(Latest opinion in the South China Morning Post 4/27/19)
US President Donald Trump had been uncharacteristically quiet since his failed meeting with North Korea’s Kim Jong-un in Hanoi. That silence ended with a confused tweet at the end of last week overturning some unannounced, but apparently new, sanctions his Treasury Department was about to impose on Kim’s government.
The Treasury had announced new sanctions for several Chinese firms helping North Korea smuggle oil and coal, among other illicit activity. The White House assured us that reversing sanctions no one knew about was an olive branch because Trump still “likes” Kim.
While that’s a downgrade from the effusive love Trump professed earlier, it seems that he still wants to keep the door open for a possible resumption of talks.
Kim had also showed some restraint, at least at first. The official state newspaper, Rodung Sinmun, kept their rhetoric on simmer after the summit, blaming National Security Adviser John Bolton and Secretary of State Mike Pompeo for the failure, rather than Trump himself.
But there’s not much left to talk about on denuclearisation. If the goodwill expressed by both sides is going to lead anywhere, there needs to be something new, like normalising relations between the US and North Korea.
Trump claimed in last weeks’s State of the Union address that if it weren’t for him, the U.S. would be at war right now with North Korea. His self-praise for merely engaging the North telegraphed an eagerness for a deal that will be hard to justify should talks not deliver full and irreversible North Korean denuclearization.
Many now argue that North Korea will never give up their weapons and the U.S. should just accept that and move on, but the stakes are high for U.S. allies South Korea and Japan, the most susceptible to a North Korean provocation. If North Korea keeps its nuclear capability, Japan, a U.S. treaty ally, will certainly move to counter that threat, triggering a regional arms race.
There’s been precious little indication that Kim is willing to give up anything for another meeting with the U.S. President, a completely predictable outcome when Trump showed so much eagerness to meet in Singapore without a major breakthrough in talks.
A presidential meeting should only come after an agreement has been reached, not the other way around.
During the lapse in diplomacy since last summer’s Singapore summit, North Korea has been expanding its weapons program, not decreasing it. Recent reports and commercial satellite imagery show that the DPRK not only continued to build missiles, but there have far more weapon sites than previously disclosed.
While North Korea has not overtly tested a missile or engine system since talks began, even the most novice global affairs observer knows delays are not concessions. Kim can fire up a test whenever and wherever he wants. Blowing up wooden sheds and exploding a mountain entrance were, at best, window dressing.
Trump has been far more adept in his trade negotiations with China and refused to meet with Xi Jinping until more details are ironed out. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are headed to China soon.
By refusing to say he’ll meet with Xi until he finds out what happens in the latest round of negotiations he maintains his advantage. A presidential meeting should only come after an agreement has been reached, not the other way around.
Which begs the question, why did Trump commit to meeting Kim before his Special Envoy, Stephen Biegun, finished negotiating any of the numerous and contentious details? After Biegun returned from Pyongyang Trump officially announced his Feb. 27-28 visit to Hanoi, but preparations were already underway for that visit. One can only surmise that Kim understood he had the advantage.
Up for grabs are a litany of economic, political, and military gives including the minimal lifting of some U.S. sanctions, a declaration to formally end the Korea conflict, establishing an interest section or Embassy in Pyongyang, and at the extreme, a reduction in U.S. troops and/or weapons systems on the peninsula.
Additionally Trump has already said he wants a Nobel Peace Prize for his efforts, but his vanity should not drive what may amount to a bad deal.
For any of these U.S. concessions, Trump must insist on full, verifiable denuclearization. Otherwise the bait-and-switch game will just go on while North Korea continues to build its arsenal. Transparency has always been the problem, and so far Kim has shown no more propensity to open his reclusive nation than his father or grandfather before him.
That may change if Kim is more interested in massive personal wealth and global recognition that followed Chinese and Vietnamese reform and opening. If so, Trump must press hard on eliminating the North’s ability to make and weaponize fissile material.
The worst thing that could happen in a real estate deal gone bad is bankruptcy. But an impulsive approach to high-stakes diplomacy with North Korea could mean risking regional and U.S. national security.
