Why President Trump Will Keep Escalating The Trade War With China

When U.S. Treasury Secretary Steven Mnuchin extended an invitation to his Chinese counterparts for a new round of trade talks, it almost seemed as if the U.S. administration was taking proactive steps toward a de-escalation of trade tensions.

Then President Donald Trump tweeted that “The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us.” Similarly, sources close to the president said over the weekend that he should announce 10% tariffs on $200 billion of Chinese goods in the coming days.

This follows his Friday statement that he is ready to issue tariffs on another $267 billion in Chinese goods — if he wants. All told, tariffs — imposed and threatened — would cover all Chinese imports to the U.S., which amounted to $505 billion in 2017.

Is this just another instance of Trump’s “pressure diplomacy” or should we brace for a full-fledged trade war?

The answer lies somewhere in the middle.
Where we stand
Neither the blunt pressure tweets nor the contradicting of statements by his own cabinet members are new. Following Mnuchin’s statement in May that the United States is “not in a trade war with China”, President Trump put an end to the temporary truce between the two trading blocs.

Trump’s tweet also follows a pattern regarding upcoming talks with foreign governments- the recent talks with the European Union being a case in point.

Just days ahead of his breakthrough meeting with EU Commission President Juncker on July 25, Trump called the EU “a foe” of the United States.

But even if Trump’s statements and tweets are simply the continuation of a pattern that aims to portray the United States in a position of strength, they do have damaging repercussions. While China has welcomed Mnuchin’s invitation to come to Washington, it remains questionable how much can be achieved.

Not enough trust to do a deal
One of the biggest obstacles will be mounting trust and credibility issues between the two parties, exacerbated by Trump’s downplaying of Mnuchin’s invitation to China.

This makes it unlikely that China will make any major concessions during potential talks for fear that any outcome would be overturned in whole or in part by President Trump afterward.

Mnuchin’s negotiating position is further weakened by internal disagreements within the administration on how to deal with China: While White House chief economic adviser Larry Kudlow is in favor of keeping talks with China alive, U.S. Trade Representative Robert Lighthizer is opposed to resuming negotiationsbecause he believes ramping up tariffs would increase U.S. leverage in future talks.

If the two sides do want to move forward in a meaningful way, there would have to be reassurances from the U.S. side that any mandate for Mnuchin is backed by President Trump. Another option would be to keep Trump personally involved in the talks with China.

A good opportunity for this is the G-20 leaders’ summit in Buenos Aires at the end of November that both Trump and China’s Xi Jinping are scheduled to attend.

Meetings like the one led by Mnuchin could lay the groundwork and technical details for any possible deal discussed by Trump and Xi.

Regardless, the threatened tariffs on the $200 billion of Chinese goods look increasingly likely to happen, even though extensive public hearings on the tariffs showed deep concern over their impact.

If the administration were to announce additional tariffs over the next week, it raises the question in how far it has taken into account the thousands of comments made during the comment period and the public hearings that ended 10 days ago.

While sources currently hint at a broad-brush approach of 10% on $200 billion of Chinese goods, there are several options for the implementation, ranging from different tariff rates for different sectors — as happened with steel (25%) and aluminum (10%) — to gradual implementation, as with the tariffs on $50 billion on Chinese goods on the basis of China’s discriminatory and unfair practices and policies related to technology transfer, intellectual property and innovation.

There is a very slight chance that ad hoc bilateral talks still happen before the tariffs are issued. There also is the (very unlikely) possibility of pausing the trade war but keeping the threat of further tariffs on the table — as President Trump has done with potential car tariffs during his negotiations with Canada and Mexico.

In the event that tariffs are announced, the extent of countermeasures taken by China could influence whether the U.S. administration withdraws its invitation to the talks altogether.

Domestic politics could slow the tariffs
Given the growing concern over the tariffs from the U.S. business community, voters, and parts of his own party, it is less certain whether President Trump would implement the tariffs in full ahead of the U.S. midterm elections in November. (He previously has threatened tariffs of as much as 25%.)

In contrast to the last round of tariffs, the next round of tariffs — as well as Chinese retaliation — would impact the average American household, as everyday consumer goods like paper, textiles, and more are affected by the list of products targeted.

With a view to Thanksgiving, Black Friday, and Cyber Monday shopping in November (a combined online shopping spend of $14.5 billion in the U.S. in 2017), both of high value to the U.S. economy as well as to U.S. voters, a gradual implementation of any additional tariffs on China seem likely.

China will be watching the midterm elections very closely, as a win for the Democrats would potentially weaken the president’s hand domestically.

Despite mounting political pressure to end the trade war, favorable economic conditions still put the United States in a strong position. President Trump tweeted that “our markets are surging”, alluding to record employment numbers, higher wages, and the U.S. economy surging at 4.1% in the second quarter. Yet experts caution that this soon will change, as the impact of additional tariffs would reverse economic tailwind created by the combination of more government spending and the hefty tax cuts.

While voices are becoming louder that a fully-fledged trade war with China could be part of a longer-term plan of the U.S. administration to “decouple” the two economies altogether, it is questionable how this would play out in reality.

Given recent developments, the prospects for a quick resolution of the trade war are unlikely. Yet, we can expect the U.S. and China to continue talking, even as the implementation of next round of tariffs will be announced soon to exert further pressure on China.

While Trump is in no rush to come to a quick solution, he will be gearing up to campaign for the 2020 presidential elections soon after the midterms.

De-escalating the situation with China before current economic tailwinds are reversed would not only make economic sense but also put Trump in a strong position for re-election.