Trump Made Two Big Mistakes in the Trade War
Over the weekend, President Trump announced success in his trade war with China, claiming, with language recalling Soviet propaganda, “the greatest and biggest deal ever made for our Great Patriot Farmers.”
Independent analysts disagreed. As the Wall Street Journal put it, “China emerges with wins from U.S. trade truce.” Trump called off new tariff increases in exchange for promises that China would purchase some agricultural and other products, but there’s nothing in writing, China has not publicly confirmed it, and even if all the purchases materialize, the total will still be less than before the trade war started. Meanwhile, the two countries put off all the contentious issues until later.
Those issues are contentious for a good reason. China has undeniably taken advantage of the U.S.-led international system, bending economic principles by manipulating its currency and protecting state-backed companies, and sometimes breaking those principles outright, as with intellectual property theft. Confronting China on these issues is not wrong, and if the U.S. is going to do so, disrupting Sino-American trade is one of the few non-violent strategies available.
But the numbers don’t look good. Donald Trump identified the U.S.-China trade deficit as a serious problem, but since he imposed tariffs the trade deficit has grown, and it’s currently on pace for a record high in 2019. Since his 2016 campaign, the president has vowed to revive U.S. manufacturing. But the ISM Manufacturing Purchasing Managers Index shows a downward trend since mid-2018, with the recently-released September figure the lowest since June 2009, during the Great Recession.
A real trade war with China was always an ambitious strategy, with the outcome uncertain. If Trump thought he could quickly bully China into concessions, he was clearly mistaken. But whether the White House always planned on a sustained trade war or just finds itself in one because of a failed gamble, America’s position was weakened by not one but two big mistakes from Donald Trump: underestimating the value of allies and the importance of domestic politics.
In the first act of his presidency, before launching the trade war with China, Trump took the United States out of the Trans-Pacific Partnership (TPP). As with every trade deal, the TPP would benefit some Americans and harm others, while providing a small boost to GDP. But no matter how small the economic gains, the geopolitical benefits were substantial.
The TPP would’ve tied the economies of 12 Pacific Rim countries — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam , and the United States— while excluding China. As the largest economy, the U.S. had the most influence. It was a smart strategy to contain China and ensure long-term American influence in East Asia. Trump threw that away.
The president also picked trade fights with allies in Europe and North America. He squabbled with leaders at international summits. He’s threatened to break economic and military agreements with South Korea while praising North Korea. That left the United States to confront China alone.
A better strategy would have been to sign and champion TPP, strengthen America’s Asian alliances, deepen trade ties with Canada, Mexico, and Europe, and confront China at the head of a coalition.
Instead, Trump picked fights with everyone at once. It’s hard to overstate the strategic error of fighting with allies over petty issues—such as relatively small Canadian dairy tariffs—rather than rallying allies for a big trade fight with China.
Because the U.S. is pressuring China alone, the Chinese have other options. That creates multiple layers of problems for the United States. China’s retaliatory tariffs on U.S. soybeans cost American farms their biggest market. And that in turn is costing taxpayers, since Trump is bailing out farmers with $28 billion (so far). And the main beneficiary is Brazil, which sold additional soybeans to China, making up for most of the U.S. shortfall.
Markets adjust, and if the trade war doesn’t end soon, American farmers who lost customers might not get them back.
The one arguably positive effect is changes in supply chains. By disrupting U.S.-China trade, Trump has injected extra expenses and additional uncertainty into business risk assessments. Tariffs and uncertainty make American companies less likely to invest in China, and more likely to reroute supply chains to avoid China, thereby reducing their exposure to trade war risk. This creates some “decoupling” between the American and Chinese economies.
I’m not sure decoupling is the best goal—because economic interdependence creates a strong disincentive for war—but if that’s the goal, the best way to achieve it is giving companies clear alternatives. Ideally for businesses, it’d be other countries in China’s proximity with reasonable labor costs and robust trade relationships with the United States, including standardized rules and few barriers, giving companies confidence in long-term investment decisions.
Two good options would be Vietnam and Malaysia. Both countries are in TPP. Thanks to Trump, the U.S. is not.
Domestic politics, both in China and the United States, serve to compound the problem. The leaders of both countries are playing what political scientists call a “two-level game,” trying to advance their country’s interests on the international level while also trying to maintain their political standing at home.
