How Trump’s Trade War Went From Method to Madness

Source: By Shawn Donnan and Jenny Leonard, Bloomberg • Posted: Friday, November 15, 2019

Inside the president’s shift from a grand bargain with China to a small deal.

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It started with a carefully calibrated trade weapon, an algorithm that spat out a list of targets for an assault on China ordered up by a U.S. president determined to rebalance the relationship between the world’s two biggest economies. The goal: building leverage for negotiations aimed at forcing wholesale changes in China’s economic architecture while limiting the pain to businesses and consumers at home. “We’ve given this an enormous amount of thought,” Robert Lighthizer, the U.S. trade representative, told senators in March 2018, highlighting the work of the computer model his team had constructed. “It’s a sensible, moderate, appropriate amount,” he went on, “and it is calculated and created in a very businesslike, sensible way.”

The algorithm produced a 28-page list of Chinese-made products, including aircraft tires, pacemakers, and printed circuit boards, whose total value—$34 billion—matched an estimate of the annual cost to U.S. businesses of Chinese intellectual-property theft and forced technology transfers. The more than 800 items on the list were selected for their potential to inflict pain on industries Beijing has designated as strategically important while taking into account the potential disruption to U.S. supply chains. Adding to the complexity, the task was to throttle back China’s imports without American consumers taking notice or endangering President Donald Trump’s promised economic boom.

The model, though, didn’t account for the unpredictability of Trump. Behind closed doors, the president took the modest number—equal to 7% of the $505 billion in goods the U.S. imported from China in 2017—almost as an affront. He didn’t want moderate or appropriate. He grumbled to aides the figure was too low and demanded it be rounded up to at least $50 billion. Trump also asked his staff, almost as an aside: “Do you think I should put tariffs on everything from China?”

Twenty months later, what began as method now looks more and more like madness. A tit-for-tat tariff war has ensnared more than 70% of bilateral trade in goods and raised the specter of a decoupling of two economies that once seemed destined to become progressively more intertwined. If the countries can’t resolve at least some of their differences in the coming weeks, the White House will on Dec. 15 add 15% punitive tariffs on a further $160 billion in Chinese imports, delivering on what were once just presidential ruminations. That tariff round could jeopardize America’s record-long expansion, according to some economists. As it stands, the existing duties will knock 0.8% off global growth in 2020, according to recent forecasts from the International Monetary Fund.

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President Trump Meets with Chinese Vice Premier Liu He at the White House on Oct. 11. Photographer: Shealah Craighead/White House

The disruptions of an all-out trade war may yet be averted: Trump and China’s president, Xi Jinping, appear intent on reaching at least a partial truce by mid-December. In a Nov. 12 speech, Trump again signaled he would refrain from a new tariff assault if Beijing agrees to a “phase one” deal that hinges largely on it stepping up U.S. agricultural purchases to as much as $50 billion within two years, more than twice the level before the conflict, and curtailing intellectual-property theft. Trump sees it as the start of a more comprehensive agreement. But Chinese officials quietly say they see any future successful phases as unlikely and that commodity purchases will at first simply be at the level they were before the Trump tariffs. Skeptics in the Trump administration also question whether Beijing is willing to close a larger transformative deal with a president running for reelection amid a slowing economy.

Politicians and businesses across the board agree Trump was right to take on China. At the same time, the issues being tackled in a first phase of the trade deal are much narrower than the ambitious goals the White House once set for itself. There’s little doubt the fight will have a place in history, says Douglas Irwin, an economic historian at Dartmouth: No American president in the past century has waged an economic war on this scale. But while Trump created an opportunity, he risks squandering it as well.

“Are we going to look back and say, ‘This was all a failure’? I don’t think so,” says Wendy Cutler, a former U.S. trade negotiator who leads the Asia Society Policy Institute. “But if we end up comparing what they’re able to accomplish vs. their initial objectives, I think their accomplishments are going to fall way short. And they won’t be the first administration to do that. But wow, they certainly raised the stakes and certainly allowed U.S. interests to suffer through the tariffs in this effort.”

● Oval Office Scuffles

The picture that emerges from dozens of interviews over the past year with officials and other people close to negotiations is one in which one man’s impetuousness has confounded attempts at strategy. It’s the story of a president caught between his instincts as a dealmaker, his place in history, and a contentious band of aides, some of whom goad him into more radical action and others who tease him into restraint.

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Trade War Cabinet — Robert Lighthizer: The Reagan administration alumnus is Trump’s trade czar and leads negotiations with China.
Photographer: Evan Vucci/AP Photo

“That’s very Nixonian!” intoned Larry Kudlow, the head of the National Economic Council, as the president and his aides huddled in the Oval Office in August to debate an intervention to weaken the dollar. The strong greenback is an obsession for Trump, who believes it undermines his tariffs. Three months on, the invocation has different connotations as Trump faces possible impeachment. But back then it was a code between two seventysomething men for avoiding an economic mistake—an allusion to Richard Nixon’s August 1971 decision to end the dollar’s convertibility to gold. That move led to years of turmoil in markets and the stagflation of the 1970s.

