China’s Ministry of Commerce and its Foreign Ministry said jointly on Saturday that China will fight to the end in a trade war imposed on China. Perhaps I would not say this is a war, but rather a serious standoff. Retaliations will follow suit. No winner. Who will be the first to blink? It depends on costs and stakes.

My hunch is Trump will not prevail on his terms. Compromise will be made. It will be a process of hard negotiation. Let us look at the competitive edge on both sides. No doubt, China should get prepared for the worst but must stand firm. We don’t have the pressure of competitive elections or domestic politics. Also size matters. Let me explain.

The Chinese strength comes from a very big continental economy and the strong new leadership whose political will and confidence should not be underestimated. The US has been proud of its service industry but at the cost of manufacturing and jobs. China is able to provide ten million new jobs each year domestically due to our successful industrialization, and effective and consistent industrial policies. Our digital technology is catching up very quickly.

The problem is whether China is accepted as a liberal market economy. This won’t matter so long as globalization provides deep integration and entails an interactive value chain. It is what we call interconnectivity. China has executed its ambitious blueprint of the Belt and Road Initiative. It aims to build an economic alliance and a more inclusive world economic order.

The EU, Canada, Japan and Australia depend on our market demand. They won’t easily take sides with the US despite IPR concerns or they will pay a price domestically. They need us to ensure full employment. We have huge demand given our 200 million middle-class consumers.

In sharp contrast, the US depends on China’s market for agricultural exports and energy. It cannot lose to Airbus in battles of aviation primacy. It needs to have a lion’s share of China’s growing service industry. Let us sit down and negotiate. 

Trump wants to create jobs before the midterm elections. An embattled Trump does not have the luxury of bipartisan support as he is mired in sex scandals and investigations into Russian contacts. China could use RMB devaluation and dumping of our huge forex reserves. Trump hates globalization and free trade in violation of WTO rules. But China fully supports globalization.

Trump has a strong ego. He has no diplomacy or Asia strategy. No, he does not look like a president. China will let him learn fast that compromise is the only viable option for both sides. The only thing we cannot afford to compromise on is Taiwan and the One China principle. Fortunately the State Department says it will honor the three official documents about our bilateral ties and won’t change position about the island. This helps avert war.