No ‘jaw-jaw’ until Nov US elections to cool trade war
Donald Trump is ignoring history, and his policies will backfire especially with China, argues Daniel de Blocq van Scheltinga
If US President Donald Trump had a real sense of history he would realize that the United States does not have a successful track record in winning trade wars. During the Great Depression the American economy was suffering terribly, and initially to support the farmers, (but later expanded to include many other sectors), President Herbert Hoover enacted the SmootHawley Tariff Act in 1930, which indeed led to the envisaged significant reduction of imports to the US. However, the ensuing retaliatory measures from the affected countries across the globe led to a 61 percent reduction of US exports, further prolonging the impact of the Great Depression. The act had backfired and by 1934 the US Congress repealed it, but the damage had been done.
The current US administration has not only ignored the lessons of history, but is clearly more focused on national politics, rather than solving international trade disputes. And the Trump administration has weakened itself as it enters into many trade disputes simultaneously: not only with China, but with its direct neighbors both to the south and to the north, with Japan, with South Korea, as well as with the European Union. This shotgun approach does not suggest a strategic well-thought-out plan, with defined objectives, making it incredibly difficult for counterparts to negotiate any agreements, or find solutions. Another complication, whether this is intentional as a tactic or not, is that the White House is not speaking with one voice, with different factions holding opposing views. The Chinese government was reported to have been frustrated by the inconsistent messages coming out of Washington. Shaking hands to reach agreement with an octopus is indeed not easy.
As the November midterm elections approach, the US president will increasingly focus on creating national headlines, demonstrating his tough “America First” approach and pandering to short-sighted nationalism. Any counterpart who gives in to Trump’s tough rhetoric and actions will only be providing more ammunition to the current US administration, in turn leading to tougher posturing. China should therefore remain very firm, only employing comparable retaliatory measures, as and when further tariffs are put in place by Washington. At the same time the WTO dispute settlement procedures should be initiated.
The whole bullying tactic, as espoused in The Art of the Deal book by Trump, might have worked well for Trump Inc in the rough New York real estate world, but it is certainly proving to be a counterproductive strategy for promoting multilateral trade relations. Trump as president ignores the fact that the very essence of trade is the multilateral aspect. It takes two to tango, as the saying goes. Both parties have to “win”. As a result of not realizing this, a number of American businesses, from nail manufacturers hit by steel import tariffs, to farmers hit by the international counter agricultural import tariffs, are suffering. The recent proposal coming from Washington to subsidize American farmers suffering as a result of the very trade dispute that the US government started, is proof of the negative impact on the farming community. This is the same community that largely voted for Trump in 2016, so their well-being is crucial for the president. The ironic thing is that the Republican Party is traditionally against subsidies, believing in the workings of the free market.
Another lesson that Trump has forgotten, and that he should know very well from his past business life, is that it is not wise to antagonize your lenders. China is the largest foreign holder of US Treasury bonds, at almost $1.2 trillion, second only in size to the US Federal Reserve itself. China will not immediately sell off its US Treasury Bill reserves, as this would have a negative impact globally and also hurt China, but China could always signal its intent to stop acquiring new US bonds, which would make the rapidly growing US budget deficit more expensive to finance. The increasing budget deficit is anathema to the Republican Party, and higher financing costs would only increase the deficit. This would put further pressure on President Trump to sit down and talk trade with Beijing. In the same vein, China has already shown its teeth in the M&A arena. The envisaged acquisition by the US company Qualcomm of the Dutch NXP Semiconductors was considered strategic for the United States with regard to the future 5G telecom strategy. As we now know, the Chinese regulators did not approve the transaction in time for the deal to materialize. The global perception is that this transaction was the “collateral damage” in the trade war. If the American business community understands that the ongoing trade dispute could lead to more “collateral damage” then the pressure on the White House to sit down and talk with Beijing will increase.
And yet the US president continues to pretend that all is well. According to his recent pronouncements through Twitter “Tariffs are working far better than anybody anticipated ... China is talking to us”, and a few minutes later “Tariffs will make our country much richer than it is today. Only fools would disagree”. The armchair psychologist would suggest that this defensiveness is an indication of the pressure Trump is facing. How long will it take for the American voters to realize that the emperor has no clothes remains to be seen. In the meantime China, and other countries, must continue with a measured approach. Retaliate only in equal measure when new US tariffs are put in place. The latest salvo from the White House threatening to raise tariffs on $200 billion of Chinese goods will, if implemented, lead to a similar Chinese riposte.
At the end, likely after the November mid-term elections, common sense will prevail as the two nations are too intertwined economically. As Winston Churchill famously stated,”meeting jaw to jaw is better than war”.
One of the more surprising quotes from Donald Trump in The Art of the Deal is as follows: “I’ve read hundreds of books about China over the decades. I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.” If truly this was the case, the president would understand how futile a trade war with China is, and how trying to corner China publicly with economic pressure will backfire. The belief in some Washington circles that China will blink first is false, and based on great ignorance of the Chinese dynamics.
The belief in some Washington circles that China will blink first is false, and based on great ignorance of the Chinese dynamics.