Collapse of China Trade Deal Raises Tariff War Fears

China’s refusal to stand by the trade deal it had agreed to in negotiations with the United States threatened to touch off a tariff war. The standoff has raised fears in financial markets that the added cost to consumers from higher tariffs could increase inflation and reduce economic growth. Stock prices fell sharply last week after President Trump announced that he would implement a previously announced tariff increase on $200 billion worth of Chinese-made goods to 25%, up from the current 10%, because the Chinese government decided to renege on a trade deal that “was 95% there.”

On Monday morning, the Chinese government announced its response to Trump’s move. It would increase tariffs, starting on June 1, on $60 billion worth of US-made products, from the current 10% up to 25%, including animal products, frozen fruits and vegetables and seasoning. The added Chinese tariffs specifically target US agriculture, to increase political pressure on Trump from farmers who are an important part of his future voter base. But for the time being, China held off on raising tariffs on another $60 billion worth of American goods it currently imports, including Boeing commercial passenger jets and crude oil.

The stock market’s reaction to China’s announcement of retaliatory tariffs was immediate. The Dow Jones Industrial Average opened Monday morning on the New York Stock Exchange 500 points lower, and closed down by 2.4% for the day. The biggest losers were three large American companies which are heavily dependent on trade with China. They include Apple, whose iPhones are manufactured in China and would be subject to the American tariff; Boeing, which hopes to sell more of its jetliners to Chinese airlines; and Caterpillar, the leading American exporter of tractors and other heavy-duty industrial equipment.

Stock market prices stabilized later in the day after Trump announced that he had not yet decided to carry out his threat to extend 25% tariffs to another $325 billion worth of Chinese-made imports, including clothing and footwear, whose retail prices to consumers would rise sharply as a result.

TRUMP CONFIDENT THE US WILL WIN

By the next morning, stock markets were snapping back, recovering about half of their losses from the previous day, and indicating that fears of an all-out US-China trade war were subsiding. Investors seemed to take to heart President Trump’s comment Tuesday that the dispute with China was only a “squabble” in which the US would ultimately come out on top.

On Monday, the office of US trade representative Robert Lighthizer announced that it was launching the process required to impose new tariffs on the additional $325 billion worth of Chinese imports, which includes a public comment period concluding on June 24, which is the earliest date that those new tariffs could go into effect, should Trump decide to impose them.

Despite the failure of the latest round of US-China trade talks in Washington last week, Trump still talks hopefully about his “very good relationship” with Chinese President Xi Jinping, and his high hopes for “a very fruitful meeting” when they both attend the G20 international economic summit in Osaka, Japan on June 28-29.

HOW THE CRISIS DEVELOPED

A dinner meeting between Trump and Xi on the sidelines of the previous G20 summit in Argentina last December 1 resulted in a temporary easing of trade tensions between the US and China. It persuaded Trump to suspend imposition of the 25% tariffs which he had announced on July 6 last year until March 1, in the expectation that a new round of trade talks would lead to China’s agreement to eliminate the abuses in its trading policies.

As those talks progressed, Trump extended the March 1 implementation date for the new tariffs indefinitely, but ran out of patience with the Chinese on May 5, after it had become clear that Chinese negotiators were backtracking on key concessions they had already agreed to.

US trade officials engaged in the talks said that their Chinese counterparts “were playing games with us. . . The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding. . .

“We’ve expressed some pretty serious frustration at times. It’s been a necessary ingredient to success. You can be nice to someone, but sometimes you need to say ‘stop [messing around] with me.’”

As senior Trump economic advisor Larry Kudlow told reporters more bluntly, on those occasions, US trade representative Lighthizer “read them the riot act.” Lighthizer has a reputation for being a “hawk” in trade negotiations with China, advocating for the need to stand firm in pushing China to remove non-tariff barriers to US companies seeking to enter the marketplace in China, and confronting China over such practices as the theft of US intellectual property and forced technology transfers. Another US demand was that China put in place sufficient safeguards against cheating on the terms of the deal by formally incorporating them into Chinese law. Lighthizer also insisted that the current 10% US tariffs remain in place, maintaining pressure on China until well “after the ink was dry” on the signed agreement.

