Having not focused exclusively on China for several weeks, it is now time to return to it. Too many things have happened in the past few weeks to ignore it. Most of the events did not fundamentally alter the situation, although there does appear to be a change of thinking on both sides that will make resolution more difficult.
First, a lot has happened since President Trump's temper tantrum announcing the imposition of tariffs on an additional $300 billion in Chinese goods effective September 1 (first tranche) and December 15 (second tranche). Apparently, the assessment was divided in order to prevent a big consumer impact at Christmas. (See last week's column for a discussion of the hypocrisy of claiming the Chinese are paying the tariffs while delaying them to avoid consumer impact.). That was followed immediately by a sinking renminbi, the United States declaring China a currency manipulator, Chinese retaliation for the new tariffs, and Trump increasing the amount of the existing tariffs and issuing a tweet ordering U.S. companies to leave China. China subsequently announced it would not immediately retaliate further, thus at least temporarily calling a halt to what risked becoming an increasing cycle of tit for tat retaliation.
Hopefully, this pause will let everybody catch their breath and figure out how to get constructive talks back on track. However, that will not be easy because the fundamentals have not changed. The United States is still demanding more than the Chinese will give, so the president will ultimately have to choose between striking a weak agreement or continuing the war with costly consequences. As I have said before , the best way out for him is an agreement shortly before the election—roughly a year from now—which he can sell as the greatest ever but whose weaknesses won't be exposed until after the election. His short-term problem is how to drag out the talks for a year without looking like he's stalling.
The good news is that he will have some help from China. Neither country has a short-term interest in pulling out of the talks. If Trump leaves, he is acknowledging defeat on a signature issue. This will deprive him of a much sought-after preelection victory and expose him to criticism for pursuing a failed policy that caused enormous collateral damage. If the Chinese pull out, they are allowing Trump an opportunity to get off the political hook by blaming them. They also will be undermining their self-portrait as the good guy in this argument who wants a reasonable pro-trade outcome and exposing themselves to potentially worse retaliation. The result is both sides are locked in an uncomfortable embrace where neither can leave without making things worse for them.
The wild card, as usual, is the president; his behavior, particularly over the past few weeks, has made the situation much more uncertain and appears to be causing the Chinese to conclude that an agreement with him may be impossible. Essentially, the president has made himself the negotiator, undermining the credibility of Ambassador Lighthizer and his other advisers. (In fairness, Xi Jinping may have done the same thing to Liu He.) It is very difficult to negotiate a deal when both sides believe the other may at any point be undercut by his boss.
It is worse on the U.S. side because over the past two years, the president has proven himself to be an uncertain tribune. Does he fundamentally want an agreement that will force structural change in the Chinese economy, or can he be bought off with a big Chinese buying spree? Is Xi Jinping his best buddy or his worst enemy (after Fed Chairman Jerome Powell)? Is Huawei a national security threat that must be excluded from the U.S. market, or is it a bargaining chip in the trade talks? Will he actually impose the next group of tariffs, or will this be another case like Mexico? Will he really try to force U.S. companies to leave China? For every statement, there appears to be an equal and opposite statement either from him or his advisers. I feel sorriest for Larry Kudlow, who seems to be the designated guy with the broom and dustpan following along behind the president trying to clean up the mess.
The answer to all these questions is that nobody knows, probably not even the president, who appears to operate on spur-of-the-moment thinking. The negative effect of all this uncertainty on business investment, the financial markets, and overall economic growth has been well documented. It now appears that it is affecting the negotiations as well. The Chinese appear to have concluded that our lower-level negotiators have lost credibility and that it is impossible to determine what our president actually wants, or, more important, whether he will honor any agreement they make. The Mexican episode was telling in that regard. Six months after signing a trade agreement with them, the president was threatening across-the-board tariffs. The Chinese have to be thinking, if agreements can be so cavalierly ignored, what's the point of making them? So, while the fundamental issues may not have changed, the mood has; This makes final agreement much less likely even while talks continue because neither side can afford to break them off. Stay tuned for more drama—and more columns.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.