“If there can be no arrangement, then we are at an impasse.”
That’s a line from The Princess Bride, a movie from 1987 I used to watch with my kids.
But it also sums up the trade situation between the U.S. and China…
On Friday, May 30, President Trump said China reneged on rolling back trade restrictions on rare earth minerals. “China, perhaps not surprisingly to some, HAS TOTALLY VIOLATED ITS AGREEMENT WITH US,” he wrote on Truth Social. “So much for being Mr. NICE GUY!”
As such, he’s determined to impose 50% tariffs on all Chinese aluminum.
China, of course, denied the accusation, saying it was the U.S. that had “severely violated” their truce. To which Trump replied on Wednesday, labeling President Xi as “extremely hard” to work with.
An impasse indeed…
There was also Secretary of State Marco Rubio’s May 28 announcement on X that “the U.S. will begin revoking visas of Chinese students, including those with connections to the Chinese Communist Party or studying in critical fields.”
And then, of course, there was the June 3 revelation that two Chinese nationals were caught bringing a deadly biopathogen into the U.S. So, all in all, I think it’s safe to say we’re not on friendly terms.
All of this drama has understandably concerned investors and businesses alike, begging the question: Will there ever be a worthwhile resolution? While stocks have largely recovered from each new round of jitters, there’s no telling what will happen from here.
If you’re a regular Wide Moat Research reader, you know I don’t put much weight on short-term market movements. Then again, resolving this dispute, one way or the other, could have an outsized effect on the long-term direction of the market.
Trump and Xi are in a bit of a zero-sum game. The administration’s goal of bolstering American manufacturing would come at the expense of China’s export-led economy. And if China continues with several of its unfair practices (predatory dumping, as just one example), it will hurt the American manufacturing renaissance Trump hopes to foster.
So… how will it all shake out?
Don’t Underestimate Where China Is Coming From
Before I say another word about China versus the U.S., I want to reiterate something.
Nobody has a crystal ball, including me. Absolutely anything can happen from here.
Maybe China invades Taiwan. Maybe the BRICS nations succeed in dethroning the U.S. dollar. Maybe the U.S. will fall into a recession too deep to keep plying its current tariffs.
Maybe… maybe… maybe.
However, I think the ultimate result of the current trade war is simply this: Trump will win.
I don’t say that because I like the guy, although I do. After conducting boots-on-the-ground research of him and his properties while writing The Trump Factor: Unlocking the Secrets Behind the Trump Empire – and after serving on his advisory board in 2016 – I have a lot of respect for him and his capabilities.
But my opinion of where this trade war will end only has so much to do with Trump himself. There’s another factor that must be taken into consideration – and one that too few outlets are talking about.
The mainstream media mainly focuses on how hard the U.S. will be hit because of Trump’s tariffs. And it’s not completely wrong in that line of thought. As even the president himself acknowledged back in March, there might be pain involved in securing the country’s future.
“But,” as he added on Truth Social, “we will Make America Great Again, and it will all be worth the price that must be paid.”
I don’t see how China can say the same. Not the way President Xi is running the country.
As I wrote on May 13:
… China was struggling well before Trump took over. As The Wall Street Journal noted on January 1:
“China’s economy today is burdened with excess: Millions of empty or unfinished apartment blocks, trillions of dollars in debt straining local governments, and ballooning industrial production driving an export surge that is igniting trade tensions worldwide.”
And since that situation has been getting steadily more noticeable since Covid hit six years ago, the Chinese populace is becoming more and more discontent.
That shows in the money they’re not spending, the marriages they’re not making… and the drama that’s gone down since I wrote those words a month ago.
China Can’t Handle Much More Interruption
On May 30, Trump declared the reason he put a 90-day pause on Chinese tariffs was out of concern – for China:
Two weeks ago China was in grave economic danger! The very high Tariffs I set made it virtually impossible for China to TRADE into the United States marketplace… and it was devastating for them. Many factories closed and there was, to put it mildly, “civil unrest.”
So he “made a FAST DEAL” before the situation got worse.
Many people mocked Trump for that post. And maybe they were right. Maybe that was a convenient offramp when the real goal was calming the markets.
But he wasn’t wrong about the state of China.
Last month, right after the 90-day pause was announced, I noted how “China can’t afford to lose the U.S. market” on multiple fronts. “The number of individual businesses that would suffer and perhaps even collapse without U.S. dollars would be significant, leading to an even greater chance of civil unrest.”
By then, electric vehicle auto giant BYD had already seen thousands of workers walk off the job in both March and April over poor pay and conditions. Another strike happened at a sporting goods factory. And construction workers elsewhere literally threatened to jump off the roofs they were building if they didn’t get paid as promised.
That discontent hasn’t gone away since, with more protests breaking out again late last month. According to Radio Free Asia:
Protests by Chinese construction workers, teachers, and factory employees demanding unpaid wages have erupted across China… amid rising public anger over the impacts of tightening local government finances, according to affected workers and videos posted on social media.
From China’s northern province of Hebei to the southern autonomous region of Guanxi… and its neighboring coastal province of Guangdong to the east – Chinese workers are facing the full impact of cash-strapped institutions grasping for ways to survive the economic downturn.
One man even reportedly set fire to the textile plant he worked at after he wasn’t paid properly. And his efforts were hailed by colleagues.
China is notorious for suppressing bad news. So, it stands to reason that such stories that are leaking are just the tip of the iceberg. In which case, President Xi just doesn’t have much room to provoke his U.S. counterpart.
As Trump noted, Xi can continue playing the tough guy… for a time. But he also has more domestic troubles than he lets on. And if the reports of mass civil unrest are even close to accurate, he’s going to have to negotiate.
From my perspective, it’s not really a question of whether the U.S. or China will emerge victorious at all. It’s more a question of how long it will take China to come to the bargaining table.
Regards,
Brad Thomas
Editor, Wide Moat Daily
P.S. It appears we didn’t have to wait long at all! As we prepared to publish, news broke that President Trump spoke with Xi over restarting trade negotiations. We’ll just have to see what happens from here. Rest assured, I’ll keep an eye on the situation and report back to readers with my analysis.
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