2 2019-05-14 13:53:46 2019-05-15 13:52:46 SPH 2 A deepening trade war with China plunged the Dow Jones Industrial Average on Monday, and raised not just pessimism over trade but worries over the direction of US-China relations.

WASHINGTON - A deepening trade war between the United States and China caused the Dow Jones Industrial Average to plunge on Monday, and raised not just pessimism over trade but also worries over the direction of US-China relations.

The latest round of tariffs are "far too great a gamble for the US economy", the National Retail Federation said in a statement. "Taxing Americans on everyday products like clothes and shoes is not the answer for holding China accountable.

"We urge the US and China to get these critical negotiations back on track. Both sides will lose in a full-blown trade war, and the global economy will suffer."

There are grounds to believe it is in China's and America's interest to reach a deal that addresses US priorities while not forcing China's President Xi Jinping to lose face.

Besides the stock market plunge, President Donald Trump's reaction to China's retaliatory tariffs was relatively muted on Monday, and even optimistic on the prospect of reaching a deal.

But some analysts are beginning to wonder if a deal is possible at all, and whether what is really happening is the decoupling of America's economy from China's - something China hawks in Washington have been advocating for some time.

US companies operating in China are already beginning to research options to relocate; a favoured alternative manufacturing base is Vietnam.

"President Trump wants American firms to leave China and come to the United States, not to South-east Asia," says Ms Yun Sun, director of the China Programme at the Stimson Centre. "But South-east Asia will do, because it is not a strategic threat to the United States."

It may be too late to completely decouple the two economies, but that does not mean it cannot be done to some degree, she said.

"The US tariff hike threatens to dislodge China from the global supply chain," Dr Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore, told Bloomberg. "The current China-centred supply chain will likely break up and shift towards South-east Asia and disperse more widely across the globe."

The prospect of a deal remains up in the air, with all eyes on a late June meeting in Japan between President Trump and President Xi.

The problem is their goals are not compatible, says Ms Yun Sun. China wants the trade war to end but in the words of its chief negotiator, Vice-Premier Liu He, last week, it wants a "dignified" deal, which means President Xi - who is facing some internal criticism for his provoking the US' push back - cannot afford to be seen as caving in to the Trump administration.

And there are some in the Trump Administration who believe that even if there is a deal with China, China will find a way to circumvent it - hence the US insistence on China codifying the deal into law. Beijing balked at having to do this, and analysts see it as unlikely to happen.

"People ask whether the Trump Administration wants a deal, well maybe not," said Ms Yun Sun. "The US would be happy with a deal that gives them the complete upper hand and restricts Chinese technological development in such a way that makes it impossible for China to compete effectively with the United States. But we know that is not going to be feasible."

Whatever the outcome - and some analysts are saying the current stalemate may continue into next year - President Trump must also keep an eye on the political fallout at home.

"Americans understand the need to hold China accountable, but they also need to know that the Administration understands the economic pain they would feel in a prolonged trade war," Senate Finance Committee Chairman Chuck Grassley of Iowa, a family farmer and member of the Senate Agriculture Committee, said on Monday.

There are two possible short-term outcomes according to Dr William Reinsch, senior adviser and Scholl Chair in international business at the Centre for Strategic and International Studies (CSIS).

He wrote on Monday: "The President can sign a weak agreement that gives him less than he wants, or he can walk away and maintain or increase the tariffs."

A weak deal will leave him vulnerable to the Democrats. "They will attack the President for being soft on China and a poor negotiator," Dr Reinsch wrote. If there is no agreement, they will label him a failure who has produced significant economic pain only to achieve nothing.

"Right now, we appear to be in a slow-motion train wreck, with both sides sticking to their positions - on the Chinese side to avoid loss of face and loss of control, and on the US side to prevent the political consequences of failure."

Dr Glenn Altschuler, professor of American Studies at Cornell University, remains cautiously optimistic about a deal with China. If there is no agreement through the summer, pressure will build on both sides as the global economy begins to slow down, he maintained.

"In 2019, politicians respond to markets perhaps as much or more than they ever have," he said.