U.S vs. China: Is it a trade war, a chess game, or an opportunity for the art of the deal?
Has the great negotiator underestimated his opponent? Is the White House policy genius, lunatic … or both?
99.9% of the financial pundits agree. But are they 100% wrong?
President Trump’s been unloading on China for a while now. Basically since the start of his campaign. (And really way back since the 1980s if you like to dig up old tapes.)
“We give state dinners to the heads of China. I said, why are you doing state dinners for them? They’re ripping us left and right. Just take them [for takeout] and go back to the negotiating table” (Bluffton, S.C., 2015).
“China’s upset because of the way Donald Trump is talking about trade with China. They’re ripping us off, folks; it’s time. I’m so happy they’re upset” (Staten Island, N.Y., 2016).
“They are like grand chess masters. And we are like checkers players. But bad ones” (Manchester, N.H., 2016).
The president has heaped other put-downs on China’s head, calling it the perpetrator of one of the “greatest thefts in the history of the world,” and a “currency manipulator,” as well as an environmental polluter and, also, an Olympic-game cheater.
China is such a threat that the president has “ordered” American companies by presidential tweet to stop doing business with the country, and has assured us all he is “the chosen one” who will bring the bad guys down.
China has been the top target on the Trump hit list since the very beginning. Remember, the U.S. was going to “win so much” it was going to be “sick of winning”? One game it was supposed to be winning was the one against China. And illegal immigration. Illegal immigration is still proving to be a tough opponent, but how’s it going on the China front?
Some say it’s all going according to plan, while others think the U.S. is headed for catastrophe, pointing to skittish markets and anxious dairy farmers. As with most things surrounding Number 45, a whole slew of experts think the president is either a shrewd chess master or an amateur checkers player.
What’s Going On?
It’s been a while now since all this convoluted China talk started, and, like the Russia investigation, after a few years of it, it’s hard to remember what exactly it was all about.
So as a refresher: So far, the U.S. has imposed tariffs on $250 billion worth of Chinese goods, with China retaliating, placing tariffs on $110 billion worth of American goods.
The U.S. has put in place duties on a whole range of items from handbags to railway equipment, while China has done the same to a whole range of other stuff, ranging from chemicals to medical supplies. And soybeans. And this month, the Trump administration ratcheted things up by placing new tariffs on smartphones and clothing from the East, effectively placing duties on nearly all Chinese products.
How did things get to this point?
Previous administrations had concerns about China, but did not face them head-on, says Edward Alden, Senior Fellow at the Council on Foreign Relations, in a conversation with Hamodia. “Trump comes along, says we’ve been messed over on trade, the Chinese manipulate their currencies, they destroy our jobs, and he promised to fix all this.”
How did he intend to fix this? “By using the power of the large U.S. market to force changes in Chinese behavior. … Since Trump became president, he instigated all the new tariffs. He did so with Canada and Mexico to force the renegotiation of NAFTA as a form of pressure, which was mildly successful (although the new deal hasn’t been ratified yet). Now they’re trying to do the same with China. Force them to the table. Get them to stop doing what they’re doing, stealing intellectual property, favoring Chinese companies.”
But so far, there’s been little movement, other than expected price hikes at Walmart and hushed whispers of a possible recession. All of which raises the question, is China worth it?
The Evil Dragon?
It seems almost obvious that this communist state is a dangerous one. It’s got a gulag packed full of a million Muslims, it censors the media, imprisons dissenters, encourages reporting on fellow citizens, and basically has a one-party government.
That said, the Trump administration is not playing hardball with China because of its humanitarian crimes. This game is a financial one. So when exactly did China start stealing bases, and is it just being maligned by its sour-grapes opponents?
“It goes back to the 1980s,” says Mr. Alden. “Until the ’80s, China was not part of the global economy. It was closed, centrally planned. It began opening up, and joined the WTO (World Trade Organization) in 2001, and that’s when it became part of the global story.”
Shortly after that, investments started flowing into China. It has an efficient, inexpensive workforce, so that was inevitable — and Chinese exports began flooding the world. “Its economy started growing, and now it is the largest exporter,” Mr. Alden continues. “That was uncomfortable for many countries, particularly the U.S., which lost a third of its manufacturing jobs in the 2000s. One of the reasons was this heightened competition from China. The world struggled with how to respond. Technically, the Chinese abided by the letter of the WTO, but not the spirit. It found loopholes to favor its own industries at the expense of others.”
“The trade dispute with China started following an investigation by the Trump administration into Chinese trade practices, namely issues of intellectual property rights, under Section 301 of the Trade Act of 1974,” Tori Whiting, a Trade Economist at the Heritage Foundation, tells Hamodia. “The Administration determined that investment restrictions, discriminatory licensing procedures, technology transfer rules, and cyber intrusions by China cost the U.S. economy $50 billion annually.”