Trump understands that brand matters, and the latest version of brand America is failing badly. At this year’s World Economic Forum in Davos, business executives expressed not only concern, but outright dismay, over the investment climate in the U.S. And they aren’t just sitting on their capital waiting for better days.
Investors are voting with their money and heading for other countries. The statistics for Foreign Direct Investment in the U.S. (FDIUS) show a troubling trend. In the second quarter of last year FDI turned negative, a reversal of fortune not seen in years. That followed a drop of 41% year-on-year to $277 Billon in 2017, after peaking at nearly $472 billion 2016, according to U.S. government data.
Companies including Tesla, Unilever, and Foxconn are looking elsewhere to invest due in part to the uncertainty around the U.S.-China trade war. Imports and exports have been hit along with supply chain disruptions. While the upcoming trade talks in Washington were bathed in a positive light from governments on both sides of the Pacific, the outcome has been thrown into serious doubt after the Department of Justice announced criminal charges against Huawei and its CFO Meng Wanzhou.
She is currently detained in Canada on an extradition request that is now sure to move forward. Trump has said he may intervene in her case if it serves the trade talks and U.S. national security. What he can actually do, politically or legally, remains unclear.
The souring on brand America isn’t just about China trade disruptions. Trump’s immigration policies, his tacit acceptance of jingoistic and racist dog whistling by his most ardent supporters, and the perception that the U.S. is retreating from global affairs is turning away international students that might otherwise invest in a coveted U.S. education.
Enrollment in undergraduate programs dropped for the second year in a row with a 6.6% fall for 2017-2018. That’s putting new strains on colleges and universities that have grown accustomed to full-tuition paying foreign students.
The longer term cost to the U.S. will show up in worker shortages, primarily in science, technology, engineering, and math disciplines. These professions are already woefully short on trained graduates and unfilled jobs create a drag on economic growth.
While the administration touted $1.5 trillion dollars in corporate tax reductions that began in 2018, a survey by the National Association of Business Economics shows that companies are not in fact spending more. Trickle-down economics didn’t work under Reagan and it certainly isn’t working now even with a new, slick cover promising to make America great again.
A brand is only as good as what it delivers and so far Trump’s promises made continue to be promises broken. The U.S. accumulated a lot of good will over the decades. That hard-earned reputation is now at risk of being destroyed in only a few years.
Messaging is everything in international diplomacy, especially around high-level negotiations. After the latest round of U.S.-China trade talks in Beijing, all signs pointed to a successful outcome. An extra day was added beyond the planned two days of talks. Vice Premier Liu He made a short appearance at the lower-lower-level gathering of deputies. The U.S. Deputy Agriculture Secretary had glowing words after the meeting (though curiously no one from USTR spoke during the coveted press briefing.) Trump even tweeted shortly afterwards that the talks had gone very well.
And then the messaging changed, at least from USTR.
Lighthizer said last week, according to Sen. Grassley who had met with him Friday, that he hadn’t seen the structural changes he was looking for from China. That’s a major sticking point for the White House and something Trump has repeatedly said must be addressed to avoid raising tariffs from 10% to 25% on Chinese goods.
It is an odd complaint since China would likely only agree to the far more difficult issues face-to-face at Cabinet-level negotiations with either USTR Lighthizer or President Trump. The Beijing meeting was a the Deputy level, a.k.a. not the decision makers.
Lighthizer also announced that if talks don’t work out, U.S. companies could apply for exclusions to the 25% tariffs on $200 billion of imports from China that are set to take affect in March.
That’s a weak nod to the U.S. business community who were directly affected by the 10% tariffs and are likely lobbying hard for a resolution to the trade impasse. The promise of exclusions provide cold comfort since the aim of the next round of tariffs is to put even more pressure on China. Any exclusions would weaken that influence. Approvals would likely be slow-rolled by the administration.
USTR now appears to be trying to get out in front and push their hardline agenda ahead of the Jan. 30-31 talks. Sen. Grassley commented in a briefing to the press that since China’s economy is ailing there’s a chance to get more progress on these harder issues, which include IP protection, forced tech transfer, and stealing trade secrets.
These issues aren’t going away. The Department of Justice is now looking into whether Huawei stole robotic technology from T-Mobile.
