonstrated quite sophisticated timing skills. We did not choose to announce immediately on the Beijing time of April 3rd, clearly indicating that these countermeasures were well-prepared. Instead, we chose to announce at 6:00 PM Beijing time, or 5:00 AM Eastern Time in the US, on April 4th, Qingming Festival. The purpose was to avoid exacerbating market panic on April 3rd due to countermeasures and to strike the US stock market while giving domestic stock markets two days to digest and mitigate the impact. The announcement time at 5:00 AM US time also gave the US side no time to issue calming announcements to stabilize market confidence.
April 4th, screenshot of the State Council announcement
In the second round, China's timing strategy not only demonstrated preparation but also increased the element of surprise for participants in the US stock market, partially offsetting the diminishing marginal impact of China's countermeasures on the US market:
After the trading day on April 9th when A-shares rose while other global markets fell, China announced the second round of additional countermeasures at 6:00 PM Beijing time, or 5:00 AM Eastern Time in the US. This avoided impacting the same day's A-shares while continuing the strategy of striking US stocks at the opening.
The difference this time was that three hours before announcing the countermeasures, the State Council Information Office released the "Position Paper on Several Issues in Sino-US Economic and Trade Relations" at 3:00 PM, right at the end of the A-share trading day. This avoided uncertainty that could affect the A-share market, making the market feel that, during this turbulent period, China is at least a major country with predictable foreign trade and investment policies and relatively low risks of uncertainty.
At the same time, this white paper led Western media outlets and participants in the US stock market to generally believe that China would not take a second round of countermeasures. Under these circumstances, announcing the second round of countermeasures at 6:00 PM left Western media outlets and US market participants caught completely off guard. Major Western media outlets such as The New York Times, BBC, Reuters, and Agence France-Presse generally took one to twenty minutes after the announcement to report the news, and prominent American media reporters expressed amazement at the explosive effect.
Differentiated Suspension of Tariff War, Resulting in Unintended Consequences
Thus, Trump's announcement of the differentiated suspension of the tariff war appears to be a "good move" in the short term and on the day, but in the medium to long term, it is an unintended consequence of a poor decision.
Because the 104% tariff rate effective on April 9th is basically the prohibitive tariff rate for Sino-US trade, its marginal damage to China's trade is approaching zero. Suspending the tariff war for 90 days on 75 economies that have not retaliated against the US, however, allows Chinese enterprises and businessmen in these countries/regions to utilize this window of opportunity to urgently and massively re-export "Made in China" products, thereby indirectly alleviating the impact on China. They will certainly not waste this opportunity.
On April 9th local time, Trump suddenly announced a 90-day deferral for most countries, retaining a so-called baseline tariff of 10% during this period.
In terms of circumventing regulations, we should not underestimate the creativity of businesses across countries. While modern manufacturing development requires extremely high thresholds, circumventing regulatory "innovation" requires very low thresholds. Before joining the WTO in late 2001, to obtain export quotas for textile and apparel markets in the West, Chinese companies flooded into developing countries with quotas, resulting in as many as hundreds of thousands of Chinese workers in Mauritius, an island nation in the Indian Ocean, whose population was only 1.26 million until the end of 2023. Mauritius benefited from this for many years. Today, how many historical marvels in international trade will Trump's differentiated suspension of tariffs create in the next 90 days? Let’s wait and see.
In the long run, Trump's tariff war aims to reconstruct the US tax-economic system and rebuild US manufacturing. However, the initial investment costs for manufacturing are enormous, especially high in the US. It requires a long-term predictable policy environment to attract real investor involvement. Can his flip-flopping, inconsistent style instill confidence in the predictability of the US policy environment among manufacturing investors?
No matter how flexible his postures or how proud he is of his "art of negotiation," in the medium to long term, people cannot defeat objective economic laws. There is no need for us to be overly anxious about Trump's measures to initiate a third round of the tariff war. What we should do is strive to discover and utilize potential opportunities created by the differentiated suspension measures. In continuous rounds of strategic games, opponents' short-term measures to extricate themselves often expose more exploitable vulnerabilities.
Meanwhile, if insiders in the Trump administration use insider information about the differentiated suspension to profit prematurely, the world will witness a good show of American political "internal strife."
This article is an exclusive piece by Observer Network. The content purely reflects the author's personal views and does not necessarily represent the platform's stance. Unauthorized reproduction is prohibited, or legal action will be taken. Follow Observer Network on WeChat (ID: guanchacn) for daily interesting articles.
Original: https://www.toutiao.com/article/7491593164298388009/
Disclaimer: The views expressed in this article solely belong to the author and are welcome to express your attitude through the 'Like/Dislike' buttons below.