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Economy

Trump’s Failing Trade War

Mar 08 , 2019

President Trump’s political theater follows a pattern. He creates a crisis and then tries to become the hero for solving it. It is like starting a fire then taking credit for calling the fire department. Optimistically, crises might create bargaining leverage for a better settlement, but unfortunately, crises also have their costs and unintended consequences. In the aftermath, when Trump returns to negotiations, he typically gains little for the pain inflicted. Both sides have been injured, but a mutually beneficial deal is still receding into the future.

Examples abound. Among the most dramatic has been the rollercoaster relations with North Korea. During his first year in office, Trump escalated his “fire and fury” rhetoric and moved military resources to the region, seeming to push to the brink of war. By early 2018 both sides reversed course, ceasing their violent mutual threats. Trump had persuaded China to tighten economic sanctions. The U.S. postponed routine military exercises in and around Korea and the North ended nuclear and missile tests. Trump confessed his love for North Korean leader Kim Jong Un, but no further progress has been made in the year since. North Korea remains a minor nuclear power. There is no breakthrough or permanent solution, but the North Korean people continue to suffer under the economic sanctions and the oppressive Kim regime. Trump tried the stick but offers few carrots that might actually motivate a transformative deal.

This winter Trump responded to the impending Democratic Party takeover of the House of Representatives by rejecting a budget from the lame-duck Republican-led House because it included only very minor funding for his cherished border wall. His refusal to sign the budget closed down much of the government for more than a month. Finally, he gave in and signed a budget passed by the incoming Democratic Congress that included even less funding for the wall: great pain but no gain. Then he declared a farcical “national emergency” that even he admitted was likely futile in the face of inevitable court challenges.

Trump’s trade conflict with China follows a similar script. Trump created a crisis by instituting broad and unprecedented tariffs eventually impacting about half of all Chinese exports. China responded in kind, but not quite as severely. After the first round of tariffs on $50 billions of China’s annual exports, the two sides seemed close to agreement last May when a delegation led by Treasury Secretary Mnuchin visited Beijing, but there was dissent within the U.S. delegation and Trump vetoed the prospective deal. Trump added 10% tariffs on another $200 billions of Chinese exports in September and threatened to increase these to 25% by year end and then probably expand tariffs to most of the rest of China’s roughly $500 billion in exports if he still did not get his way. It was the most sweeping trade action by any U.S. president since the early Cold War.

Yet, following Trump’s pattern, talks have continued sporadically, but without a major substantive breakthrough. After turmoil in the U.S. stock market, partly blamed on the trade war and partly on the government shutdown, Trump backed off his threat of new or increased tariffs. As with North Korea, he changed his tune and hyped the prospect of a broad new trade agreement with China. The Chinese government played along and floated what sounded like bold new proposals, such as somehow buying a trillion more dollars of U.S. exports over the next six years, almost doubling its U.S. imports. The cheery mood rallied stock markets, but is it all smoke and mirrors?

The two sides are living in alternate realities. Mutual understanding is lacking. Except for possible rhetorical flourish, China will not go much beyond the offer it made last May. It involved buying some additional agricultural products, petroleum products, liquified natural gas, and circuits totaling in the tens of billions of dollars per year, far short of Trump’s demand. This might include transferring China’s $12 billion petroleum imports from Iran to the U.S. China could buy more U.S. meat by easing current regulatory obstacles. China has also said for years it might reduce various tariffs, including its 15% auto tariff, though this is not likely to boost sales of cars shipped from the U.S. as much as it would benefit exports from nearby South Korea and Japan. China has been willing to open its financial markets more to foreign banks and insurance companies, but the devil is in the details. Concessions like these have been on the table since May, but Trump and his hardline advisors consider them inadequate.

What more can China give? Most American trade experts think plenty, but much of Trump’s wish list is pie-in-the-sky. If there is any paper agreement much beyond what China offered last May, it will consist largely of empty promises that China will be unable or unwilling to keep. No matter how much pain is inflicted on both sides in a trade war, there can be no viable concessions that exceed the administrative capacity of the Chinese government to deliver or the ability of the U.S. to enforce. It may be that even empty promises would be a short-term boost to financial markets and Trump’s tattered political fortunes, but empty promises are of little long-term benefit.

One category of empty promises China may be induced to make are those difficult to verify, such as spying for commercial advantage. Espionage is, by its nature, covert. Most major nations, including the U.S. and China, devote large resources to it. Demanding a country agree not to spy is like demanding your spouse avoid lustful thoughts about anyone else. They may readily agree, but do you really gain anything by demanding it? You know it is hard to verify and easy to deny. When spies are caught, you can prosecute or exchange them, but governments and private companies will continue to spy. The best defense is effective counterintelligence.

U.S. outrage over China’s 2025 plan to subsidize research and development in advanced industries also generates unrealistic demands. China has ceased touting the plan, but preventing research is impossible to enforce. For example, if R&D subsidies to industry were somehow blocked, China could merely redirect research funds toward its universities and implement the same goals there, just as U.S. companies partner with its great research universities. Lots of time and ink can be wasted drafting an agreement, but it is certain to be evaded.

Many commentators have emphasized agreements better enforcing intellectual property rights: patents, copyrights, trademarks, and trade secrets. Such monopoly powers are a growing element of the earnings from selling technology-rich products. These demands run up against the capacity limits of Chinese administration, including the courts and police. They are not as fair or efficient as those of the U.S.; improvements are gradual. Laws can be changed, but real progress must occur within diverse and complex social relations, not just on paper. The more ambitious the promises demanded, the more surely future results will fall short of expectations. Institutional inertia impedes reform, as in any political system. For example, imagine a foreign power demanded the U.S. eliminate racial discrimination; we might promise to do it, but how well would we do, and how quickly?

Trump loves to act tough and demand a lot, but then backs down when pain mounts and resistance is met. What he neglects is offering significant positive incentives. If Trump acted like past presidents and negotiated the low hanging fruit, we could have had a mutually beneficial agreement in 2017 that would have gained much of the substance that we might now get from any pending agreement even after all the trade war pain. Even better, if he might dare a visionary deal, like former Egyptian President Sadat in Jerusalem, unprecedented mutual gains might be had. Instead, Trump may continue to hold out for impossible and unenforceable demands while arbitrary tariffs and uncertainty continue to depress both economies.

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