To further complicate the administration’s signaling, Treasury Secretary Mnuchin has been discussing lifting tariffs as an incentive for China to make an equally bold move, though it’s unclear what that could be considering the depth of structural changes needed to satisfy U.S. concerns.
Since China isn’t going to agree to the U.S. list of over one hundred issues raised, and Trump isn’t going to accept some token purchases of U.S. goods and nothing else, some kind of compromise is necessary. What Grassley and other White House hardliners may not fully accept is that Trump’s approval ratings are plummeting, major U.S. companies are feeling the effects of the tariffs, and Trump himself may be itching for a settlement.
Compromise isn’t really in Trump’s winner-take-all approach and his impulsiveness can lead to unexpected outcomes (e.g. the Wall shutdown). The U.S. and China have been locked in a mutually reinforcing death spiral of tariff-raising for the past year and time is on no one’s side here.
USTR should certainly push for everything they can get. If cooler heads prevail, some sort of short-term relief with continued tariffs on some Chinese goods, and a plan to tackle the harder issues over time is the most likely outcome.
Both sides might not get exactly what they what, but it’s certainly better than the global economic carnage of a prolonged trade war and Trump really looks like he could use a win right now.
U.S. negotiators are heading back after an extended trade negotiation with their Chinese counterparts in Beijing. While there’s been no formal agreement yet, both sides are expected to make public announcements on Thursday. If talks had gone badly something would have come out in the official Chinese state-run press by now, so all signs point to some kind of deal. Will it, however solve any of the more difficult challenges in the relationship?
Trump wants to see markets rebound. Chasing the sugar high of a stock jump is hardly a trade policy, and a terrible negotiating position. This essentially gave China added negotiating leverage knowing he is eager to settle. That doesn’t bode well for any substantial movement on the most difficult issues facing U.S. exporters — forced tech transfer, non-tariff barriers, and intellectual property theft. That was the whole reason Trump launched his ill-thought out trade war in the first place by ratcheting up tariffs on Chinese goods.
If there’s no movement on those hard issues, what was the point? China announced they’re going to be buying U.S. soybeans again, but China was already buying U.S. soybeans before Trump’s tariffs. That’s not a concession.
China also announced that U.S. rice would be allowed into their market. While this is new, market access isn’t likely to dent the trade deficit as U.S. rice prices are significantly higher than other suppliers to China, most notable from Southeast Asia.
Other Chinese government moves included reduction in auto-tariffs, already offered to the rest of the world. While some legal reforms have been mentioned, enhancing IPR protection for example, changes in law are often not fully implemented. Given the inherently political nature of China’s judicial system, companies have little recourse.
These “structural” reforms tend to be the most difficult, often edging too close to issues that party hardliners in Beijing hold dear (e.g. favorable government and financial support to state-owned enterprises.) They’ll most likely kick the can down the road like they have for years and wait out what’s left of the Trump presidency.
That’s the crux of these negotiations. Are Chinese officials convinced that Trump will hold his line or will he cave to his own domestic economic pressures? It’s looking like Trump’s eagerness for a win will trump his own hardliners who are pushing for China to fundamentally change the way they do business. While that’s a laudable goal, they’ve used the wrong tool for this kind of heavy lifting.
Adding to the uncertainty, no senior-level negotiator was present for the talks. This was more of a working level negotiation and all of the familiar figures in Washington need to give their input including U.S. Trade Representative Lighthizer, Treasury Sec. Mnuchin, and Advisers Navarro and Kudlow. Interestingly it was mainly the Agriculture Deputy Secretary who spoke to the press, not the USTR Deputy Secretary, who ostensibly led the negotiations.
So what did Trump get out of all this turmoil? Hard to say until tomorrow, and there’s still three weeks to the March deadline, but there will be plenty of spin about the great, great, concessions that no U.S. president has ever gotten from China before.
Expect an announcement highlighting all the U.S. goods China is going buy as a result. For comparison, from Jan. to Oct. 2018 China bought $102.5 billion in U.S. goods. Over the same period in 2017 the number was $104.5 billion (U.S. Census data for 2018 is currently available through Oct.) If the structural issues aren’t resolved, don’t expect too much difference in overall U.S. exports, especially as China’s economy slows down.