Others have used more extreme language while describing concerns about China. Niall Ferguson, a historian and Fellow at the Hoover Institute, referred to China as “dangerous”, and called the current dynamic “Cold War II,” in a Fox interview, asserting that President Trump “woke America up” to the threat.
Dr. Greg Autry at USC, who served on President Trump’s transition team at NASA, writes in Foreign Policy how the U.S. has been turning a blind eye to the problem for decades. “As Presidents George W. Bush and Barack Obama subsequently adopted Clinton’s ‘business is business’ policy, the Chinese Communist Party learned to exploit a complacent Western media to whitewash its authoritarianism, militarism, and repression and greenwash its environmental deprivation.
“Lazy American journalists eagerly reprinted half-truths generated by D.C. think tanks funded by the multinational corporations growing rich on the China trade, as well as quotes from professors at universities addicted to foreign student tuition fees and wealthy Chinese donors.”
So if China is a “malevolent force,” what should the U.S., or the world for that matter, do about it?
The Trump Doctrine
For Team Trump, the answer is tariffs.
In a recent interview with CNN, Peter Navarro, the president’s trade advisor, laid out how effective tariffs have been in a number of areas. “With Mexico, for example, when we threatened tariffs, we literally got more done in two weeks on our immigration policy than any previous president got done in the last 20 years.” He argues that this model has worked with other nations, and will be effective with China as well. He points out that China has already come to the negotiating table, which wouldn’t have happened without the tariffs, and that other countries, like Germany and Japan, are investing in the U.S. rather than in China for fear of auto tariffs. “President Trump is using the tariff strategy brilliantly,” he concludes.
Interestingly, there seems to be bipartisan support for clipping China’s wings. Even Senate Minority Leader Chuck Schumer (D-N.Y.) offered up this comment on the Senate floor in 2018: “I don’t agree with President Trump on a whole lot, but today I want to give him a big pat on the back. He is doing the right thing when it comes to China. … Democrats, Republicans, Americans of every political ideology, every region in the country should support these actions.”
While there is consensus that China is a threat, there is little consensus on how to combat it. Even within the conservative wing there is vigorous debate as to an effective strategy.
Tori Whiting at Heritage acknowledges that China is a threat, but strongly disagrees with the president’s tariff escalation. “The Trump Administration has rightly pointed out practices in need of reform in China,” she notes. “However, taxing the American people through tariffs is proving to be an ineffective strategy to achieve those changes. Furthermore, the Administration has also spent scarce taxpayer dollars on rounds of subsidies for the agricultural sector. The role of the government should not be to make it more difficult or more expensive for Americans to buy and sell with individuals around the world, and that is really all that has changed in the trade relationship with China.”
“Since talks with China broke down in May, things have just gotten increasingly more chaotic,” says Edward Alden. “Trump threatened more tariffs, then held off for a while; when the Chinese retaliated with the last round of tariffs, Trump ‘ordered’ Americans to stop investing in China. It’s now just a battle of egos. It doesn’t seem like a strategy anymore.
“The rational part of this is that there is a struggle between the United States and China for supremacy. Whichever one dominates the next generation of technology will be the world’s dominating military and economic power.”
Although many conventional conservatives are critical of using tariffs to effect change, there are a number of experts and politicians who see this as the necessary trajectory for an ultimate win.
Senator Lindsay Graham has defended the Trump administration’s China strategy, pointing out that Democrats have been decrying China’s underhanded practices for decades, but are now suddenly shying away from the president, who is finally standing up to this foreign power. “The Democrats for years have been claiming that China should be stood up to. Now, Trump is, and we’ve just got to accept the pain that comes with standing up to China,” the senator said on CBS. “They sell us a lot more stuff than we sell them,” he continued. “Until they feel the pain, they’re not going to stop.”
For Niall Ferguson, the president’s strategy is already working.
In an article titled, “The China I See Is Losing the Trade War,” which he posted on his website, Ferguson begins with a bold acknowledgment: “Roughly 99.9% of economists regard President Donald Trump’s trade war against China as idiotic.” Yet then he goes on to delineate just how shrewd this “Trump Shock” may be. China, of course, has much more to lose, since it exports more to the U.S. than it imports. Ferguson writes, “a visit to Beijing … revealed to me a governing elite scrambling to formulate a strategy for a trade war they thought would be over months ago, an economic elite divided about the consequences of the ‘Trump shock’ and a middle class increasingly ambivalent about the government of President Xi Jinping.”
Ferguson argues that many middle-class, educated Chinese view their government’s foreign policy with derision, and that President Xi will fear an economic slowdown which could cause unrest within China’s burgeoning “capitalist” class. Of course Xi will not do anything to lose face, therefore a large-scale concession is unlikely, but, Ferguson implies, small-scale, after-the-fact concessions may be Xi’s way out from between a rock and a hard place.
He concludes with, “Sure, Trump’s tariffs violate the theory that free trade is a ‘win-win’ process, but they make a good deal more political sense than is generally realized. With his uncanny instinct for the weak spot of the counterparty, Trump has found the Chinese leadership’s principal vulnerability.”
