While COVID-19 put the US-China trade war on the backburner, recent events have reopened old wounds as the US gears up for election season and China is faced with the difficult prospect of meeting its obligations under the phase one deal. But while it’s unlikely that Trump will move on China prior to the election, Beijing could force his hand.
“The strained relationship between the United States and China is intensifying ahead of a US election, where the latter is likely to be blamed for the former’s current economic woes,” said Binay Chandgothia, portfolio manager at Principal Global Investors. “Recent Chinese legislation increasing its control over Hong Kong could become the latest escalation point.”
If the situation were to escalate in Hong Kong – and the US rescinded its recognition of Hong Kong as essentially an independent country – the US could use the “nuclear option” of banning the Hong Kong Special Administrative Region (HKSAR) from owning US dollars – essentially crippling the Hong Kong dollar and causing massive turbulence throughout the global economy. And while that nuclear option is unlikely, cooler heads will still have to prevail.
“Realistically, neither China nor the [US] can afford significant economic damage in the current environment,” Mr Chandgothia said. “Even if temperatures rise, the desire to avoid detrimental economic outcomes should prompt both sides to keep working with each other. Yet, the risk of policy mistakes leading to ever more dire actions does exist.”
Mr Chandgothia believes it’s unlikely the US will use tariffs against the HKSAR for fear of endangering its US$25 billion trade surplus – and given that 99 per cent of HKSAR exports are re-exports, only 1 per cent of its exports could attract new tariffs.
“Actions will likely revolve around sanctions against the officials behind the national security law,” Mr Chandgothia said. “On the other side, China’s responses to [US] measures have been restrained, and will likely remain so.”