Markets react quickly to news, and then adjust to facts. Trump might still get his temporary stock bump, but a sugar high never lasts. China is playing the long game and a fickle market movement is about as small a win as it gets.
Time is running out on the U.S. extradition request for Huawei’s CFO, Meng Wanzhong who was arrested in Canada in December. This follows an investigation on sanctions-busting by the firm related to business ties with Iran. Trump said that he might intervene in the case if it helped with the China trade impasse and for national security reasons. As much as he’d like to use the Huawei case for political purposes he actually has few options.
Intervening creates a dangerous linkage between national security issues and trade politics. China routinely engages in this type of politicization, and is part and parcel of their attempts to influence other countries over a variety of perceived slights. In 2017 South Korea’s Lotte department store chain shut its China operations after a concerted government effort to thwart their business (stores were suddenly hit with fire hazard violations,) when the firm gave up land to the South Korean government for a U.S. THAAD missile defense system installation. In 2011 the Chinese gov’t banned Norwegian salmon after the Nobel Prize was awarded to Liu Xiabo, a Chinese dissident who later died while in custody.
The U.S. is not China, and a Trump intervention would signal that the rule of law is no longer the rule of the land. The political backlash from left, right, and what remains of the center would be swift and significant.
Political intervention would make Trump look weak on China, again. Trump already gave Xi Jinping a huge gift when he lifted a ban on ZTE after its own Iran sanctions trouble. The company would have gone out of business without that commercial “pardon” to continue purchasing U.S. technology. Xi Jinping did not return the favor and blocked Qualcomm’s $44 billion purchase of NXP. China was the only country standing in the way.
That’s not to say Trump won’t try, but a criminal case is harder to interfere with than the ZTE sanctions case. Politically, Democrats have the majority in the House and will hit from the left. Hardline Republicans, who want a more forceful policy on China, will strike from the right. And any meddling in the Department of Justice while Mueller’s investigations remain open would be a huge red flag for those considering impeachment hearings.
The only option is to let the legal system run its course. While this may inflame tensions with China in the short term, it reduces the chances of a U.S. political backlash.
Don’t be surprised though if Trump surprises us all and defies the collective wisdom with an impulsive response if Canada agrees with the extradition request. While he has the power to free Huawei’s CFO, promising more than he can deliver ahead of time may prove that a Trump promise made, is a promise easily broken. That would significantly weaken his trade negotiating position vis-a-vis China.
Trump Chaos Rattles China Trade Negotiations Before They Even Begin
Just days after President Trump claimed success in trade disputes with China, disagreement over the details have emerged. That rings with a familiar tune.
The Trump-Kim Summit this past June in Singapore raised similar doubts about what, if anything, was actually accomplished. It turns out that even with a loosely worded document we now know that nothing was formalized after that highly touted success.
While North Korea continues to develop missiles and possibly more nuclear weapons, Trump complains he hasn’t been offered the Nobel Peace Prize for his efforts.
The Saturday Trump-Xi dinner in Buenos Aires didn’t even offer anything in writing and journalists were left guessing why applause erupted from behind closed doors as the dinner ended. There was no press conference or photo op to clear up the issue as Trump & Co. headed for the airport.
After landing, Trump claimed Chinese auto tariffs were being lifted. The White House has now walked that back. Trump claimed China would spend over $1 trillion on U.S. goods. His economic advisor Larry Kudlow said that was more aspirational than specific and would be determined by private entities and economic conditions. Trump said if China doesn’t make bold moves in ninety days, he’s Mr. Tariff, and then suggested the timeline might be extended.
No one knows what success looks like three months from now, and that’s a serious problem.
Now China has expressed its discontent with the White House version of winning it all. Yet again, Trump excels at undiplomatic posturing while others are left to clean up his mess.
The pattern here is clear. Trump’s erratic words cannot be trusted, only managed, even by those closest to him. It’s another episode of “Promises Made, Promises Broken.”
U.S. markets didn’t like that kind of uncertainty, and along with other negative financial news on Tuesday, they shed over 3% in one of the worst days in their history.
Making matters worse, US Trade Representative Lighthizer replaced Treasury Secretary Mnuchin as lead negotiator. Lighthizer is a known China hawk, and while having someone strong-willed and skeptical at the table is an advantage, if the lead isn’t considered to be negotiating in good faith that will not end well for bilateral relations or the international trading system.
