Capital Economics estimates that the latest US tariffs will cut Chinese economic growth by less than 0.5 per cent of GDP, and this can be offset by fiscal stimulus in a heartbeat.

A grave miscalculation

China is in any case the dominant world supplier for half of the 6,000 goods on Mr Trump's new sanctions list, so the US will struggle to find alternative suppliers.

"We believe that the White House has made a grave miscalculation about China's vulnerability. It's the fiscally incontinent US we should be worried about," said Patrick Perret-Green from the hedge fund AdMacro.

Beijing said Mr Trump had shown "no sincerity and good faith at all" after he imposed 10 per cent tariffs on a further $US 200 billion ($277 billion) of Chinese goods, rising automatically to 25pc at the end of the year. It vowed a "beautiful counter-attack".

Mr Trump is imposing tariffs and barriers on his own companies, and his own economy. Mark Schiefelbein

Mounting damage to the US corporate supply-chain will soon cut into Wall Street profit margins and trigger a correction in US equity markets, currently priced for perfection and trading at a higher Shiller P/E ratio than in 1929 or at the pre-Lehman peak in 2007.

Mr Trump brags about the spate of fresh records on Wall Street. He deems a frothy market to be a verdict on his presidency. The Chinese must surely have their poisoned arrow trained on an Achilles' heel so openly exposed.


Clearly Beijing cannot and will not kowtow to intimidation of this kind. William Zarit, the head of the American Chamber of Commerce in China, predicted that the country will meet "fire with fire", taking the world into a "downward spiral of attack and counter-attack" that engulfs everybody.

Mr Trump threatened to move immediately to "Phase Three" and prepare sanctions on the gamut of Chinese exports if there is a squeak of retaliation.

On a collision course

The world's two superpowers are on a collision course. A path of automatic escalation has been set that will shut down the core trading relationship of the international system within months unless somebody blinks.

The Chinese economy has certainly slowed this year. This has little to do with Mr Trump's tariffs. It is due to an assault on shadow banking and a credit squeeze launched after the coronation-for-life of President Xi Jinping last November was safely out of the way. Beijing has since begun to reflate.

If pushed, it can flood the economy with stimulus, and tighten capital controls to reduce leakage. The risks are of a different kind.

The global economy is already slowing hard, chiefly due to rate rises and quantitative tightening by the US Federal Reserve, as well as bond tapering by the European Central Bank. This has drained dollar liquidity and squeezed emerging markets.

The knock-on effects are visible in crumbling eurozone data. JP Morgan says the average "nowcast" measure of global growth has dropped from a 3.4pc rate in the second quarter to 2.2pc in the third quarter.


The worry is that broader damage to the interlinked nexus of Pacific trade - and to confidence - will cut global growth to stall speed. Mr Trump brags that "tariffs are working big time" and that it is easy to win a trade war against mercantilist rivals running a structural surplus.

His evidence is the 22 per cent bear market collapse of the Shanghai Composite index since late January, set against the serene ascent of the Russell 2000 index in New York.

This is a potpourri of confusions. China's equity markets are irrelevant. They are not a meaningful source of funding for companies. They are casinos, decoupled from the real economy.

Chimerica is a single economy

Lakshman Achuthan, from the Economic Cycle Research Institute in New York, says the US outperformance this year is an illusion of the cycle. Mr Trump has mistaken the sugar rush from his tax cuts for fundamental strength.

It has fed hubris. Washington has sought to calibrate the sanctions to minimise "blowback" into the US. It exempted smart watches after a plea from Apple, as well as Bluetooth devices, antibiotics, and key chemical inputs into manufactured goods and agriculture.

Such fine-tuning is forlorn. Chimerica is a single integrated economy. Mr Trump is imposing tariffs and barriers on his own companies, and his own economy.

The likely outcome is that US stock markets will converge with Asian markets - downwards. This dispute is really about strategic rivalry rather than trade.


Bill Bishop from Sinocism said the secret Beidaihe "summer summit" of the Communist leadership in August concluded that Washington's true purpose is to "thwart China's rise" and maintain US hegemony over the cutting edge technologies of the 21st century.

"Xi has decided the US is intent on keeping China down," he said. Mr Perret-Green said China has been gearing up for a fight ever since the release of the US National Security Strategy in December 2017 and is better prepared than either the White House or the markets seem to realise.

This document named China for the first time as a strategic rival that seeks to "challenge American power, influence and interests, attempting to erode American security and prosperity".

This was followed by a US trade report accusing China of cyber espionage and systematic theft of intellectual property.

This Sino-American showdown was always on the cards. Washington hawks may be right that China's top-down system of Leninist state capitalism is incompatible with the open market economies and liberal societies of the West.

The uneasy modus vivendi was manageable as long as China seemed to be opening up, and still abiding by Deng Xiaoping's dictum: "hide your ambitions and disguise your claws."

It is less tenable as China steps forward as a strategic rival, and reasserts the ideology of Maoist party dictatorship.

Where Mr Trump is wrong is to think he can achieve anything by means of bluster and brinkmanship. The Chinese have seen through him.

The Telegraph London