Then, referring back to those 99.9% of “experts,” he writes, “Future historians may be as impressed by the ‘Trump shock’ as today’s economists are contemptuous of it.”
While that may be the case, as of yet, the 99.9% have a lot to say on the subject. Namely, that the president should be rethinking his China doctrine.
Is This Really A Great Game of Chicken?
Despite Niall Ferguson’s hopeful outlook, there is as of yet no real sign of Chinese concessions. So how does this whole story end?
Some like to say that it all comes down to game theory. And yes, it is true that chicken has been uttered a few times too many in the hallowed spheres of politics during the year 2019, be it via a Democratic congressman bringing a great bucket of the fried food to William Barr’s congressional hearing, or the president’s protracted tiff with the Far East.
Dr. Jonathan Aronson, a Professor of International Relations at USC, thinks the metaphor is an apt one to describe the China-U.S. conflict. In a conversation with Hamodia, he explains:
“Imagine a game of chicken where two drivers speed at each other. If one disconnects his steering wheel and holds it out the window for the other to see, the second driver will likely turn aside. But if the next time they play chicken, both players disconnect their steering wheels at the same time, they could both see devastation coming but have no way to avoid it. Nobody wants a trade war, but we could stumble into one. … If neither President Trump nor President Xi blink, the results for the world economy could be catastrophic. The good news is that both sides know this, so the chances of walking back from the brink are good.”
The great challenge for the Trump administration is its potentially short timeline. With 2020 elections looming, the chances of the Chinese conceding are small. “The Chinese leaders believe, probably correctly, that the United States is more vulnerable to domestic political pressure than they are,” Dr. Aronson notes. “China may bend and make small concessions in the face of what they see as irrational U.S. behavior, but they will not surrender unilaterally. They are much more likely to give a little and wait it out until a more ‘normal’ president replaces President Trump. Their time horizon is longer than America’s.”
Or, as National Review put it, “The Chinese economy is more vulnerable to the trade war than ours, and is sustaining more damage, but Xi isn’t running for reelection in 2020. Only Trump is.” (For those who may have forgotten, Xi recently became president for life. How’s that for job security?)
In other words, China is probably going to wait this one out. Which means President Trump may just have to wave his steering wheel out the window to show everyone just how serious he is.
For those like Tori Whiting at the Heritage Foundation, tariffs are the wrong answer. She lays out an agenda promoted by the foundation, “namely, the administration should do the following things,” she says.
(1) The Treasury Department should sanction individuals and companies that have violated U.S. IP laws.
(2) The U.S. should take more cases to the World Trade Organization, where, when the U.S. wins cases, China changes its behavior roughly 90 percent of the time.
(3) The two sides should resume regular meetings on market liberalization. This is where great progress has been made in specific sectors over the last several years.
“Any resolution to the China trade dispute must include a rollback of tariffs imposed thus far. These tariffs are taxes on American businesses and families, and they should not become the new normal,” she concludes, echoing a position held by many conservatives and libertarians.
Congressman Dan Crenshaw, a Republican from Texas, similarly advocates for weaponizing international institutions against the Chinese. “I wish we would take fights to the WTO, where we actually have a history of being successful against the Chinese,” he said in a talk-show interview. “And we should go after singular companies like Huawei.”
Some other suggestions have been to limit Chinese access to U.S. financial markets and schools, as well as to use targeted retaliation against specific Chinese companies that “cheat,” as Congressman Crenshaw suggested, and the U.S. can build a coalition of nations willing to stand up to China together.
However, despite these formulations, the general tone and tenor regarding China seems to be somewhat defeatist amongst the expert community.
“Maybe just because I’m old,” Edward Alden says with a laugh. “But sometimes it seems like there are no good solutions to problems.
“The effort to constrain China through the WTO rules were at best only modestly effective. The Chinese don’t care about WTO rules, and want to advance technologically and economically to become a great power. Knowing this, it became clear that the U.S. approach had to change. However, Trump’s approach has been ill conceived. There have been no significant concessions, and it has disrupted long-standing alliances. It’s been imbecilic, but it’s not like the Obama or Bush strategies were tremendously effective. The Trans-Pacific Partnership would have put more pressure on the Chinese. That had the potential to be more effective, but really, it’s all too little too late.”
Dr. Aronson echoes a similar attitude. “New China-U.S. controversies will continue to arise; there is no long-term solution; but if disputes are not managed with caution and diplomacy, watch out.”
However, it’s always easy to sit in an academic ivory tower or a snazzy think-tank office and rain down criticism on the guys writing the storyline. Perhaps Niall Ferguson is right, that while the majority of experts think the president’s policy is “idiotic,” “future historians may be as impressed by the ‘Trump shock’ as today’s economists are contemptuous of it.”
Meanwhile, the rest of us get to watch this game of chicken and hope those steering wheels have some kind of backup mechanism.