By Scott Kennedy —
Not So Fast!
Just as everyone was getting comfortable thinking a broad U.S.-China trade deal was close at hand, and the relationship between the world’s two largest powers would stabilize, a consensus emerged that President Trump and President Xi would sign an agreement by the end of June, either in the United States or on the sidelines of the G20 summit in Osaka, Japan.
But not so fast! President Trump’s sudden verbal pyrotechnics over the weekend and the concerns that underlie them have raised the real possibility that the talks will break down, tariffs will go up, and the downward spiral in U.S.-China ties will continue. Observers should never forget that uncertainty is an enduring hallmark of the Trump administration’s strategy and that straight-line projections are fraught with danger. Chinese vice premier Liu He’s visit to Washington later this will be a make-or-break turning point for the negotiations.
Why the Tweet Storm?
Some observers believe that the president’s weekend verbosity reveals his true desire, goaded on by hawks inside the administration, to blow up a deal and generate an economic and political crisis in China. But in reality, the president was responding to reports from staff that talks made little progress last week and that China may be backing off commitments they thought they had already locked up.
Negotiators have made a lot of progress, hence a draft text of seven sections comprising roughly 150 pages, but there are still several outstanding issues:
- Substance. Some specific elements related to purchases, market access, and industrial policy have not been resolved. Most noticeable appear to be questions surrounding restraints on industrial subsidies.
- Clarity. The United States reportedly wants major Chinese regulatory commitments to be made through changes in laws passed by the National People’s Congress (NPC) and not via less authoritative regulations adopted by the State Council or individual ministries. It also appears there is not yet a complete Chinese text, and the United States needs to ensure no new loopholes sneak in through a different language.
- Enforcement. Last summer, the United States imposed tariffs on roughly $50 billion worth of goods it says benefited from weak protection of intellectual property rights, and then in September 2018 put tariffs on an additional $200 billion in products as punishment for not quickly admitting wrongdoing and making concessions. Beijing retaliated with tariffs on approximately $110 billion in U.S. exports to China. It appears unresolved how quickly existing tariffs by either party will be removed and whether China will permit the United States to re-impose tariffs should it find China to not be in compliance.
The president and his chief negotiators want a deal, but they won’t make a deal just for the sake of reaching one; and so, they are willing to escalate penalties if genuine progress is not made. The impulse to not settle for a superficial outcome is laudatory, but their approach inevitably creates a lot of heartburn.
The “Crazy Uncle” Strategy
The president’s outburst is part of a distinctive broader trade strategy by the Trump administration of bilateral brinksmanship geared to pressure counterparts to make major concessions. Previous administrations all practiced some form of “patient integration” with China, in which negotiations with Beijing were embedded in an effort to strengthen multilateral and regional arrangements, creating strong incentives for China to adjust its domestic practices to avoid being left on the outside looking in. By contrast, Trump abandoned the Trans-Pacific Partnership, chastised the World Trade Organization, and engaged in a series of bilateral talks, while also slapping trading partners with tariffs and threatening still more penalties.
To their credit, the administration has created tremendous leverage against China. The president has marshalled hyperbolic “facts” concerning the trade balance to portray the United States as a long-suffering victim and the amount of collected tariffs to show that the trade war is benefitting Americans. Although objectively inaccurate, his apparently sincere declarations signal the fervency of his beliefs and his willingness to bear tremendous economic costs in the short-run that conventional politicians wouldn’t consider, all in order to force a stubborn China to modify its economic policies and system. These threats matter immensely to Beijing because of the United States’ huge market, dynamic financial system, and massive military power. And the president’s threats are believable because he has already acted on them before, pushing aside entreaties from Wall Street, allies, and close friends.
Some observers in think tanks, industry, and governments have been willing to overlook the intellectual weaknesses of Trump’s arguments because his claims and strategy support a larger underlying truth, emphasized by U.S. Trade Representative Robert Lighthizer, about the deeply discriminatory and damaging nature of China’s industrial policy system and the need for it to be uprooted. Their grudging support has given this approach more staying power.
But the president’s “Crazy Uncle” strategy may be wearing thin, not only through fatigue but also as listeners become accustomed to his outbursts and have difficulty differentiating between momentary complaints and genuine threats. Ever more tempestuous language is needed to generate the desired anxiety and subsequent concessions, and at some point, targets either don’t get the message or decide to break this anxiety-compliance spiral by not giving in. This strategy vis-a-vis China may be nearing the end of its shelf-life.
The administration’s hope is that the Chinese delegation arrives as scheduled later this week and is sufficiently forthcoming on their side. In this way, it can credibly claim to have achieved a better deal than what would have resulted via continuing the patient dialogue of the past. Beijing went almost completely quiet in the day following the president’s tweets, which seems to indicate that China has acclimated to Trumpian language. The standard media made no mention of the threats, and social media was void of commentary. The lone voice, the foreign ministry spokesman, on Monday said China has heard such threats before and that the delegation would still travel to Washington. Beijing confirmed on Tuesday that Vice Premier Liu He would still lead the delegation, suggesting China still wants to find a way to resolve the current impasse and reach an agreement.
The economic risks to China of not taking Trump’s threats seriously would be very real, as the current recovery is built on a combination of more credit to the private sector and optimism about a trade deal. All of China’s financial markets fell off significantly on Monday (Shanghai fell 5.6 percent, Shenzhen 7.6 percent) and the offshore rate for the renminbi declined from 6.73 to the dollar to 6.81, reflecting deep concerns should there be a sudden escalation of tariffs.
If momentum toward a better deal is regained, even if not every i is dotted, every t crossed, or every brush stroke completed, expect the administration to back off their threat to raise tariffs on Friday at 12:01 a.m. A genuine stand-off, with China blatantly rejecting making any further compromises, would be necessary for the administration to have any chance of successfully justifying the actual imposition of across-the-board 25 percent tariffs. Regardless, there would invariably be severe pushback from many quarters, domestic and international.
Toward an Unstable Relationship
The president’s tweets and the announcement of potential tariffs have brought us to a genuinely dramatic turning point in the trade negotiations. But regardless of whether there is a breakthrough or a breakdown this week, much more is happening beyond these talks. Even an agreement on commercial issues would not impede the concurrent effort by the Trump administration to expand restrictions on high-tech investment and exports and to aggressively compete against China for friends in Asia and elsewhere. Equally important, President Trump’s “Crazy Uncle” strategy reinforces the impression in Beijing that deals with the United States are temporary and that sooner or later Washington will up the ante and demand still more, while offering no more than momentary calm in return. This does not bode well for efforts to reach any sort of enduring equilibrium in the U.S.-China relationship, whether one based on cooperation and harmony or even one rooted in greater competition and rivalry. Such stability would require an approach that strengthens Washington’s credibility at home and abroad. Bilateral brinksmanship, whether conveyed by Twitter or other means, cannot serve that function.
Dr. Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at CSIS.