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By Martha C. White

Businesses and markets are bracing for a drawn-out fight between the U.S. and China that ventures into new, economically fraught territory and throws tit-for-tat rhetoric out of the window.

China is appealing to nationalism as its trade rhetoric grows increasingly bellicose. A spokesperson from China’s Ministry of Commerce on Thursday criticized the “wrong actions” taken by the U.S. and demanded a reversal before trade negotiations would continue, a day after Secretary of the Treasury Steven Mnuchin told CNBC that no new trade talks had been planned.

“The propaganda is not leaving much room for compromise,” said Mark Williams, chief Asia economist at Capital Economics.

On Monday, Xi invoked the phrase “new Long March” in a video released by the government’s news operation. China’s government-controlled media gives it one big advantage in terms of marshaling public support behind the idea that Chinese citizens should expect some hardship and make some sacrifices for the greater good.

“The message from China’s state media over the past week has been belligerent and uncompromising, with reminders for viewers of glorious moments when China and the Communist Party stood up to aggressors,” Williams said. “It sounds like the leadership is preparing for a drawn-out fight.”

Earlier this month, Trump signed an executive order delivering a potentially crippling strike against Chinese tech giant Huawei, blocking access to critical American technology on the grounds that Beijing could exploit Huawei’s presence in the U.S. market for surveillance or spying. The Commerce Department then moderated that with a 90-day authorization allowing the continuance of existing relationships to “prevent the interruption of existing network operations and equipment,” according to CNBC.

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On Friday, Politico reported that President Donald Trump was planning additional restrictions on Chinese access to U.S. technology, and Chinese media accused the U.S. of trying to “colonize global business,” according to the Associated Press.

Just one day prior, Secretary of State Mike Pompeo repeated the assertion that Huawei poses a security risk to the nation — even as the president suggested that restoring Huawei’s access to American technology could be part of a broader trade deal.

Experts say these conflicting messages indicate that the administration is exploiting the purported risk. “This is clearly, to me, not something the administration had to do. It was something they wanted to do in order to send China a signal. It’s clear that, at least in the short term, the ability to cut off Huawei’s access to American technology is a very powerful coercive tool,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.

“Access to U.S and Western know-how is considered key to China becoming a world leader in robotics, renewable energy, electric cars etc.,” said Tom Elliott, international investment strategist at the deVere Group. “The Made in China 2025 project is based on China taking, and improving with lots of state subsidies, on U.S and other Western technology,” he said, referring to one of Chinese President Xi Jinping’s signature economic initiatives.

In response, China pointed out that it has exports on which U.S. companies depend, as well. When Xi made a public visit this week to facilities that specialize in the production of rare-earth minerals, he was sending a clear, unspoken message, Kirkegaard said. “If you don’t want to sell us your tech or your chips, maybe we don’t want to sell the rare earths you need to make those chips,” he said. “They’re signaling that they can play dirty, as well.”

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Chinese dominance in the manufacture of components incorporating rare earth minerals is not a new concern: When the country temporarily suspended exports in 2010, then-Secretary of State Hillary Clinton warned that it was a “wake-up call” about relying on China for these elements.

Kirkegaard said, though, that this threat is unlikely to be carried out as long as China seeks to maintain a strategic moral high ground. “By far, the best thing that could happen for China is if Trump remains completely isolated from all America’s traditional allies. One of the ways China can do that is not to retaliate with the intent of causing maximum damage,” he said.

Beijing has an interest in seeing the U.S. break ranks with other Western nations, as most trade experts agree that a multilateral approach would be more successful at curbing Chinese practices like forced technology transfers that hurt American companies. “Trump’s threat would be still greater if he could conduct his China policy in alliance with Europe and Japan,” Elliott said.

Williams said the two countries probably each could go it alone, but it would damage both economies. “China and the U.S. don’t need each other but they can each inflict pain on the other, so the question is how much each is willing to withstand,” he said, expressing a more negative view that is being adopted by a growing number of observers. “Unless President Trump makes another sudden shift in his approach, a deal now looks very unlikely,” he said.

“There’s a chance for a deal at the G-20 [when Trump and Xi] meet face to face, but I’m quite pessimistic,” Kirkegaard said.

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“With regard to the prospects of additional escalation, there’s a great deal of pain yet to be inflicted. We don’t want to go there,” said Doug Barry, spokesman for the U.S.-China Business Council. “We’re talking about a couple of trillion dollars of economic activity and a couple of million U.S. jobs’ worth of potential hurt.”

Ultimately, political pressure at home may be Beijing’s best leverage. Kirkegaard pointed out that China’s retaliatory tariffs, heavy on agricultural products, were calculated to target Trump-supporting parts of the U.S. “They did it selectively, obviously with the intent to cause as much political damage to Trump as possible,” he said.

“President Trump may find it harder to convince Americans that the trade war is worth fighting if the next escalation sends up prices of consumer goods and causes the stock market to fall,” Williams said.



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