There are two major views about President Trump's approach to trade. The cynical view from much of the business community is that his bark is worse than his bite. He complains loudly about foreign trade practices, especially by China, compounded by the supposed weakness of past U.S. presidents and previous trade agreements, but that is mainly to appease his voter base. When push comes to shove, he will be satisfied with minor adjustments or progress that was already occurring even without his trade war threats . . . and then call it a victory.
Those who take Trump more literally on trade issues, including me, warn that he really does measure success by rebalancing trade in favor of significantly more U.S. exports and fewer imports. By that measure, China is the biggest problem, with a persistent trade surplus now over $350 billion. Most trade experts would agree that none of the concessions China is likely to make in the near future would significantly erode China's massive trade surplus with the United States.
The U.S. stock market seems to be taking the cynical view. Although the initial announcement of Trump's $50 and then $100 billion dollar tariff threats and China's tit-for-tat responses caused stocks to fall initially, reassurances from Trump's economic advisors, especially economic adviser Larry Kudlow and Treasury Secretary Mnuchin, seemed to restore business optimism that a trade war with China is not very likely. Most of the threatened tariffs will not go into effect for some months. Meanwhile there are supposedly backchannel talks underway that might avert a trade war (although China denies this.)
U.S. markets were further reassured by Chinese President Xi's apparently conciliatory speech at the Boao Forum for Asia on April 9. He promised to lower China's auto tariffs and further open China's financial markets to foreign firms. Trump tweeted his approval of Xi's remarks, even though these are proposals China has made for years, often with no tangible result. Furthermore, even if everything Xi promised were done, the impact on the U.S. trade deficit with China would be limited. “So what?” cynics say: like Trump's bombing raids on Syria, the point may not be to actually accomplish anything definite, but merely to appear to be a man of action.
Cynics also point to Trump's recent turnaround on the Trans Pacific Partnership (TPP). During his presidential campaign, he criticized it again and again. One of his first acts as president was to withdraw from the TPP. Now that the other 11 countries who are party to the agreement are going forward with it anyway, Trump has suddenly realized it might be useful to rejoin. Maybe Trump is not the hardcore economic nationalist that his over-the-top rhetoric seems to convey.
But it is a mistake to think Trump will back down easily now that he has brought the U.S. to the brink of a trade war with China. He lauds President Xi's words about further opening of China's economy, but having laid over $150 billion of new tariffs on the table, he is not likely to back away from the brink without an obvious and incontrovertible win. Conciliatory words may not suffice. Much like in his pending negotiation with North Korea about its nuclear program, his timetable is for swift action by the summer, not negotiations that drag on for years.
The reason Trump is more impatient than past presidents is his political vulnerability. This year, before the November 2018 midterm elections, he must score some momentous foreign policy victories on the scale of Nixon's great initiatives during 1972. Otherwise, he is facing repudiation by the voters as his Republican Party faces voter wrath. Already, a record number of powerful incumbent Republican congressmen, including the Speaker of the House, Paul Ryan, are retiring rather than fighting for reelection. They anticipate a strong showing by the opposition Democratic Party that could win majorities in both houses of Congress. If this happens, Trump faces — based on the relentless progress of the investigation led by Special Prosecutor Robert Mueller — a real prospect of impeachment. I reject the cynical view of Trump aiming at only superficial public relations victories, because I believe Trump knows these will not be enough to energize his voter base and stave off defeat at the polls, and perhaps disgrace.
If Trump does stay the course, demanding that North Korea abandon its nuclear weapons and that China acts to significantly reduce its massive trade surplus with the U.S., then this is the critical year for him. If he does not succeed this year, he might not have another chance. Trump has thrown down the gauntlet by putting a massive trade threat on the table. This is a bolder and more drastic move than any previous president has done. It is a high stakes gamble. If he backs down with little to show for it, he will look weak.
Broadly speaking, the U.S. has two major categories of disputes with China: the old economy and new economy. The old economy disputes relate to Chinese overcapacity in such industries as steel, aluminum, and soda ash. The U.S. and other foreign producers argue that Chinese firms receive unfair subsidies in the form of tax rebates and subsidized infrastructure, credit, etc. These sorts of subsidies are not at all unique to China. Furthermore, excess capacity and price wars have emerged in every crisis of capitalism for centuries, even without government intervention, as during the 1860s oil boom in Pennsylvania and the post-Civil War railroad boom and crash cycle of the later 19th century. Dealing with these problems is difficult within institutions such as the World Trade Organization, whose rules falsely presume that problems like this only emerge from government action, not from private power and the cyclical nature of capitalist investment. The problem is compounded in China's case because of the decentralization of economic power since Deng Xiaoping launched “market socialism.” Many investment decisions are spurred by local governments more bullish than the Beijing authorities, but also somewhat autonomous. Even in the absence of government intervention though, monopoly power and episodic disequilibrium guarantee perpetual trade disputes.
The “new economy” disputes may be even more intractable. China wants a tight rein over the internet as a critical means of communication and, frankly, spying. Therefore, China is trying to force companies to share technology and proprietary code so that it can assure that there are backdoors for the Chinese government, but not for outside intruders. China is also worried about the vast amounts of data the internet companies acquire and what they or foreign governments might do with it. This is an issue of political power as much as economic competition. The recent scandals in the U.S. about Russian interference in the U.S. 2016 election highlight the dangers. The U.S. arguments for both corporate privacy and open access to the Chinese market start to sound more dangerous, given what is happening in the U.S. itself.
There are important reasons for Chinese government foot-dragging on many disputed issues, including the inability of the central government to enforce its will on every local authority and Chinese officials' own insecurity about potential spying and subversion. One need not sympathize with these concerns to recognize that many of the major issues under dispute are not easy for Beijing to concede. Trump may push hard for major concessions, but China may also resist most of what he wants. The result might very well be a trade war that will injure both countries.
