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Talks with China may lead to long-promised deal — or all-out trade war

Talks with China may lead to long-promised deal — or all-out trade war
President Trump meets with Chinese Vice Premier Liu He, left, in the Oval Office on April 4, 2019. (Manuel Balce Ceneta / Associated Press)

In more than a year of haggling, China has insisted it would never negotiate a trade deal with a gun to its head. But that is what’s about to happen in Washington.

The outcome may determine whether President Trump gets his long-promised better shake from the United States’ biggest economic partner or instead launches a full-blown trade war.

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The consequences of a miscalculation on either side could be enormous — economically and politically.

Chinese President Xi Jinping’s special economics envoy and personal confidant, Vice Premier Liu He, is set to arrive for talks on Thursday, just one day before Trump has threatened to slap draconian new tariffs on imports from China.

Trump used a Twitter post to announce the new tariff move last weekend, instantly dimming hopes that a deal was finally at hand after 10 rounds of negotiations. His top trade official, Robert Lighthizer, blamed new tariffs on what he described as Chinese backsliding on promises it had agreed to previously. Trump said in a tweet Wednesday that the Chinese pulled back in the hopes that he might lose reelection in 2020, allowing them to get a better deal with another U.S. leader.

Beijing has been stone silent on Lighthizer’s assertion about reneging but is known to have considered canceling the whole trip by Liu and his aides. Instead, Xi decided to go ahead with the long-scheduled talks and to do so with the high-profile Liu, which suggests to China experts that Beijing is confident it can fend off Trump’s threat. On Wednesday, China said it would retaliate if the U.S. imposed new tariffs.

Twice in the past, Trump has pulled back from similar vows to hike tariffs.

“If things were really broken down, why would Liu be going to D.C.?” said Andy Rothman, a former State Department official in China and now an investment strategist for Matthews Asia.

In Beijing this week, Rothman characterized Trump’s ultimatum as a last-minute ploy to squeeze more concessions from China. He thinks Liu may have been told by U.S. officials, “Look, this is a negotiating tactic and if progress is made, then the tariffs don’t have to be put in place on Friday.”

Whether that is a safe assumption is far from clear.

Trump reiterated Wednesday that he would be happy to keep tariffs on Chinese goods, which Lighthizer and other China hardliners see as necessary to force Beijing to live up to any agreement it makes. U.S. negotiators are demanding that China rebalance trade and address long-standing complaints about market access, subsidies to state-owned firms and policies that force outside companies to share their technological secrets.

At the same time, Trump has been growing restless. He’s cut a deal on updating the North American Free Trade Agreement, but prospects for congressional passage are unclear. Trade talks have just begun with Europe and Japan. The big game is China, and Trump is hankering to announce a victory.

Trump has boasted about how great he’s been for the economy and that that is why he should be reelected in 2020. The struggle over trade has already imposed significant costs and hardships on both sides: In the U.S., it has hurt farmers, small business owners and others who are part of Trump’s electoral base; in China, it is affecting millions of workers and business leaders who have been promised a continuation of rapid growth and prosperity.

With the stakes so high, why are the two countries seemingly going to the brink?

In Beijing’s case, it may be counting on its own negotiating skill, Trump’s history of pulling back from drastic action and his penchant for claiming historic victories, even when deals make only marginal changes. Also, even if they make concessions, China’s leaders have considerable power to shape and restrict the information that flows to their people, at least in the short run. Indeed, there was a virtual media blackout of Trump’s weekend tweets threatening new tariffs.

Trump appears to be betting that a U.S. economy that is outperforming expectations will give him more leverage to endure a trade war, if needed.

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If Trump follows through by raising tariffs to 25% from 10% on $200 billion of Chinese goods, many U.S. importers and ultimately consumers will feel additional pain. But with the domestic economy expanding at a healthy pace, job growth strong and many Americans still benefiting from tax cuts and low interest rates, Trump could be betting that businesses and individuals could absorb a pinch.

David Loevinger, an analyst for TCW Emerging Markets Group and a former senior Treasury Department official for China affairs, said Trump may be thinking he “can bash China and still get enough growth.”

Loevinger noted that hardly anyone in Washington is criticizing Trump for getting tough on China. A strong bipartisan consensus has developed that the U.S. must crack down on Beijing’s unfair behavior on trade and things like computer hacking and coercing foreign firms to hand over their technology secrets as the price of doing business in China.

Since Trump took office, the U.S. government has been taking a host of actions, including tightening controls on exports to China, scrutinizing inbound Chinese investments and denying visas to Chinese researchers. The Trump administration is planning to block China Mobile from U.S. markets and has been lobbying allies to shut out telecom giant Huawei.

“China bashing in the U.S. is a very safe base, politically,” said Loevinger.

Yet the dangers of miscalculation are huge on an issue as fundamental as trade is to millions of Americans’ well-being. Eventually, the economic costs could become too high to ignore.

In the past year, Trump has imposed tariffs of 10% to 25% on $250 billion of Chinese products, prompting retaliatory duties from the Chinese on $110 billion of American goods. U.S. soybeans, wine, chemicals and cars have been among the hardest hit.

New higher and more far-reaching tariffs, if imposed, would magnify the pain just as the 2020 presidential and congressional elections loom. Trump’s weekend tweets also threatened to assess 25% tariffs “shortly” on another $325 billion of Chinese goods, which is virtually everything that the United States imports from China.

Then there are financial markets, which Trump clearly wants to keep high to boost investor sentiments and his standing among business donors. Stocks fell in the immediate aftermath of Trump’s renewed threats, and a prolonged slump could undermine confidence and growth.

Cailin Birch, global economist at the Economist Intelligence Unit in London, said there’s enough motivation on the U.S. side to avoid a blow-up in the talks. Her expectation: a limited deal that will be largely cosmetic, hard to implement and short-term in nature.

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“Ultimately, what this boils down to is, the two countries are engaged in a long-term strategic rivalry for economic dominance,” she said.

For China’s Xi, the political dangers from an all-out trade war may be less recognized because of the authoritarian nature of the Chinese government, but they are no less real and serious.

Since China opened up its economy some 40 years ago, the Communist Party has survived in large part by delivering economic prosperity year after year. It’s gotten harder for Xi and other party leaders to keep their part of the bargain.

Growth has slowed in recent years as the nation transitions to a more consumer- and service-driven economy. Beijing is grappling with massive private debts, an aging population and inefficient state-owned enterprises.

Trade has long been a major source of growth, but China said Wednesday its exports fell in April, with a steep 13% decline in shipments to the United States.

Analysts estimate that a full-on trade war could cut as much as one-fourth of the country’s growth over 12 months.

“Tit-for-tat tariffs led to a severe impact on sentiment,” said Andy Xie, a longtime economist based in Shanghai. “The lesson is, you don’t escalate.”

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