PREMATURE OPTIMISM

The talks seemed to be making progress in April. Treasury Secretary Mnuchin, who had also been participating in the negotiations alongside Lighthizer, optimistically said that the negotiations were “getting close to the final round of concluding issues.” Mnuchin was looking forward to one last meeting with Chinese trade negotiators in Washington, where they would work out the final details and make plans for “a signing summit with President Trump and President Xi upon the completion of this agreement.”

But it was not to be. Just days before the final negotiating meeting was to convene in Washington, Chinese negotiators began expressing serious reservations about the terms of the agreement which they had already accepted. They were no longer willing to commit to changing laws covering intellectual property, stopping forced technology transfers, and ending state subsidies for competing Chinese companies. They also demanded that existing US sanctions be lifted immediately, and objected to the publication of all the details of the agreement.

The Chinese claimed it was a matter of national honor: The US had to show that it trusted the Chinese government to keep its word. But Lighthizer did not accept that argument. He said the Chinese were just using it as an excuse to “move the goal posts” for reaching agreements at the last minute.

Trump’s response was immediate. Three days before the final meeting in Washington was scheduled, he announced that the increase to 25% tariffs on $200 billion worth of Chinese goods whose March 1 implementation he had suspended would go into effect on Friday, May 10.

After Chinese officials briefly considered and then rejected the idea of cancelling the negotiations in Washington, the two-day meeting went forward, but both sides had hardened their positions. Neither side had expected any progress to be made, but they did go through with the meeting because they wanted to avoid the appearance that their negotiations had broken down.

ACTION AND REACTION

The new round of American tariffs went into effect on Friday, prompting the Monday announcement of Chinese retaliatory tariffs on $60 billion of US goods.

Trump then issued a warning. “China should not retaliate-will only get worse!” Trump tweeted. “I say openly to President Xi and all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries.”

Chinese state television responded to Trump’s warning against retaliation, saying, “Whether the US wants to talk or fight in the next step, or take other action, China has already fully prepared its policy toolbox and prepared a comprehensive response.”

Earlier, Trump accused the Chinese of deliberately stalling the trade negotiations until the 2020 elections, in the expectations that a Democrat president would give them a better deal, and warned them that it would be mistake.

He tweeted, “I think that China felt they were being beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky and have a Democrat win – in which case they would continue to rip-off the USA for $500 billion a year.

“The only problem,” Trump continued, “is that they know I am going to win [the election] because] of the best economy and employment numbers in U.S. history, and much more. The deal will become far worse for them if it has to be negotiated in my second term. Would be wise for them to act now.”

TRUMP UNAFRAID OF A TRADE WAR

Trump has long argued that the US has a natural advantage in a tariff war with China, because of the huge trade imbalance between the two countries, making China’s exports to the United States much more important to the Chinese economy than American exports to China are to the US economy. Trump suggested that the increased tariffs would ultimately divert business activity from China, as American companies shift their production and supply chains back to the United States or to countries which are now directly competing with China for low cost production, such as Vietnam.

Trump also promised to increase federal payments to soybean farmers and other affected US industries as compensation for their lost foreign sales due to China’s retaliatory tariffs. “We’re going to take the highest year, the biggest purchase that China has ever made with our farmers, which is about $15 billion, and do something reciprocal to our farmers. Our farmers will be very happy. Our manufacturers will be very happy. . . I think it’s working out very well.”

The current standoff in trade talks between the US and China is a source of growing concern in international financial and commodity markets, especially if the impasse cannot be broken by the end of June, when the new tariffs from both sides kick in.

WOULD A US VICTORY BE WORTH THE COST?

At that point, Trump economic advisor Kudlow has acknowledged that the US and the Chinese economies would both “suffer.” But he also insisted that the cost to the US would be worth it, if it ultimately results in China being forced to give fairer treatment to American businesses.

Other economists warn that if the trade war between the world’s two largest economies continues for much longer than that, it is likely to create a considerable drag on the entire global economy and hurt American consumers. For example, Hun Quach, vice president of the Retail Industry Leaders Association, which represents Best Buy, Walmart, Target and the Dollar General chains, predicts that, “Americans’ entire shopping cart will get more expensive.”

