What does a trade war worst-case scenario look like?

Ben: Do you think Trump has misjudged the resilience of his foe on this one? As in, do you think he thought he would have won this battle by now?

Josh: Yes. I think his view was that a trade war does more damage to the Chinese economy than the U.S. economy, and the Chinese economy was already in more trouble than the U.S. economy, and so China would have to cave to him. He was right that they are more exposed. But he underestimated reasons they would dig in anyway.
Some of the demands the U.S. is making — about opening up the Chinese economy more to U.S. firms, respecting our IP, not subsidizing their industries — go to the core of the Chinese economic model. It’s a big ask for them to change it.

Trump’s other main demand — for China to somehow target the trade deficit — is impractical. China just doesn’t have the capacity to consume the quantity of American goods they’d have to buy to meet the goal. So even though it is hard for China to endure the trade war, it’s even harder for them to meet U.S. demands. Trump is not the first president who has wanted these changes from China, and he’s running into the same reasons they’re reluctant to make them. It doesn’t help that he’s made the demands in a humiliating manner — which makes it politically harder for Xi to give in and politically easier for Xi to deflect blame for economic trouble to Trump and the U.S.

I also think even the sophisticated members of Trump’s team, like Robert Lighthizer, have been surprised by just how rigid the Chinese have been. I think they didn’t quite anticipate the extent to which Xi would be hemmed in by domestic political concerns.