China Bets Trump Will Cave to Special Interest Groups on Trade, Says Jefferies

By Tracy Alloway
May 16, 2019, 4:54 AM EDT

China is resisting U.S. trade demands because it believes that Americaís political system "is in long-term decline" and the Trump administration will cave to special interest groups as trade tensions cut into profits.

Thatís according to equity analysts at Jefferies Financial Group Inc. led by Laban Yu, who say the strategy effectively amounts to a bet on "American political decay." Taking into account U.S. politiciansí ties to special interest groups including farmers, retailers and big companies means that China, with its centralized economy and political system, can withstand greater tariff-inflicted pain than America.

"In a bout when two well-matched boxers have arms intertwined, a head-butting strategy will be won by the side who can take the most pain," Jefferies wrote in research published this week. "China will test Americaís pain threshold with the belief that U.S. politicians are beholden to interest groups."

Rising tensions between the worldís two biggest economies have set off a wave of commentary from analysts, economists and policy makers attempting to gauge political will on either side of the trade dispute. On Wednesday, less than a week after hiking import tariffs on about $200 billion worth of Chinese products, Trump appeared to ratchet up his battle with China by moving to curb Huawei Technologies Co.ís access to the U.S. market and American suppliers.

Complicating matters is Trumpís tendency to take credit for rising stock prices, which should theoretically encourage the U.S. president to pursue market-friendly policies. The Republican Partyís business ties were also singled out by Karthik Sankaran, Eurasia Groupís senior strategist, as a potential U.S. vulnerability.

"Trumpís problem is that if Chimerica as an economic system [is] the union of Chinese labor and American capital, [then itís] really hard to hurt Chinese labor without hurting American capital, which is hard for the self-described party of American capital," he wrote on Twitter on Wednesday.