The three reasons China believes it can win the Sino-US trade war
Top Chinese economist says maintaining calm is the key to victory.
The Sino-US trade war appears to have reached at the very least a provisional resolution, little more than two months after President Trump first launched his Liberation Day tariffs on 2 April.
On 11 June, Trump announced that his "deal with China is done, subject to final approval with President Xi and me."
The agreement struck between Washington and Beijing in London on Tuesday will see total tariffs applied by the US to China sit at 55%, as China levies a 10% tariff on US goods.
Given the uncertain nature of policy decisions emanating from the Trump administration, China's economic commentariat do not believe this to be the end of the story at all.
They've called for further precautionary measures, to ensure China's economy can weather any further contingencies that arise vis-a-vis relations with its third-largest trading partner.
Chinese pundits have highlighted the role of a range of factors in determining the final outcome of trade disputes between the two great economic powers.
These include the potentially irreplaceable role that China plays in manufacturing key goods that the US needs, as well as Beijing's critical control of rare earth minerals.
Factors that could weigh against China include its ongoing struggle with inadequate domestic demand, and whether subsidy policies can boost consumption to the point where it compensates for any shortfall in exports caused by trade tensions.
Liu Yuanchun (刘元春), chancellor and deputy party-secretary of the Shanghai University of Finance and Economics (SUFE), highlights three factors in particular that work in China's favour when it comes to dealing with Sino-US trade disputes
One: The bond market
In a recent opinion piece (“刘元春：决定中美关税谈判的三大关键因素”), Liu highlights the impact of Trump's tariffs on the US Treasury market.
He says volatility on bond markets has served to deeply undermine the Trump administration's resolve when it comes to the imposition of harsh trade measures against Beijing.
“The turmoil for global financial markets has far exceeded expectations," Liu writes.
"Since 2 April, even though global financial markets have started to make up for prior declines in terms of absolute value, every tariff measure has been accompanied by intense market volatility."
The key area of world financial markets most heavily hit by volatility is the US Treasury market.
Liu points out that the yield on 10-year US Treasuries has risen to 4.6%, exceeding nominal US GDP growth.
He says bond market volatility - as well as doubts surrounding the sustainability of Washington’s fiscal position, is the key reason that drove Trump to apply a 90-day stay on reciprocal tariffs starting from 9 April, just a week after Liberation Day.
Liu further argues that turmoil on the US Treasury market has led to a "fundamental shift in the model for global capital flows and the logic behind financial pricing."
Two: US inflation
Liu points out that Trump's key support base is lower-middle class Americans - a demographic that's most vulnerable to the impacts of any inflation that could see a resurgence as a result of tariffs against China.
"Since the start of the US tariff war, its industrial chains - in particular supply chain structure - has undergone marked changes," he writes.
"This is embodied in two key areas. On the one hand, US stores are seeing a cut off in supplies for Chinese commercial goods.
"On the other hand, the prices of daily goods in the US have undergone adjustment - for example, Walmart has announced price hikes.
"This clearly shows that Trump's judgement that tariff policies would not drive US prices higher to be unfounded."
Liu cites this as a key reason that the US made haste to resume negotiations at the start of May, little more than a month after the launch of Liberation Day.
Three: Rare earth metals
A final key factor in the trade war is China's disproportionate control of global rare earth metals.
"Trump's urgent desire to speak with President Xi also sent a positive signal to China," Liu writes.
"A key factor here is the issue of rare earth metals...any controls on rare earth metals will have a direct impact on key components used in the global automotive sector, which could have a major impact on the US economy.”
What China's winning strategy should look like
Liu argues that China's immense manufacturing prowess gives it the upper-hand in any future trade negotiations.
For this reason, he says China "needs to firm up confidence, and fully believe in the resilience of the Chinese economy."
"China should never be overly anxious in its handling of the negotiations process in future," he writes.
"This point is of the utmost importance....we fully possess the ability to achieve victory in the tariff conflict."
Liu argues that China's focus should be on "seeing effectively to its own affairs" (办好自己的事) - as advocated by the Politburo on 25 April, at its first key meeting following Trump's launch of Liberation Day tariffs.
In practice, this will mean stepping up policies to increase domestic demand, to reduce China’s vulnerability to export-related uncertainties. The focus here will be consumption, which has historically under-performed as a driver of aggregate demand in the Chinese economy.
Another major policy implication will be continued efforts to drive funding for Chinese scientific and technological innovation - whether via government investment, capital markets, or the state-owned banks that have traditionally dominated the reform-era financial system.
The goal here is again to wean China away from dependence on the US - in this case for access to critical technologies that play an essential role in its industrial production chains.
Liu argues that by "seeing effectively to its own affairs," China will further enhance any advantages that it has in future Sino-US trade negotiations.
"This way, we will then be able to obtain the strategic initiative when it comes to the basic rhythm of negotiations.
"For this reason, China should make planning and implementation of precautionary matters the focus of work in the next phase, instead of simply putting excessive effort on forecasting rises and falls in foreign trade levels."