This war is a bitter fight for ideology and power and it’s still a work in progress after 25 hard months…….

We’re 25 months into what most people thought was a simple skirmish that would blow over quickly.

Well, they’re still slugging it out.

Normally, 3 strikes and the batter is out. No such luck.

You already know why I think there is no appetite from the White House for the trade war to end, but it’s easy to lose track of where we’re up to, so here’s the score card, one bone shattering strike at a time.

Strike 1, 7 July 2018, Game on mole - U.S. 301 tariffs (25%) were placed on an estimated US$50 Billion in steel, aluminium and other products with a list of US$200 billion considered for 10% tariffs.

Strike 2, 10 May 2019, The Don’s retaliation - In retaliation against China’s alleged roll-back of certain trade agreements, US tariffs which were imposed on the additional US$200 billion of Chinese products were increased from 10% to 25%.

Not thinking he’d hit the ball hard enough, the Don took another swing by threatening to extend tariffs over the entire estimated US$540 billion of annual Chinese imports - that’s the additional US$300 billion, for good measure.

Strike 3, 10 May 2010, China’s triple down threat - When leaving the Washington trade talks, China Vice Premier tripled down on the conditions that would have to occur to end the trade war, namely: 1. Remove all extra tariffs. 2. Set purchases of goods in line with real demand. 3. Ensure the text of the deal is ‘balanced’ to ensure the ‘dignity’ of both nations.

Strike 4, 13 May 2019, The Dragon finally picks up the blunt instrument - Prior to the planned release of new tariffs on US$300 billion in Chinese imports from the White House, China responded with retaliatory tariffs. The tariffs would apply to only about US$60 billion of U.S. goods, with most items seeing existing tariff rates at least double, with 5% items moving to 10%, and 10% items to 20% or 25%. In addition, during May, China threatened to restrict rare earth exports to the west.

Strike 5 - 13 May 2019, Play suspended, with US$300 billion tariffs yet to land - The Don’s threat was put in play, but team China was slow to come to the mat, and meanwhile the Don picked up his bat to play hardball in another ball park.

Strike 6, June 2019, The Don smashes the Mexican ball out of the ball park with tariffs on Mexican imports - Mexico, which then accounted for 14.9% of trade with the U.S., making Mexico the second largest trading partner, copped the 6th blow. But the Mexicans quickly went to the mattresses to discuss tightening up migration controls with the U.S., and Mexican tariffs were then suspended indefinitely.

Strike 7, 5 June 2019, Quickly capitalising on his Mexican homer, the Don swatted an Indian pitched ball, but the Indians roared - And that play didn’t go so well. Firstly, the U.S. terminated India’s designation as a beneficiary developing country under the GSP (which provides easy access to the U.S. and lowers U.S. duties on developing country exports). Secondly, the move meant that U.S. tariffs would apply to some US$5.6 billion of Indian imports.

Strike 8, 16 June 2019, India joins the war - In retaliation, India placed tariffs on 28 imported U.S. products. With walnuts, import duty was raised from 30% to 120%. Duty on chickpeas, Bengal gram and masur dal increased from 30% to 70%.

Strike 9, China digs in with rhetoric and currency devaluing moves - In response to the Don’s comment that if President Xi chose not to meet him at the G20 at the end of June, he would impose tariffs on at least another US$300 billion of Chinese imports - the Chinese Foreign Ministry said:

“If the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.”

China then continued its direct intervention internally through further relaxing bank reserve requirements and pumping more liquidity into its economy, adding a currency war flavour to the game.

And then, all eyes refocused ahead to the G20 meeting in Japan for some sort of silver bullet from U.S. Secretary of State, Mike Pompeo. This would be in the shadow of the 1 year anniversary of the US imposed Aluminium and Steel tariffs - some 3 weeks away at that time.

Platitudes were exchanged in Japan with no breakthrough, as expected, although the Don did decide to cease fire on the US$300 billion in tariffs to give President Xi another turn with the bat.

Strike 10, 2 August 2019, Enough’s enough and the Don points to centre field with 10% tariffs on US$300 billion - Well, Strike 5 which had been winding up since 13 May 2019 finally landed, with US$300 billion of goods to be tariffed at 10% from 1 September 2019. This included all consumer products. That’s US$250 billion of pre-tariff imports attracting 25% tariffs and US$300 billion attracting 10%. But it’s not as simple as multiplying each out and adding to see how much tariff revenue the U.S. would derive - the problem was worse in that trade flows were sure to decline (which they did).

Strike 11, On Jackson Hole Friday, 23 August 2019, China stepped up to the plate and smashed out US$75 billion in new tariffs on sensitive U.S. sector goods - China’s Finance Ministry announced it would place additional tariffs of 5% or 10% on US$75 billion of U.S. imports starting on 1 September. It also said that it planned to resume tariffs on U.S. imports of automobiles and automobile parts (25% for vehicles or 5% on parts), effective 15 December.

The new tariffs targeted 5,078 products, including soybeans, coffee, whiskey, seafood and crude oil, an industry the U.S. is trying to ramp up.

The retaliation included technology company/rare earth supply chain bans and disruptions as well as a weakening Chinese currency providing China with more buffer than the U.S.

At the same time, the Don asked American companies to consider alternatives to doing business in China.

And, in response, the Communist Party People’s Daily reported:

“China is confident that it will follow its own path and do its own things well, and will never waver in its stand on countering any provocations by the U.S. side.”