On a more optimistic note, Kudlow also told Fox News that even though last week’s trade talks in Washington made no progress, China has issued a fresh invitation to US trade negotiators Lighthizer and Mnuchin to come to Beijing to continue the trade negotiations, but he admitted that there were “no concrete, definite plans yet.”

Trump’s reliance on imposing punitive tariffs as a strategy in trade negotiations about strategic commodities, such as aluminum and steel, has been widely criticized by America’s major Western trading partners. However, there is broad agreement in the international community that something had to be done to reign in China’s trade abuses, which have given it an unfair advantage and enabled it to grow into one of the world’s strongest economies.

TRUMP’S MOST POPULAR POLICY

Many countries are now quietly cheering because no US president before Trump has had the political courage to risk an all-out trade war with China. Trump is the only world leader who has ever made a serious effort to hold China responsible on the issues of fair trade, military expansion, currency manipulation, intellectual property rights, and protecting the environment.

Even Trump’s bitterest Democrat critics, including Senate Minority Leader Charles Schumer and Ohio Senator Sherrod Brown, are encouraging the president to stand firm in his condemnation of China’s misbehavior, before China becomes too great a military and economic threat to this country’s future.

Conservative economic commentator Stephen Moore, who call himself a free trader who hates tariffs, writes in The Hill that “if ever there were a right time to impose punitive tariffs, it is now, and it is against China. President Trump is on the side of the angels on this one, and this is the right moment to shut down China’s abusive trade practices forever.”

Moore points out that when Trump began raising tariffs on imported Chinese goods last year to 10%, he was only setting them equal to the tariffs which China had long been imposing on American goods. But even after equalizing the tariff rate, the economic playing field was not yet level, because the US operates as an open market while China maintains non-tariff barriers which “make it prohibitively expensive [for foreign companies] to do business there.”

THE RIGHT FIGHT AT THE RIGHT TIME

Moore argues that Trump’s attempt to “leverage America’s strategic advantage over China today. . . is a gamble worth taking. . . Trump’s timing for this confrontation could hardly be shrewder. The American economy is riding high, as [is] the stock market, so we are in good shape to ride this out. Meanwhile, Beijing miscalculated, big time. . . They underestimated Trump’s resolve on this issue.”

Moore dismisses fears that the newly increased tariffs on Chinese imports will be costly to American consumers as “exaggerated.” He notes that the 10% tariffs which Trump imposed on the same goods last year had virtually no impact on their retail prices, because they were largely absorbed by China’s deliberate devaluation of its currency against the American dollar.

However, Moore warns that “this U.S.-China trade dispute is the first skirmish in what is likely to become the epic economic battle of our lifetime. The future of free and fair trade is much better enhanced if Trump wins. . . And it is why Trump must win, and will.”

Conservative talk radio commentator Rush Limbaugh also agrees with Trump’s decision to use tariffs to challenge to China’s unfair trading policies. Limbaugh also claims that the president is ideally suited to the task, because he is not infected with the globalist mindset of the elite establishment which would deny the United States, because of its superpower status, the moral right to demand a level economic playing field with its competitors in the international marketplace.

RESPONDING TO OTHER CHALLENGES FROM CHINA

Trump’s aggressive trade policies against China are consistent with his more general strategy of directly confronting countries which pose a direct threat to America’s vital interests, which, in Trump’s view, include both economic and national security issues. In addition to the trade imbalance, China is also challenging American strategic interests in the Western Pacific through a massive buildup and modernization of its military forces. China has also been expanding and fortifying disputed islands in the South China Sea, turning them into forward military bases which challenge the territorial claims and security of other allied countries in the region. In addition to its other obligations around the world, the Pentagon’s most urgent task for the past several years has been to develop and implement an effective strategy in response to China’s increased military capability.

The US has also stepped up pressure on its allies to avoid using advanced Chinese telecommunications equipment from firms such as Huawei and China Mobile to upgrade their infrastructure, because of the security threat they pose. The White House has also condemned the mistreatment of China’s Muslim minority population and moved to block or discourage certain security-related Chinese investments in the economic infrastructure of other countries around the world, including Israel.

In a speech he delivered in London last week, Secretary of State Mike Pompeo said that China’s ambitions poses “a new kind of challenge; an authoritarian regime that’s integrated economically into the West in ways that the Soviet Union never was.”

