US-China trade: Don’t confuse speed and resolve

• Our expectation has long been, and remains, that ‘Day 1’ trade action by the Trump administration against China will be limited (c. 15% tariff increase at most), and that nothing resembling a 60% blanket tariff will ‘ever’ come into force (see here, here, here).
• It strikes us, however, that this may be wrongly interpreted as a sign of dovishness or lack of resolve, where we would argue the opposite.
  • Early Trump 2.0 appointments are making it clear that – as we have been flagging – a key difference between the first and second Trump terms will likely be a total absence of appetite for endless back and forth negotiations with a Chinese government whose word the incoming team does not trust anyway.
    • This leads us to expect that what we will see is the opposite of a ‘shock and awe’ strategy (e.g. announcing 60% tariffs) from which the Trump White House would then progressively back down as dialogue with Beijing progresses.
    • Instead, we expect (and we believe both Trump trade advisor Robert Lighthizer and Secretary-of-State-to-be Marco Rubio have made abundantly clear) that the strategy will be one of relatively slow (or incremental), but un-compromising, tariffs phasing-in over time, with the aim of creating ‘real’ decoupling in key sectors of the US economy.
      • In Lighthizer’s own words: “I propose doing this clearly and phasing it in over time to minimize disruptions and allow for business to change their current practices” (Source)
    • If so, such targeted sectors could include:
      • “semiconductor devices and other electronics, steel and pharmaceuticals” (Source)
      • “manufacturing, including computer and cell phone production”, as well as “critical medicines, protective equipment, essential technology, many materials needed for production”, and “dual-use products with security implications, such as drones” (Source)
      • “manufacturing of heavy equipment, biotechnology, artificial intelligence, quantum computing and telecommunications” (Source)
      • “such critical industries as defense” (Source)
      • In other words, the equivalent of so-called ‘Hamilton industries’ (here).
    • If our working hypothesis proves true, then whether the glass ends up looking ‘half full’ or ‘half empty’ will depend on:
      • Whether the ‘slow phase-in’ turns out to be a genuine grace period meant as a price signal to producers, or an excuse to ‘kick the can down the road’ forever.
      • Whether the sectors targeted point more to a de-risking strategy (i.e. pure national security-related sectors only) or genuine de-coupling strategy (i.e. using an expansive scoping of manufacturing).