Welcome to the US-China Cold Soup War

Nathaniel Taplin

The Wall Street Journal

Biography
nathaniel.taplin@wsj.com

May 21, 2018 7:31 a.m. ET

Headlines on trade these days are like leftover pea soup—sometimes hot, sometimes chilly, always unsatisfying.

Saturday’s joint Sino-U.S. statement following talks in Washington—essentially a vague call for larger Chinese purchases of U.S. goods and better intellectual property protection—was thin gruel. Still, Asian stocks rose Monday, with China’s main benchmark up 0.5%. U.S. stocks may follow suit, after Treasury Secretary Steven Mnuchin’s statement that the U.S. is “putting the trade war on hold.” Just in case the complete disarray of the U.S. side wasn’t already clear, U.S. Trade Representative Robert Lighthizer, who has advocated a tougher approach, put out a separate statement saying tariffs remain an important tool to “protect our technology.”

A truckload of soybeans is unloaded at a farm in Fargo, North Dakota, Dec. 6. Photo: dan koeck/Reuters

What are investors to make of all this?

First, don’t confuse this latest thaw with anything approaching a resolution of the core issues. Tariffs may this time be avoided. But China’s leaders are well aware their best hope of joining the ranks of wealthy nations is the continued absorption—some might say stealing—of developed-world technology. Leveraging low-cost labor and advanced foreign technology is, after all, one of the main ways developing countries experience so-called catch-up growth. The U.S. itself once pursued a similar strategy: the 19th century New England textile juggernaut was launched with stolen British intellectual property.

China will therefore be open to tinkering but unlikely to cease large-scale state support for its high-tech industries—the key complaint of U.S. hard-liners. Dealing with the $375 billion goods deficit itself also defies easy solution. Even if China were to “meaningfully” raise purchases of key U.S. farm and energy goods as the joint statement stipulates, U.S. oil and soybean exports to the world in 2017 totaled less than $50 billion. Trade tensions will inevitably get hot again somewhere down the line.

Still, all-out conflict is avoidable—mostly because of the U.S. side’s divisions on goals and strategy. China is a major market for U.S. farm products, and has already used that leverage over President Trump’s base with great success. The U.S. needs China’s help with North Korea. And Mr. Trump’s shoot-from-the-hip approach creates additional opportunities. Having publicly promised President Xi Jinping he would help sanction-busting Chinese tech conglomerate ZTE, Mr. Trump will now find it difficult to accomplish any sort of deal without at least limited relief for the company.

For investors, the best approach remains steady as she goes. On-again, off-again Sino-U.S. trade “wars” increasingly look like a semi-permanent part of the investment environment. That’s not particularly satisfying, but better than a full-on stomach flu for markets.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com

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