“MAXIMUM PRESSURE” ON US ENEMIES AROUND THE WORLD

At the same time, Trump has been following a policy of exerting “maximum pressure” against other rogue nations around the world which pose direct threats to American interests and allies, including Iran, North Korea and Venezuela. While Trump has criticized his predecessors in the White House for making open-ended US military commitments without clear exit strategies, he has not hesitated to apply US military power to achieve limited objectives, such as the elimination of the ISIS caliphate, and the 2017 missile strike that punished Syrian President Bashar Assad for using chemical weapons against civilians.

While avoiding a direct military confrontation with Vladimir Putin, Trump has increased economic sanctions that punish Russia for its aggressive moves against its neighbors. Trump has also responded by selling lethal weapons to help Ukraine to defend itself against Russian aggression, and by stationing US troops in Eastern European NATO allied countries, which feel threatened by the buildup of Russian military forces on their borders.

Since walking away from the fatally flawed 2015 Iran nuclear deal negotiated by the Obama administration, Trump has been steadily ratcheting up US sanctions on Iran, which are having a devastating impact on its economy and oil exports. Trump has also responded to recent reports that Iran is planning an attack on US forces in the region by reinforcing them with an aircraft carrier and additional military aircraft, including B-52 bombers. He has warned that he will use them against Iran if it dares to carry out its aggressive threats. Trump has also recently approved revised military plans to send as many as 120,000 American troops to respond to an overt act of aggression.

Iran’s most recent threat to violate the essence of the 2015 nuclear deal by restarting uranium enrichment did not succeed in its goal of panicking the European signatories on the 2015 agreement to get them to pressure Trump to pull back. This leaves Iran’s leaders to watch helplessly as their country’s economy deteriorates due to the latest escalation of US sanctions, which will also dry up its remaining oil exports.

THE STANDOFF WITH NORTH KOREA

With regard to stalled US negotiations with North Korea, the Trump administration has not allowed itself to be provoked by the recent short-term missile tests which did not pose a direct threat to Japan and other US allies and bases in the region, nor did they violate North Korea’s pledge to suspend long-range missile tests.

Trump is waiting patiently for North Korean leader Kim Jong Un to realize that, unlike his predecessors, this American president will not be bluffed. Trump proved that by walking away from the negotiating table when Kim offered him a deal at their February summit in Hanoi, which did not meet US demands for full North Korean nuclear disarmament. More recently, the US has seized a North Korean vessel on the high seas for carrying coal to sell, which violates the current sanctions.

PATIENCE IN VENEZUELA

In contrast with Trump White House policies towards Iran and North Korea, which have often been at odds with those of America’s traditional European and Western Pacific allies, the administration has been working in close cooperation with its allies and most Latin American countries in its approach to the delicate political situation Venezuela. The latest effort by the US-backed opposition leader in Venezuela, Juan Guaidó, may have failed to replace Nicolás Maduro, the corrupt Cuban-backed socialist dictator, but the Trump administration is still determined on restoring freedom and democracy to Venezuela’s suffering people.

James Carafano, a scholar at the Heritage Foundation, says that, “A big part of Venezuela is the US showing the Russians and the Chinese it’s going to maintain dominance in the Western Hemisphere.” During the 19th and 20th centuries, the US maintained that traditional dominance, also known as the Monroe Doctrine, using gunboat diplomacy. But in Venezuela, the Trump administration has been acting more subtly, without using military force, by ramping up the diplomatic and economic pressure and building on the international consensus that the Maduro regime has lost its legitimacy.

KEEPING ALL THE BALLS IN THE AIR

Some of Trump’s critics have expressed concern that Trump and his chief foreign policy operatives, Mike Pompeo and John Bolton, may have bitten off more than they can chew. But so far, Pompeo and Bolton have shown a remarkable ability to handle all these multiple diplomatic challenges at the same time, without dropping the ball on any of them, or losing their focus on the long-term strategic challenges from Beijing and Moscow.

What is perhaps most surprising of all is that, aside from his accomplishments in stimulating the economy, Trump’s bold and sometimes unconventional approach to managing foreign policy challenges has become one of the most successful aspects of his administration.