China’s Xi Jinping leads an authoritarian system and consolidated power within the Chinese Communist Party. But he has strong incentives to be the Chinese leader who stood up to American bullying, rather than bow to it. While his government controls much of Chinese media, and could probably spin concessions as a win to the public, other top officials would know.
Meanwhile, Xi can suppress information about economic pain, or put a positive, nationalistic spin on it, that no Chinese media organization will challenge. He can enact economic stimulus without checks and balances or independent institutions getting in the way. And evidence indicates China has been able to offset much of the negative effects of tariffs with stimulus and currency depreciation. Since he’s effectively president for life, Xi is less worried about popular anger in response to tariffs squeezing some sectors of the Chinese economy.
By contrast, Donald Trump is the head of a democracy. He’s running for re-election, and he knows incumbent presidents stand a better chance when the economy is good (which is a big reason he touts positive economic metrics). In 2020, Trump needs support from the constituencies and states that carried him to the White House. While the trade war threatens China’s economy more than America’s — because China is more dependent on exports to the U.S. than the U.S. is on exports to China — it threatens Trump’s political survival more than Xi’s.
In particular, the trade war has hurt U.S. farmers. China is the largest market for many American agricultural products, and Chinese tariffs on soy, corn, and pork have left some farmers unable to sell what they’ve produced. Farmers make up about 1 percent of the U.S. population, but there are more in some states than others. In Wisconsin, for example, 11.8 percent of jobs are in agriculture.
In 2016, Trump won Wisconsin by 0.77 percent. He won Pennsylvania, another high-agriculture state, by 0.72 percent. If he loses those states, re-election becomes much harder.
The president is popular with Republicans and rural voters, and will probably retain most of their support. They might trust his trade war strategy will eventually yield benefits, find the bailouts acceptable, and/or prioritize non-economic issues. But with narrow margins in important states, Trump imposing economic pain on farmers has to make his re-election campaign nervous.
In August, Trump delayed new tariffs on China, announcing “We’re doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. customers.” The move signaled that the president worries the trade war is hurting the American economy — and by extension, his political standing. It also undermines his attempts to claim the U.S. is actually profiting from the tariffs, which is factually incorrect, but if Trump could convince China he believed it, it might have made them second-guess their strategy. Now they know it’s working.
As a result, there’s almost no way the Chinese make significant concessions, at least not before the 2020 election. Ahead of the latest trade talks, China allowed some tariff-free purchases of American soy, indicating the additional purchases Trump announced might actually happen. But Xi knows he can use the upcoming election to pressure Trump, and is unlikely to back down on any of the big issues unless the U.S. does as well, which means we went through this trade war only to end up near where we began, with the same problems, plus some economic damage, and a China less afraid of U.S. trade disruptions.
China vs. Democracy
In the Atlantic, Joseph W. Sullivan, former special adviser to Trump’s White House Council of Economic Advisers, argued that the trade war has become a test of democracy against authoritarianism, and anyone who values liberal democracy and human rights has to support Trump’s efforts.
The essay, from August 2019, perfectly encapsulates Trumpism. Sullivan writes as if he just discovered that trade wars are difficult for democracies. For example, he warns that if “the U.S. is ultimately perceived to have lost the trade conflict, the leaders of democracies around the world will take notice. They will learn that confronting Beijing risks provoking a campaign of democratic destabilization — one that was successful elsewhere.”
But we already knew this. A wide swath of economists, political scientists, and other experts predicted it in advance. I first warned of the two-level game problem in December 2016, writing “the danger is that Xi and Trump — whose need to respond to public slights appears pathological, and who also wants to look tough to his domestic audience — get caught in an escalating spiral.”
And we already knew democratic leaders facing re-election were especially vulnerable to targeted tariffs. In 2002, President George W. Bush imposed tariffs on imported steel. The European Union threatened retaliatory tariffs against products produced in Florida, Michigan, and other swing states, and many countries filed cases at the World Trade Organization. In November 2003, a year before Bush’s re-election, the WTO’s Dispute Settlement Body declared the tariffs illegitimate and authorized retaliatory measures. The president removed the tariffs the next month.
But the Trump administration claimed it knew better than the experts. And now they insist everyone should get behind a strategy that was undermined from the start by their own mistakes, because otherwise the world will learn what the rest of us already knew.