BACKING DOWN ON TRADE CREATES RISK
Chinese growth in investment, factory production and consumer spending have all slowed this year, and its economic growth has slowed alongside. The situation is expected to worsen as effects of the escalating U.S. tariffs ramp up.
While the United States made overtures toward China in recent days to talk trade in Washington this month, some officials said they now doubted Beijing would engage again at a high level until after the midterm elections in November, when President Xi Jinping may meet Trump on the sidelines of an economic summit meeting in Buenos Aires.
Trump himself seemed to dangle the prospect that he, and he alone, could broker a resolution that threatened to cause economic pain to companies and consumers on both sides of the Pacific.
“Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection,” Trump said in his statement announcing the tariffs.
Yet it is not clear that either side will see a reason to back down. Aides to Trump say the president believes the United States has the upper hand on China, with an ability to impose tariffs on a far larger number of goods than the Chinese can match given that America imports far more than it exports. And while the tariffs are unpopular with Republican lawmakers, farmers and manufacturers, his trade approach remains popular with his political base.
The Chinese side has its own political reasons to avoid capitulation. Acceding to Trump would be considered a sign of weakness for Xi, according to analysts.
And they see no sign that China is willing to give up on Made in China 2025, an industrial program that aims for dominance in robotics, artificial intelligence and other high tech industries that have been the domain of the United States and Europe and that Trump has identified as a policy initiative that must be stopped.
While Chinese officials have expressed a willingness to get rid of the name Made in China 2025, they have been much more cautious about accepting limits on some of the crucial features of the country’s industrial policy, like big loans from state-owned banks at very low interest rates to favored industries.
Inside the White House, there remains a pitched battle between those who want to make a deal with Beijing and those who are determined to keep piling on pressure to force a more radical change in its trade practices. At the moment, the hard-liners have Trump’s ear.
“You would expect the administration to have tabled a negotiating text with a clear set of commitments, but that has apparently not been done,” said Daniel Price, a former trade adviser to President George W. Bush. “There are some in the administration who see tariffs as an end in themselves.”
Price said the Trump administration had done a good job of cataloging China’s abuses: theft of intellectual property, forced transfer of technology from foreign companies, predatory joint venture agreements. But it has failed to marshal a coalition to confront China, instead provoking separate trade fights with the European Union, Japan, Canada and Mexico by imposing tariffs on steel and aluminum and threatening additional taxes on imported cars.
“Doing this without the EU and Japan fully on board as though Chinese unfair trade practices were only a bilateral problem is wrongheaded and certainly less effective,” he said. “But it’s very hard to galvanize your allies when you impose steel and aluminum tariffs on them and threaten auto tariffs.”
For China, a complicating factor is figuring out who has influence in Trump’s White House. Treasury Secretary Steven Mnuchin, who has been leading the negotiations, invited China’s top trade negotiator, Liu He, to Washington for a meeting next week, even though his last visit ended badly when Trump spurned a deal that would have cut the U.S. trade deficit with China.
Mnuchin believes the United States must be open to talks as long as China is willing to address structural issues, including the trade gap between what America exports and what it imports, pressure on U.S. companies to hand over valuable technology as a condition for doing business in China and intellectual property theft.
Other senior officials, notably Peter Navarro, who oversees the office of trade and manufacturing policy, have told colleagues that inviting the Chinese now was a sign of weakness. Navarro, an economist who made his name with book titles like “Death by China,” is among those who favor putting more pressure on China to force a change in its behavior.
His office produced a compendious report in June called, “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World.” In early May, he and Mnuchin clashed openly during a visit to Beijing after Mnuchin excluded him and other U.S. officials from a private meeting with Liu.
It is not clear whether Liu will visit Washington next week. But even if he does, people who have spoken to Chinese officials said the unraveling of the agreement Liu believed he had struck on his last visit would make him reluctant to make any deal this time.
“The Chinese deep learning from that is, ‘We should not substantively re-engage until the administration has its internal house in order,’ ” said Rudd, who is now the president of the Asia Society Policy Institute.
After months of bruising encounters, Rudd said Chinese officials recognized that they would need to change their policies on trade and market access. But he said Xi was no less likely than Trump to risk losing face by giving in to American pressure.
“China has politics, too,” he said. “The whole notion of ‘back down’ and ‘face’ is as live a consideration within internal Chinese politics as it is within U.S. politics.”
Trump’s aggressive moves drew intense criticism from some quarters at home. Fred Smith, the CEO of Fedex and an enthusiastic supporter of the president’s tax cuts, called his trade policy a form of mercantilism that was “worrisome to everyone.”
But Trump has shown little sign of changing course. While there are differences among members of his economic team, there is a broad consensus in the administration about taking a hawkish stance toward China. Some point to evidence that the trade pressure on China was making it less adventurous in the East China Sea, where it spars regularly with Japan.
Trump has forged ahead with tariffs even while saying the trade tensions were making China less cooperative in pressuring North Korea on its nuclear arsenal — a claim that puzzles some of his own advisers.
“They have been helpful; I hope they’re still helpful,” Trump said at a news conference Tuesday with the Polish president, Andrzej Duda. “There’s a question about that.”
But the president added, “It got to a point where the numbers were too big.” China “rebuilt their country with tremendous amounts of money pouring out of the United States,” he said. “And I’ve changed that around.”