The biggest risk at the end of February will be China claiming they did everything they said they would do and the U.S. saying whatever they did wasn’t enough.
Chinese state media has already started making the list and announced increased punishments for firms found guilty of IP theft, but will they be implemented?
If Trump really wants to reduce the trade deficit, protect intellectual property, and remove investment barriers, he and his team are going to have to be far more disciplined than they have been to date, and that seems highly unlikely.
Playing loose and fast with the facts, tweeting exaggerated wins, and painting Chinese negotiators into a corner will not make this relationship work. Both sides have to be able win.
11/30/18 – Updates on potential Trump-Putin meeting below.
The city center is bulking up on barricades and armed officers as world leaders being arriving for this year’s G20 meeting. Some 22,000 security personnel are being enlisted to keep the peace as anti-globalization and leftist political protests are expected, though they’ll be confined to a largely emptied part of town. The Argentine economy is under significant stress with 45% inflation and the peso more than doubling over the last two years against the dollar. Major parts of downtown will be completely closed, including cafes and shops.
Saudi Arabia’s Crown Prince Mohammed Bin-Salman arrived on Wednesday and French President Macron is on the ground today. Trump is expected Friday along with several hundred press in tow. How many are fake news, but real people, will likely be tweeted ad nauseam starting late Saturday as Trump winds up his 48 hour stint in Argentina.
Here are a few of the potentially most controversial issues to come out of the annual gathering.
Will there be a joint statement?
After the debacle at APEC where the U.S. and China were at loggerheads over the final text and in an unusually thuggish move, the Chinese delegation stormed the offices of the Papua New Guinea Prime Minister’s office demanding changes. In the end there was no agreement over language for a final statement, the first time since APEC’s founding in 2003.
For context, those final statements are mostly aspirational with very watered down, benign language that all participating countries can sign off on. They aren’t even legally binding. Early drafts are usually negotiated well in advance.
Will the same happen at the G20 with an even more complex set of issues in play including climate change (which Trump doesn’t believe is a scientific fact), migration (U.S. troops still on the border with Mexico), economic growth, health, sustainable development, the international financial architecture, and a host of other issues in addition to an “Action Plan.”
Part and parcel of G20 gatherings are major business deal announcements and project financing, aka deliverables. Most, if not all of these, have either been in the works for months or already started, but it makes the event look like a venue where things get done. China is funding Argentina’s fourth nuclear power plant and if the proliferation of China’s ICBC bank branches across the capital are any indication, financial ties are strengthening even during Argentina’s economic downturn (Citibank sold its retail operations to Santander in 2016 further shrinking U.S bank presence in the country.)
What, if anything, will the U.S. be announcing in terms of large deals in Latin America? The re-negotiated NAFTA with Mexico and Canada is already old news as is Argentina’s new beef exports to the U.S. China’s financing largesse is likely to overshadow any announcements by Trump unless the numbers are “bigly” and “yuge.” There are no signs of that happening.
Rumor has it Trump and Xi are meeting for dinner on Saturday night, with the venue and menu yet to be reported. The outcome of that feast may well determine the near-term future of global trading relations, major stock market movements, and a wave of punditry over the temperature of a new Cold War. Trump’s economic adviser, Larry Kudlow, tried to strike a positive tone this week suggesting a deal could be made over the tit-for-tat tariffs that have roiled markets, while hedging with a statement that China needs to offer more. Trump, with his illimitable bravado, threatened even more tariffs.
Meanwhile China’s President Xi continues to travel the world (most recently Spain) and continues to tout support for free markets and the allure of China’s growing market. So far there’s been no mention of structural reform and there likely won’t be. State-owned enterprises are a fixture of China’s Communist Party rule despite its turn towards capitalism, and no threat from the U.S is going to change that.
Update 11/30/18 12:54 – Russia says a meeting with Trump is still on as with other leaders. WH says nothing has changed. They may be splitting hairs on what “meeting” means. Technically a “pull aside” is not an “official” meeting since it doesn’t involve a formal sit down with advisors, etc. and can take place for a very short time. A pull aside also doesn’t carry the same gravitas as a formal meeting, but leaders still talk to each other, and usually without press or even a briefing afterwards.
