Why the US trade war has become a never-ending game of whack-a-mole

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Global markets may have heaved a sigh of relief after this weekend’s G-20 meeting in Osaka, Japan, ended with the U.S. and China calling a trade war cease-fire on tariffs while reviving negotiations, but the hostilities likely won’t end anytime soon.

That’s according to Ethan Harris, head of global economics at Bank of America-Merrill Lynch, who said the trade war has devolved into a “no pain no deal” situation.

“The two sides will tend to fight hard, go through brinkmanship moments until there’s signs of pain,” such as a market selloff, economic weakness or political pressure, Harris said in a conference call with media Tuesday. “Given that there isn’t that much pain right now in the U.S. from the trade war, it’s likely to take awhile to get a de-escalation between the U.S. and China.

Harris said a deal will require some weakening of the U.S. economy and the equity market.

“Once that pressure starts to build on the Trump administration, we do think there’ll be kind of an awkward convergence to a partial rollback of tariffs, some increase in Chinese purchases of U.S. products and some market opening in China. And some concrete intellectual property protection measures,” he said. “We don’t see a full deal where all these issues are resolved.”

But even that isn’t likely to put the trade war to bed.

The Trump administration has been focused on reducing the U.S. trade deficit as an end-goal of the trade war, but there seem to be few signs that the deficit is going away.

“The U.S. has a big trade deficit. The trade war isn’t really effective at reducing that deficit,” Harris said. “What is does mainly is move that deficit around to different countries and different products. And so the trade war is likely to continue to morph going forward.”

That means the Trump administration will likely play a lot of “whack-a-mole” ahead.

Vietnam, which has been in the spotlight as a likely beneficiary of businesses moving out of China to avoid U.S. tariffs, is likely to be the Trump administration’s “No.1 target” ahead, Harris said.

Trump threatened last week to expand his trade war to Vietnam, which he called “the single worst abuser of everybody” in a Fox Business interview.

Vietnam’s customs data show the country’s exports to the U.S. were up 29 percent on-year in the January-to-May period, Reuters reported.

But the Southeast Asian country’s moment in the sun may see some shade from the Trump administration.

“Vietnam is the favorite alternative destination coming out of China. Its got a very rapidly growing surplus with the United States. It’s a communist government, so it has state-directed credit and a managed currency. Those are both red flags, no pun intended, for the Trump administration,” Harris said.

In addition, U.S. companies don’t have much investment there, meaning tariffs on Vietnam would mainly affect other nations’ firms, he said.

Mexico and other Southeast Asian countries benefiting from businesses being displaced from China could also end up facing pressure from the U.S., he said.

All of that trade tension is set to continue being a drag on economic growth.

BofA-ML cut its global economic growth forecast for this year to 3.3 percent from 3.8 percent, coming in just a tad above the 3.2 percent during 2016’s economic slowdown. The bank also cut its growth forecast for the U.S. to 1.3 percent for the second half.

Harris put the blame largely on the trade war.

“For many people and companies that are linked into the international markets, [there is] the growing sense the trade war is not going away and it’s becoming increasingly hard to figure out where you’re supposed to invest and what you’re facing in terms of tariffs in the future,” Harris said.

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