Strike 12, the Don later added that he might have second thoughts about escalating the trade war - This was later clarified by the White House to mean that he had regretted not raising tariffs higher!

Strike 13 - November 2019

“We are just trying to restore our place and role in the world rather than reliving the humiliating days of semi-colonial and semi-feudal era. In those days there were signs in Shanghai saying Chinese and dogs are not allowed inside — and we will not relive those days again. President Xi Jinping, 22 November 2019.

Strike 14 - December 2019

“I like the idea of waiting until after the election for the China deal. But they want to make a deal now and we’ll see whether or not the deal is going to be right. It’s got to be right,” and “The China trade deal is dependent on one thing: Do I want to make it? Because we’re doing very well with China right now and we could do even better with the flick of a pen.” President Donald Trump, 3 December 2019.

Strike 15, so-called ‘Phase One Trade Deal’ signed on 15 January 2020 - Lighthizer, Liu et.al completed the so-called Phase One trade agreement between the U.S. and China, and it was signed on 15 January 2020.

The deal provides:

• China to spend US$200 billion on U.S. goods and services over 2 years, with 2/3rd back-ended to year 2, after the U.S. 2020 elections in November.

• In return, new tariffs on US$160 billion of Chinese goods shelved indefinitely, with no increase to existing 25% tariffs to a 30% rate.

• US$370 billion blunt instrument (with average tariff of just under 20%, or $75 billion) remains.

• No commitment from China to stop subsidising its State Owned Entities.

• No arbitration or multilateral court de-escalation mechanism, with termination allowable.

• Timing for Phase Two undecided, and only relevant if parties agree there will be a Phase Two.

Strike 16, March 2020, the Don blames China for hiding the ‘China Coronavirus’ outbreak - enlisting support from other world leaders for an enquiry, with Australia supporting and promoting the need for accountability.

Strike 17, May 2020, China introduces new legislation to exert China control over Hong Kong, sparking protests, riots and a worldwide glare on the CCCP.

Strike 18, May 2020, the Don tears up town - The Don rips up China’s special trade status in the U.S. and then on the 24th of July orders evictions from the China consulate in Houston, under espionage charges.

Strike 19, China retaliates with orders to shut down U.S. consul in Chengdu - In July, the Chengdu retaliation from the CCCP comes, and while not a direct move from President Xi, Alibaba’s Ant Financial signaled a dual listing on Shanghai’s Star Market (the Chinese equivalent to NASDAQ) and the Hong Kong Exchange, snubbing all U.S. exchanges. Here’s a refresher on the Star Market which commenced trading on 22 July 2019.

Strike 20, 1 August 2020, the Don threatens to ban TikTok - The threat to ban was quickly followed up on the 7th of August with an executive order giving Chinese owner ByteDance 45 days to sell the video sharing app, or be banned. The Don said:

"TikTok automatically captures vast swaths of information from its users, including Internet and other network activity information such as location data and browsing and search histories. This data collection threatens to allow the Chinese Communist Party access to Americans' personal and proprietary information potentially allowing China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage."

And, then at the press conference:

“I told Microsoft, and frankly others if they want to do it, if they make a deal for TikTok - whether it's the 30% in the United States or the whole company - I say it's OK, but if you do that, we're really making it possible because we're letting you operate here. So the United States Treasury would have to benefit also.”

But half way through that swing, additional orders were issued to ban transactions with Tencent owned WeChat. Shortly thereafter, Mike Pompeo blasted TikTok, WeChat and other social media apps, underscoring:

"significant threats to personal data of American citizens, not to mention tools for CCP content censorship."

That’s a big problem for U.S. companies reliant on the Tencent umbilical cord, and for companies like Apple which relies on WeChat to access Chinese wallets via its app store - Apple is also still reliant on Foxconn and components are subject to tariffs. Apple is now the most valuable company in the world (by capitalisation).

But the final sting in Don’s swing came when the White House signaled it would kick out Chinese companies form all U.S. exchanges by 2022. That’s one year earlier than previously indicated under the ‘comply with accounting transparency standards’ or get out.

Finally, as he went one-handed on the follow through of the 20th strike, the Don finally admitted last Friday that the second phase of the so-called trade deal was no longer important to him and that he’s no longer thinking about it. Phase One was a safety steal to get closer to the November 2020 plate, while preserving an ability to call quits on the game. From China’s perspective in terms of Phase One commitments, it was still far from home at the end of June, as per the chart below.

As suggested at the time, the existence and nature of Phase One confirmed there was no real intention for a Phase Two.

Strike 21?

Will the Don force the play right up until the elections?

Why not.

If he wins, he goes harder with a very specific mandate from Americans.

If he loses, it’s someone else’s game and he washes his hands of it.

Capital flows, tech wars and currency gyrations seem set to continue.

Whether a Biden win would change any of the above is yet to be seen, if it happens.

…..but I’m thinking that would take one mighty big swing from a champ!

Stay tuned.

Shortly, I’ll be releasing the Winter digest of NextPerspective> which is sent directly to email inboxes. If you would like to subscribe, tap the button below, follow the instructions and you’re good to go.

Best wishes, Mike.

NextLevelCorporate is a leading independent advisory firm with a multi-decade track record in originating and executing transformative M&A, IPO, growth capital and strategic corporate advisory solutions, in and out of Australia.

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