Update 11/29/18 11:45 – Trump tweets cancellation of his G20 meeting with Putin citing Russia’s continued seizure of Ukrainian ships and crew. That leaves door open if they’re released in the next two days, but suspicions swirl that this has to do with more Cohen revelations of pursuing a Moscow deal during the campaign.
As of 11/29 the meeting has been cancelled via Trump’s tweet and then on 11/30 Russia says they will still meet. Who knows what “meet” means anymore.
No matter how this pans out, the on-again, off-again announcements make the U.S. look weak and confused. If Trump does end up meeting Putin, even in an “unofficial” pull-aside, he appears to be dancing to Russia’s balalaika (stringed Russian musical instrument.) There will be no time for an in depth discussion of Iran, missile treaties, Ukraine, North Korea, Syria, or a handful of other pressing issues.
It’s amateur hour in Buenos Aires for the U.S. delegation, in part or by design thanks to Trump’s inability to stay on point and engage with the international community in any strategic way. Have no doubt though that WH Comms will spin this as a series of successful events during an intense two days of high stakes diplomacy.
. . . It will certainly be a whirlwind few days of summitry, though don’t expect any mountain peaks to be topped with major announcements.
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Update 9/17/18: The Trump administration has announced a 10% tariff on $200 billion in Chinese imports that will rise to 25% at the end of the year. U.S. consumers will bear the brunt of what is essentially a tax passed on as higher prices.
China has said they will not negotiate if these tariffs are imposed. Expect retaliatory Chinese tariffs and a raft of new restrictions on U.S. businesses as Trump escalates his trade war.
China has said they will not negotiate if tariffs were imposed. Expect retaliatory Chinese tariffs and a raft of new restrictions on U.S. businesses as Trump escalates his trade war.
A dangerous new phase in Trump’s trade war is about to begin when the $200 billion in U.S. tariffs on Chinese goods comes into effect soon. Everything from electronic components to auto parts and textiles will be affected, though notably U.S. consumer goods including toys, cell phones, and pharmaceuticals were left off the list. Someone in Trump’s orbit must have realized that the consumer backlash on these items would mean a Republican hit in the midterms.
While this may look like a giant game of chicken, neither Trump nor Xi is likely to swerve anytime soon. Some China policy advisors have come to the conclusion that Trump’s true intention is to weaken China, not negotiate in good faith towards resolving long simmering trade tensions. A segment of hard-liners in Beijing always interpret U.S. policy as a direct threat to Chinese interests. They’re often wrong, but this time they may be on to something.
Leaked, off-the-record comments made by Trump during an interview with Bloomberg, as reported in The Star, suggest that Trump is only interested in win-lose scenarios. He reportedly said that he has no interest in conceding anything to Canada in ongoing NAFTA trade talks and Canadian negotiators seem to agree, noting a complete lack of flexibility on the U.S. side. Talks with Canada have since broken down.
That’s a death blow to constructive negotiations.
Trump’s refusal to offer concessions does not bode well for U.S.-China economic relations. The latest round of trade talks broke down after two days without any plan to renew discussions, and the first tranche of U.S. tariffs kicked in on $16 billion worth of goods.
While Trump thinks “trade wars are easy to win”, he is becoming ever more isolated not only from facts, but from his advisors in general. His own narcissism, on full display in excerpts from Bob Woodward’s new book “Fear: Trump in the White House” suggest nothing and no one can change his penchant for causing chaos if left to his own instincts. There are only so many times an order can be ignored or a paper can “go missing” from his Oval Office desk.
Add to that the misinformation bubble tightening around him and his warped perceptions are likely to lead to even more problems. His chief economic advisor, Larry Kudlow, recently told him that the Chinese economy is looking weak, giving false feedback that either Trump’s actions are already bearing fruit or now is an opportune time to pressure Beijing.
Xi Jinping is not likely to back down in the face of an aggressive U.S. push on trade. Quite the opposite. As China’s military build-up in the South China Sea illustrates, their rhetoric of a “peaceful rise” and “biding one’s time” has come to an end.
