US-China Trade War Escalates to a Cold War Today — How HK would be Positioned?

It was originally a war only on trade between the US and China [1], but then it spreads to a diplomacy war on extradition [2], a currency war [3], a banking industry war [4], and a new ‘opium’ war [5]. Today, it is further approaching to a Cold War!

Yesterday, the Chinese government announced new retaliatory tariffs against the US by imposing 5 or 10% tariffs on a total of 5,078 products (amounting to US$75 billion) imported from the US, including soybeans, beef, pork, ethanol, oil and aircraft; and also reinstituting tariffs of 25% on cars and 5% on auto parts (originally suspended last Dec), wef Sep 1 and Dec 15.

Today, the US President announced several retaliation measures on the Chinese retaliation by the following:

  1. impose an additional 5% duty (from 25% to 30%) on some US$250 billion goods imported from China beginning on Oct 1;
  2. impose an additional 5% duty (from 10% to 15%) on some US$300 billion goods imported from China, with the first batch begins on Sep 1 and the second batch begins on Dec 15;
  3. order US companies to look for alternatives to China (it implies demanding US companies to move their operations out of China and to stop sourcing products from China);
  4. order US shippers, including FedEx, Amazon.com Inc, UPS and the US Postal Service, to search out and refuse all deliveries of the opioid fentanyl to the United States.

Figures 1 and 2 show the market’s immediate responses, including a plummet of the DJIA and the surge of the VIX.

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Figure 1 Plummet of the DJIA since 11am US time today. Source: MarketWatch
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Figure 2 Surge of the VIX at about 11am US time today. Source: Yahoo Finance

It is no longer just a war on trade now, it is approaching towards a cold war between the two countries. It is no longer a matter of the trade deficits, but a matter of trust and relationship.

For example, when the US President tweeted today that “We don’t need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP,” [6] Trump even calls Xi an enemy, it implies a total loss of trust between the two.

If the situation worsens, it would become a full-fledged cold war, it does not only stop all the goods and services flows (trading transactions) between the two, but it would also stop all the other flows, including money flows, people’s flows, and knowledge and technologies flows, etc. Weapon race and long-haul missiles targeting each other or their allies can be expected [7]. The world would be divided and it would be a dilemma for the positioning of Hong Kong.

In the whole plan of the Greater Bay Area Development, Hong Kong is positioned as the globalized financial hub for raising funds internationally and bringing mainland corporations outward to the world. Most of these financial and trading strengths that Hong Kong are currently enjoying is more or less based on the US-HK Policy Act and the Basic Laws of HK that position HK a very unique globalization status. For example, Hong Kong is a separate customs territory such that all the US-China trade war’s tariffs do not directly apply to Hong Kong. Also, Hong Kong currency is pegged to US currency under a Currency Board Arrangement, which allows a very stable exchange rate and makes HK dollar an internationally tradable currency. Hong Kong companies and public institutes are also permitted to purchase advanced technologies from the US. Once the two countries come to a cold war, would they still allow Hong Kong to retain the current status is highly questionable? It is because Hong Kong would then become “a leak of a water tank”, i.e. a loophole of their measures against each other.

References

[1] Yiu, C.Y. (2019a) An Interim Review of the Impacts on Hong Kong Economy due to the US-China Trade War, Medium, Apr 25, https://medium.com/@edwardyiu/an-interim-review-of-the-impacts-on-hong-kong-economy-due-to-the-us-china-trade-war-13fa13c60dd5. [see also Yiu, C.Y. (2019e) Compare the Impacts of the US-China Trade War on the Economies of Singapore and Hong Kong, Medium, Jul 25. https://medium.com/@edwardyiu/compare-the-impacts-of-the-us-china-trade-war-on-the-economies-of-singapore-and-hong-kong-581388b70818]

[2] Yiu, C.Y. (2019b) Hong Kong Becomes a Battlefield of the US — China Trade War, Medium, Jun 2, https://medium.com/dialogue-and-discourse/hong-kong-becomes-a-battlefield-of-the-us-china-trade-war-a752d3d06933

[3] Yiu, C.Y. (2019c) The impact of the US-China currency war on Hong Kong’s economy, Medium, Aug 6. https://medium.com/@edwardyiu/the-impact-of-the-us-china-currency-war-on-hong-kongs-economy-7fbd322b06cf

[4] 姚松炎 (2019a) 美中貿易戰升級 — 制裁中資銀行,方格子,7月23日。 https://vocus.cc/eyanalysispoliecon/5d368587fd8978000169a452

[5] 姚松炎 (2019b) 美中貿易戰再開火的原因:新鴉片戰爭,方格子,8月2日。 https://vocus.cc/eyanalysispoliecon/5d43f7ebfd89780001356450

[6] Lawder, D. and Lee, S.Y. (2019) Trump heaps another 5% tariff on Chinese goods in latest tit-for-tat escalation, Reuters, Aug 24. https://www.reuters.com/article/us-usa-trade-china/trump-orders-u-s-firms-out-of-china-after-beijing-sets-new-tariffs-idUSKCN1VD21E

[7] Jaipragas, B. (2019) Chinese missiles likely to cripple Asia-based US forces in event of conflict: report, SCMP, Aug 18, https://www.scmp.com/week-asia/politics/article/3023316/chinese-missiles-likely-cripple-asia-based-us-forces-event

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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