Well into September, Trump said he would never settle for a partial deal with China; it had to be the grand slam. Yet behind the scenes, his advisers were starting to discuss how to negotiate a stage-by-stage agreement and harvest elements that both sides had already largely concurred on, including a pact to avoid competitive currency devaluations hashed out in February when the Chinese team was in Washington.

To extract concessions from China, the self-proclaimed “Tariff Man” would have to roll back some duties put in place over the summer—a move some of his advisers, including Peter Navarro, the White House’s most strident China hawk, oppose. In a Nov. 8 email to reporters, Navarro blamed “propagandists within the Chinese government” for inciting stories that a withdrawal of tariffs might be nigh. He and Kudlow, who says tariff “concessions” are needed to close the deal, have sparred openly.

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Larry Kudlow: The former CNBC host drafted by Trump to lead his National Economic Council is the administration’s most prominent free trader.
Photographer: Evan Vucci/AP Photo

The two men’s battle echoes divides that have existed inside the administration since the beginning. On Oct. 11, shortly before Trump sat down with China’s top negotiator, Vice Premier Liu He, in a televised Oval Office meeting to announce a “substantial phase one deal,” Lighthizer and Treasury Secretary Steven Mnuchin met with the president so he could sign off on the step-by-step approach. This, they argued, was a way to pocket some wins, take the pressure off the U.S. economy, and have another crack at the tricky issues in a second stage. Only one member of the team disagreed.

Navarro, who was present, appeared intent on sabotaging the plan and, according to one person with knowledge of what transpired, interrupted the two cabinet members so forcefully that Trump eventually turned to him and said: “Peter, calm down!” Asked about the incident, Navarro said he is “always a passionate defender of the president’s deep understanding of the situation with China and his practical solutions. But I don’t comment on private meetings with the president. What happens in the Oval should stay in the Oval.”

Within an hour of that exchange, Liu and his team arrived at the White House to finalize the truce. The discussion before the cameras arrived seemed inconclusive to some attending and left them confused, though Trump would minutes later praise a “lovefest” in U.S.-China relations to reporters. In the days that followed, Trump insisted that the teams were making progress and that he and Xi would likely sign the deal at a Nov. 16-17 gathering of the Asia-Pacific Economic Cooperation forum in Santiago. That summit was canceled after anti-government protests broke out in Chile, and a new venue and date haven’t been decided. In the meantime, the two countries are still negotiating exactly what each side will concede in a phase one deal.

Deal or No Deal

Notable moments in the past year of the U.S.-China trade war, annotated with Trump’s tweets.

● Are We There Yet?

The events of the past few weeks fit a pattern of false dawns in the trade war. At least three other times a pact seemed within reach, only to collapse in a back-and-forth of recriminations. One of the key moments came in May, when miscalculations by both sides blew up an expansive deal that had taken months to put together. Within days, Trump threatened new tariffs and placed Chinese telecommunications gear maker Huawei Technologies Co. on a U.S. Department of Commerce blacklist, restricting its ability to buy hardware, software, and services from American high-tech suppliers.

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Peter Navarro: Trump’s special adviser on trade is an avowed China hawk.
Photographer: Alex Brandon/AP Photo

The Huawei decision cast a shadow on a late June encounter between Trump and Xi on the sidelines of the Group of 20 summit in Osaka, where the Chinese president asked his U.S. counterpart to ease pressure on the company and—according to Trump—promised to immediately buy “a tremendous amount” of American agricultural products. Trump agreed and returned from Osaka optimistic that a deal was in sight. But by the time U.S. negotiators returned from a round of follow-up talks in Shanghai in late July, the mood was souring. “That is the problem with China, they just don’t come through,” read one in a barrage of Trump tweets on July 30, in which he complained that Beijing hadn’t lived up to its promise to restart agricultural purchases.

That set up one of the most volatile months of the trade war, feeding recession fears in the U.S. as signs of a slowdown in manufacturing continued to build, particularly in key presidential election battleground states. In early August, Trump announced a major escalation—tariffs covering the remaining $300 billion in China imports that would start to take effect Sept. 1. At his behest, the Treasury Department officially labeled China a currency manipulator. Then, on Aug. 23, the president directed U.S. businesses to explore ways of getting out of China. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME,” he tweeted.

