World Economy

US-China trade war is poised to intensify: 'Both sides think they have the upper hand'

Key Points
  • The U.S.-China trade war will continue to escalate through the U.S. midterm elections, said Deborah Elms, executive director at the Asian Trade Centre.
  • That is as there is not "enough pain in the system yet" for either side to want to try a new approach.
President Donald Trump (L) and Chinese President Xi Jinping walk together at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.
Jim Watson | AFP | Getty Images

The U.S. and China will continue their standoff in the ongoing trade war as there is just not "enough pain" yet for either side to back off, an expert said on Monday.

"I think we are in for a prolonged period of continuing escalating tensions," said Deborah Elms, the executive director at the Asian Trade Centre, which is based in Singapore.

One problem is that "both sides think they have the upper hand in this debate," Elms told CNBC's "Capital Connection."

Her comments came after the U.S. and China slapped new tariffs on each other last Thursday and their two-day meeting ended with no major breakthrough.

She said the situation is likely to worsen in the months ahead through the U.S. midterm elections.

"I think we don't have enough pain in the system yet for either side to say, 'Okay, I declare that we've got to have a different approach right now.' That's the challenge," said Elms.

Market watchers are now keeping their eyes on another round of U.S. tariffs on $200 billion worth of Chinese goods expected later this year.

As has been noted by analysts, China does not import enough U.S. goods to be able to match Washington's potential tariffs on a dollar-for-dollar basis. So, should the U.S. keep increasing the amount of goods on which it imposes duties, "something has to give," Elms said.

If "they can't continue to match the U.S., they'll have to do something else — it'll be on services, it'll be on retaliation against U.S. companies in China, it will be some other mechanism and they'll have to wait and see what that will be, but it will be something," she said.

U.S. companies operating in China will have to be prepared for "a lot more scrutiny," she added.

Some have suggested the Chinese currency could become a non-tariff weapon in the trade war. But, on Friday, the People's Bank of China appeared to dash that speculation when it announced a change to its yuan policy that looked to keep the currency steady.