Despite economic difficulties, and there are many, from decades of easy money, loose financial oversight, and rising debt, China’s leaders have been exceptionally adept at managing through difficult periods. The entire financial system is commanded by the Communist Party. The renminbi, despite early signs of increased convertibility, is not freely traded. Exports, as a total percentage of China’s economic activity, remains relatively low and trade with Europe and the rest of Asia are unlikely to be affected by the latest eruption from another of Trump’s late night Pennsylvania Ave. rants.
China’s economy is still largely insulated from the worst of what a sustained trade war might inflict on its economy. A slowdown in trade with the U.S., at least in the short-term, is unlikely to cause significant pressure. This trade war may actually accelerate China’s transition to a more consumer-oriented economy while other countries/regions, including the EU, Australia, and Japan, gain greater market share.
The real stakes here are a lasting break-down between two of the world’s largest economies that goes far beyond tariffs.
Normally foreign policy issues including security and trade, are addressed separately. Trump has consistently blamed China for impeding progress on North Korean denuclearization and then linked that to his tariff policy. With increased CFIUS reviews, a necessary effort to reduce potentially damaging Chinese government interference in the U.S., the hardliners in China are likely to conclude that nothing is to be gained from constructive negotiations across an ever widening number of important bilateral and multilateral issues.
No one doubts that China has been abusing the international trading system for years at the expense of U.S. companies. Intellectual property theft, market restrictions, counterfeiting of drugs, and a host of important issues need to be addresses, but a trade war is one of the least effective ways to accomplish these goals. Tariffs are simply the wrong tool for the job.
Once negotiating trust is lost, the dangers of misperception rise exponentially. Everything Trump does now may be seen as directed at Xi’s hold on power and China’s system of government. An external threat is an easy cause to rally around and China has no shortage of nationalistic tendencies at the moment. If relations become polarized there’s nothing easy about walking back form the edge towards the negotiating table again.
Wall Street’s GoldmanSachs, JPMorgan and UBS are all warning that a wide-ranging trade war will lead to a bear market as corporate earnings and investment take hits they cannot easily ignore.
As U.S. consumer prices rise and companies lose export markets, Trump will no doubt think he’s winning. The November mid-terms will show whether the nation agrees with him or not.
The next tranche of U.S. tariffs on $200 billion worth of Chinese goods are about to hit. Rather than being largely invisible to the public like the first $50 billion, round two includes seafood, bicycles, suitcases, bags, carpets, air conditioners, and sports gear (an exhaustive list of over 190 pages can be found as a USTR .pdf file here.)
Other imports subject to tariffs this time around include auto glass, tires, engines, iron, steel, flooring, and construction tools. A visit to Lowe’s or a home improvement project will cost more, along with new cars that use China-made inputs.
This is the beginning of his attack on consumers, but not the worst yet. Some of the most popular consumer items including toys, cell phones, and pharmaceuticals, were not included. A consumer backlash is the last thing the Trump administration needs right now as polls continue to show Republican candidates struggling in the run-up to the midterms. The widespread business outcry would also be hard to contain.
Still, this latest round of tariffs and the failed recent trade talks suggest more problems ahead for the relationship as both Trump and Xi harden their positions.
Some China policy advisors have concluded that Trump is hell-bent on weakening China. That view casts the tit-for-tat tariff struggle in a far more damaging political light. Xi Jinping will be easily backed into a corner where he has no choice but to fight and show his people how strong China has become.
Trump’s advisors meanwhile, including Larry Kudlow, are feeding him the false impression that China’s economy is on the ropes and ripe for disruption. With a “winner take all” approach Trump will have to keep ratcheting up the pressure, no matter how much he breaks in the process.
With so much distrust and misinformation flowing freely, expect this dispute to go well into 2019 and affect consumers far more than at present.
The U.S. can include almost $200+ billion more in traded goods. China, out of categories to include by then, can opt for a trade war by other means by restricting U.S. business operations and increasing scrutiny of foreign investment.
To be sure this is no easy win for Trump, no matter how many times he says it. Tariffs are a blunt instrument. Come January the domestic environment, including Congress, may not be so supportive of his “get tough” efforts, which will have done little except to increase consumer prices and the cost of doing business.