Stock markets rose around the world on Monday on the news that the U.S. and China are beginning mid-level talks in Washington this week to try to resolve the escalating trade conflict between the world’s two largest economies, even as another $16 billion round of tariffs comes into effect. By the end of the trading day, Wall Street had dipped after President Donald Trump told Reuters in an interview that he was “not thrilled” with Federal Reserve Chairman Jerome Powell’s agenda of raising interest rates.
The rest of the Reuters interview was released after the closing bell and was not priced into Monday’s trading, but likely would have erased more of those gains, as Trump said he wasn’t expecting much to come out of this week’s talks. “I’m like them, I have a long horizon,” Trump told the agency, explaining that he had “no time frame” for ending the dispute.
It’s never clear whether Trump is on the same page of the policy agenda as his officials, but in this case, the president’s statement appeared to contradict what American and Chinese officials told The Wall Street Journal on Friday, which is that they are aiming to reach a deal to avert a trade war by the time Trump and Chinese president Xi Jinping are scheduled to meet at the Asia-Pacific Economic Cooperation forum and the G20 summit in November.
The Chinese government is eager to see the dispute settled quickly, for obvious reasons: A protracted trade conflict with the U.S. would damage China economically and complicate Xi’s plans to transform the country from a low-wage manufacturing powerhouse into a global leader in high technology. He has reportedly instructed his deputies to stabilize the relationship with the U.S. as soon as possible.
The Trump administration, on the other hand, is not in such a rush. November is still three long months away, and the U.S. Trade Representative’s office wants to delay negotiations and keep ratcheting up the tariff pressure in an attempt to secure a deal from a position of dominance in October.
Needless to say, the U.S. business community is not thrilled at the prospect of even more barriers to trade with a country they rely on for all manner of raw materials and finished goods. The U.S. has so far slapped duties on $34 billion of Chinese goods, but the USTR wants to impose another $200 billion on a wider range of imports, including for the first time an array of consumer goods.
In the first of six days of public hearings on the new proposed tariffs on Monday, business owners warned that they would lead to huge price hikes, driving up consumer costs and putting tremendous, possibly ruinous strain on import-dependent American businesses. Meanwhile, the CEO of the global shipping giant Maersk said in a presentation on Friday that Trump’s protectionist tariffs on China and other countries could slow U.S. trade growth by up to 3 or 4 percent: a huge hit.
Granted, these businesses have a direct interest in the public believing that claim and in the administration forgoing another round of tariffs, but it’s not hard to see how raising the price of Chinese furniture and lighting products, tires, chemicals, and plastics, among other things, by as much as 25 percent would hit Americans in the wallet and disrupt a variety of U.S. industries. Of course, Trump might in that case turn around and blame these companies for passing the costs onto consumers.
The deal with Beijing the administration hopes to negotiate would see China reduce industrial subsidies, cut production in industries like steel and aluminum where overproduction has been depressing global prices, stop pressuring U.S. companies to hand over proprietary technology, buy more U.S. goods and services, and bolster the value of its currency, the yuan, to make the dollar more competitive.
This is a hefty slate of demands, but significantly pared down from the completely unreasonable proposal U.S. negotiators put forth in May, which would have compelled China to cut its trade surplus by $200 billion, abandon its industrial policies, and refrain from contesting U.S. lawsuits against it at the World Trade Organization. That was never going to happen. Under pressure and eager to reach a resolution, China may be more amenable to the less stringent terms now on offer, or some approximation thereof.
On the other hand, the Trump administration needs to be wary of China accepting a deal, then failing to fulfill its side of the bargain. Derek Scissors, a China expert at the American Enterprise Institute, points out that China has failed to keep its promises on trade in the past and has been evasive about the behaviors this deal would seek to curb, such as intellectual-property theft. The administration, Scissors argues, will need to enforce any deal rigorously, using the threat of sanctions.
Beijing might well balk at such conditions, however, and even if Xi is eager to make a deal, he will not bend over backward to accept whatever the U.S. is magnanimous enough to give him. The economic impact of a full-on trade war would complicate things politically for Xi, but giving into American demands to his country’s disadvantage would be even more damaging to his prestige. Xi has consolidated his power in Beijing, indeed to a troubling extent, and will likely remain in control of the country for another decade or more no matter what, but if he is given a choice between belt-tightening and national humiliation, he won’t have to think too hard about that decision.
Anyway, China’s efforts to become a global economic superpower are proceeding apace in other realms, such as Belt and Road Initiative, a drive to massively upgrade overland trade infrastructure between China, Central Asia, Europe, and the Middle East, as well as sea routes to Southeast Asia, South Asia, and Africa. This huge endeavor will project Chinese trade power in these regions, particularly Africa, to an even greater degree than its influence is already being felt.
There is a strong current in Chinese political discourse today that its rise to superpower status is unstoppable, even in the face of American resistance. Indeed, a trade war would much more likely slow that process than stop it completely. China’s dominance of global manufacturing was as much an organic product of globalization as a deliberate consequence of Chinese industrial policy or U.S. trade policy. Xi’s high-tech ambitions today reflect the fact that China is actually beginning to lose low-cost manufacturing operations to other, less developed Asian countries with lower labor costs.
China is going to keep on being China, no matter what Trump does. Yes, Beijing needs to be held accountable for its anti-competitive trade practices, but there may be limits to how far a trade war can go toward achieving that goal without doing unacceptable damage to the U.S. economy instead.
Perhaps the most important question to ask about these trade wars is what would it mean to win them? Trump’s obsession with trade deficits, based on the unorthodox theories embraced by his key economic advisers, has led to these deficits actually expanding as U.S. buyers rush to place import orders before prices go up. Trump’s economic policies in general are unlikely to reduce the U.S.’s current account deficit, economist Scott Sumner argues in an op-ed at The Hill, and hardly anyone other than Trump’s trade adviser Peter Navarro, Commerce Secretary Wilbur Ross, and the president himself believes that trade deficits reduce American economic output.
No matter what Trump believes, trade is not zero-sum. Before the administration embarks on a trade war with China, perhaps it should explain to the American people exactly what it would mean to win it.