Why China Wins the Trade War

WSJ: "The results of the Osaka talks are similar to those when Mr. Trump and Mr. Xi met in Buenos Aires on Dec. 1, resulting in a truce that left in place higher American tariffs on Chinese-made goods. That truce lasted until May, when the Trump administration accused China of backtracking on a partially completed agreement that would have replaced tariffs with broad structural changes in the Chinese economy."

"Leaving tariffs in place for the indefinite future has long been seen as the second-best solution by both sides. The Americans want fundamental economic policy changes in China, where the government heavily subsidizes local rivals to American companies."

"Beijing officials want the tariffs dropped entirely. But they refuse to overhaul an economic model based on industrial subsidies and state-owned enterprises that they see as successful in lifting hundreds of millions of people out of poverty over the past four decades."

My Comments: Beijing need not depend on a Federal Reserve to lower interest rates and the related valuation of the yuan. It can devalue the yuan directly.  China's economy is heavily dependent on exports and its government is not about to allow an increased value in the yuan to choke off export markets. The U.S. sees the shift of supply chains resulting from the imposition of tariffs on China. China will simply engage in trade diversion by producing more in Vietnam and other countries if U.S. tariffs interfere with more traditional Chinese supply chains.

Why China Wins

China has enabled two truces in the trade war. It will go on to win for several reasons:

1. Vietnam proved that Asian patience outlasts U.S. bluff, bluster, shock and awe every time.
2. A second truce resulting from the Osaka negotiations,  acts as a face- saving device for both Trump and Xi.
3. Only a revaluation of the yuan that makes Chinese products more expensive in global markets can revive competing U.S. Dollar-denominated production and the attraction of U.S. made goods in global markets. Not only has this revaluation not been achieved, the yuan has been devalued by 9% so far this year, due to tariffs.
4. Apple will be assembling the MacPro in China, evidence that the strategy of making dollar-denominated goods attractive has not worked.
5. Demographically, the U.S. cannot afford to reduce interest rates substantially anymore as an aging demographic will depend on higher returns on investment in order to stop working.
6. The impact of tariffs has already affected U.S. farmers and some U.S industrial and microchip producers and exporters. The U.S. consumer will soon be paying for the levies against China. This and a slowing U.S. economy will be the straws that break the camel's back.