Stephen Roach on US-China Trade War: Tariffs, Retaliation, and Economic Risks

Escalating US-China Trade War

• 💡 The market experienced a "death spiral" before President Trump "flinched" and provided temporary relief with a pause on reciprocal tariffs.
• ⚠️ However, Trump's strategy of using tariffs to "remake the world" is seen as a "hairbrained scheme" that will not end well, particularly regarding China.

China's Response and Retaliation

• 🎯 China views the US tariffs as an attack and feels compelled to retaliate, which they have done in response to both initial tariffs and subsequent penalties.
• 💬 Stephen Roach notes that China views the likelihood of further tariffs as clear justification to retaliate.
• 💥 China has numerous options to retaliate, including targeting US companies like Apple or Starbucks operating in China, or detaining executives.

Economic Interdependence and Tools

• 📈 China remains a significant export market for the US and a major foreign owner of US Treasury bonds, giving them leverage.
• 💰 Roach suggests that currency devaluation (weakening the RMB) is a more likely retaliatory tool than selling off US Treasuries in bulk.
• ⚖️ Both nations are economically dependent on each other, and both possess tools to inflict economic damage, making the situation a "race to the bottom."
• ⚠️ The current approach of isolating and squeezing China is predicted to have negative consequences for both countries.