| When China retaliated against Donald Trump’s 145% tariffs about three weeks ago, it was Hong Kong’s stock market that took the biggest battering. The Hang Seng Index plunged 13% in a single day, helping wipe some $620 billion off the value of shares. China, the moves suggested, would be the biggest loser from the escalating battle between Trump and Xi Jinping. Yet such panicked selling seems to have been a stampede in the wrong direction, at least for the moment. Trump — beset by warnings from financial markets, business leaders and top advisers over the domestic impact of the de-facto trade embargo against China — is now looking to climb down from his aggressive position. On Tuesday, the US leader said he’d be willing to “substantially” pare back his 145% tariffs on China. Later, Trump said he could announce tariff rates for countries including China over the next two to three weeks. At the same time, he said the deadline would ultimately depend on whether Beijing engaged. While Xi wants the tariffs to come down, he’s also in no rush to negotiate with such a volatile leader. This is, after all, a country which has diligently pursued Five-Year Plans for its economic development since the 1950s. Xi has been milking the region’s growing wariness toward the US by promoting the idea of an “Asian family” during visits to Vietnam, Malaysia and Cambodia this week. And investors have regained their enthusiasm for China: The Hang Seng Index has climbed 11% since the selloff in one of the world’s biggest rebounds, with fund inflows helping the Hong Kong dollar strengthen to a four-year high against the greenback. This suggests that China’s steady and deliberate approach is currently paying off as US investors contend with Trump’s erratic policymaking. As for Hong Kong, it’s not the first time the city’s been caught in the middle. Hong Kong’s shift from entrepot port to industrialization began in the 1950s, when the UN sanctioned a collective trade embargo on China after the country entered the Korean War. Being a British colony, Hong Kong followed suit. As the official government yearbook at the time said: “It is no exaggeration to say that the Korean War and the world events following it have put Hong Kong in an economically impossible position.” Although countries lifted their embargoes after the Korean armistice was signed in 1953, the US maintained its sanctions until 1972 (and China its isolation). Hong Kong, aided by the huge influx of refugees escaping upheavals in China, transformed into the manufacturing center for East Asia. By the 1960s, the US was Hong Kong’s biggest market in the export of goods from toys to garments. In the 1970s, the city became the production base for many overseas companies. After China opened up from 1978, the city’s manufacturers began moving their factories across the border, laying the foundation for services to become the key industry for Hong Kong.  Workers in a factory producing radios in Hong Kong in 1975. Photographer: Roland Scheidemann/picture alliance/Getty Images Amid the current trade war, the city is in the unusual position of being able to import both Chinese and US goods duty-free, which will (surely) offer opportunities for gray-market trading. Shipping directly to the US, however, will incur huge tariffs as the city is lumped in with mainland China. As a result, Hong Kong’s official postal service has stopped delivering by sea postal items containing goods destined for the US, and will halt air postal services from Sunday. DHL this week suspended high-value shipments to the US. FedEx continues to ship goods as normal. While Hong Kong’s economy continues to struggle — retail sales have fallen on an annual basis for 12 straight months — some businesses are looking to take advantage of the current standoff. A furniture store in Wan Chai has put up a large banner on its storefront with the words “Tariff War — Big Sale” both in English and Chinese characters against a backdrop of dueling American and Chinese flags sprinkled with gold coins. A salesperson said people have already been stopping to snap photos of the poster, and that it would be on Xiaohongshu soon, referring to the Instagram-like app favored by Chinese tourists. Although the sofa retailer doesn’t target the US market and isn’t directly affected by Trump’s tariffs, business has been slow. It hopes slashing prices will drum up sales. “For us, this can actually be an opportunity,” said a marketing staffer at the shop. —Richard Frost and Mary Hui | 