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Steven Mnuchin: The ex-Goldman Sachs chief information officer heads Treasury and co-leads the China talks.
Photographer: Erin Scott/Reuters

Markets tumbled, and panicked chief executive officers and donors demanded to have a word with the president. Among them were Blackstone’s Stephen Schwarzman and Las Vegas Sands CEO Sheldon Adelson, according to people close to the negotiations who asked not to be identified because the calls were private. They say the interventions succeeded. From that moment on, Trump was in deescalation and dealmaking mode.

Fears of an economic slowdown in the U.S. that coalesced in August also changed the equation. Publicly, Trump’s advisers point to historic lows in unemployment and modest inflation to bat back concerns. They blame the Federal Reserve and a strong dollar for growth well below the 3% to 4% Trump once promised. (The U.S. grew at an annual rate of 1.9% in the third quarter.) But the angst that the trade war may be exacting a greater-than-anticipated economic toll is thinly veiled.

Worries about the economy burnished the attractiveness of a phase one deal that puts on hold new tariffs that would directly hit U.S. consumers. A partial pact would also reward American farmers for standing with Trump, despite being cut off from one of their most important markets. According to people familiar with the negotiations, missing from the partial deal are measures to address a key U.S. concern: how China often forces foreign companies to hand over technology. There’s also nothing related to the vast web of subsidies China uses to help its companies compete internationally—an issue Beijing is unlikely to budge on.

● From Grand Bargain to Minideal

Despite the diminished expectations, Trump and his allies are quick to defend his handling of the trade war. American supply chains have started shifting away from China, they say, pointing to Apple Inc. and other companies’ shifting of production to such places as India and Vietnam. And they are elated that Trump will also leave in place tariffs on a large portion of Chinese imports as an enforcement tool to ensure Beijing lives up to its side of the bargain.

Kudlow argues that a phase one deal will reduce the uncertainty hanging over the U.S. economy while starting to address important elements of the rivalry with China. “It’s a big win for the president. Because his tough negotiating style and his use of tariffs—both of which have come under great criticism—are paying off.”

Even Navarro touts the strategy in public. “The great deal President Trump seeks for America, China, and the world is the deal Ambassador Lighthizer negotiated in May 2019 but China reneged on,” he says. That agreement would have addressed what he calls China’s seven “deadly structural sins,” including its industrial subsidies and its dumping of low-cost products in the U.S. He also argues Trump, “as a master negotiator,” will ensure further phases happen. “Of course I support the president in pursuing this strategy because it helps the American economy and American farmers, ranchers, and workers.”

Critics, on the other hand, point to a U.S. trade deficit that’s on track to end 2019 some $150 billion larger than at the end of 2016, on the eve of Trump taking office. And they argue that the tariffs and export restrictions his administration has put in place have, if anything, reinforced Beijing’s determination to outpace the U.S. in critical areas such as artificial intelligence and biomedicine.

Trump’s phase one deal, if it happens, “will not alter China’s ambitions,” says Charlene Barshefsky, who negotiated China’s entry into the World Trade Organization under President Bill Clinton. Rather than using protectionism and industrial policy to give American businesses a leg up, the U.S. should be investing in education, research, and infrastructure to boost its own competitive position. “We’ll never out-China China,” she says. “And if you spent 10 minutes in the country, you’d know that.”

Democrats looking to challenge Trump in 2020 will likely portray a phase one deal as caving. Yet, for better or worse, he has embedded the view of a malign China in Washington. Candidates from former Vice President Joe Biden to Senator Elizabeth Warren agree the U.S. has to take on Beijing, though they find fault in Trump’s tactics. Notably, none of the front-runners have committed to removing tariffs on China.

A U.S. business community that wants both a short-term end to the uncertainty and longer-term fundamental changes in China’s economic governance is also wondering if it was all worth it. “What we all need now is a trade truce,” says Myron Brilliant, who heads the international division at the U.S. Chamber of Commerce. Whether the fight will prove worth it “will depend on what comes next.”

Many China experts argue Trump’s approach was too improvised and forced allies into a “you’re either with us or against us” equation that is divorced from the economic and business realities they face. “We’re in a political era of simple solutions at a time when these really require complicated and coordinated actions,” says Jude Blanchette, an expert on Chinese leadership politics at the Center for Strategic and International Studies, a Washington think tank.

Irwin, the Dartmouth professor, says an historical reference point is the War of 1812—which the U.S. waged against an England that was by far its largest trading partner and a predatory one to boot. One slogan touted at the beginning of that conflict, he says, was “on to Canada!”—a promise to annex new territories. When the war ended with a return to preexisting boundaries, the parameters for victory changed: “You know what our slogan was after the war? ‘Not one inch of territory ceded!’ ” Trump and his aides “launched the trade war against China and said, ‘We are going to remake the economy and get the state out of industrial policy and mercantilism,’ ” Irwin says. “We are ending it by saying, ‘They are buying just as much stuff as they did before.’ ”

 

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