An already bitter trade war between the United States and China went a notch further on September 1, with the two economic superpowers imposing new tit-for-tat tariffs on each other’s goods. But despite bipartisan consensus that Beijing engages in unfair trade practices and agreement on need for a recalibration of trade ties, former US officials and market observers believe President Donald Trump is fast losing support for his trade war among American business executives, farmers and swing voters. Nile Bowie specially for the Asia Times.
And while there are reports that bilateral negotiations could resume later this month, the rhetoric on both sides signals more trade trouble ahead.
A stinging editorial published on Sunday by Chinese state-run news agency Xinhua accused the US of “economic warmongering” in response to the new tariff increases of 15% on more than US$125 billion in China-made goods, including an array of consumer electronics, linens and footwear.
Beijing, in turn, enacted a 5% levy on US crude and began imposing additional tariffs on $75 billion worth of American goods, including agricultural products like soybeans and pork. The defiant commentary described China as “an unbent nail” in the face of maximum pressure exerted by “trade hawks” in Washington.
The Chinese economy, it said, is “strong and resilient enough to resist the pressure” brought about by the trade war, adding that Trump administration hardliners should “stop denying that their trade war is hurting the American people and businesses.”
Dane Chamorro, a former US diplomat, had been optimistic that a trade deal between the world’s two largest economies – or at least measures to “take the heat off” and normalize ties – would be reached over the summer.
“I think what we’ve seen since then, we’ve had highs and lows, but now the clock has kind of run out,” he said. “[Chinese President] Xi Jinping is having to fight against people within the Communist Party who are accusing him of being weak with respect to the United States,” Chamorro, a senior partner with Control Risks, a risk consultancy firm, told Asia Times.
“They’ve had a couple of instances where they thought they had a deal, and they didn’t and were left looking silly. They don’t want to go down that path again, understandably. And so, now I think it will be very hard for them psychologically, politically, to come to a deal, which has to appear to be balanced.
“It can’t be a one-sided thing,” the ex-diplomat said. “President Trump has said a couple of times now that ‘We’re going to win the fight’ or something very close to those words and the Chinese just can’t sign a deal like that. China has options, it can wait. It can retaliate on its own, as we’ve seen.”
Many analysts believe Beijing is better positioned to wait out the trade war, given that its domestic economic growth is largely driven by internal consumption. External trade accounts for around 20% of China’s gross domestic product (GDP), with as much as 80% of that total shipped to countries other than the US.
Frank Troise, managing director of SoHo Capital, a private investment firm and merchant bank, believes average Americans, markets and the US business community, especially companies with extensive supply chains in Asia, have little appetite for a further escalation of the trade war.
“Market participants want to see this resolved and the recent stock market activity has made that abundantly clear. The practical reality is that a deal has to happen,” Troise said. “China can play this for a much longer timeframe than the US is willing to endure. So, the consensus is ‘let’s get a deal done and move beyond this.’”
Trump, who has struck a more conciliatory tone in recent days after referring to Xi as an “enemy” in a Twitter broadside last month, recognizes the need to “come back to the table and agree on something,” said Troise, particularly as the administration maneuvers ahead of an election season amid reports of a possible US recession.
“The reality is that this is becoming less and less popular for American citizens and American voters,” he added.
Still enjoying the ride. With some turbulence, the US stock market survived the second quarter largely unscathed despite Trump’s threats to blow up the global trade order.
Disaffection with the Trump administration’s trade policies could widen further with S&P Global projecting the most recent wave of trade sanctions, known as List 4 tariffs, as being more damaging to consumers and firms than the previous three tranches.
Chamorro believes China will bide its time as the US president vies for a second term, “unless they’re completely convinced that Team Trump has brought them something they aren’t going to walk away from.”
“Since they’ve been burned a couple times in terms of thinking there was an agreement when there wasn’t one, I suspect they are now in the mindset of waiting to see how the US electoral cycle runs and perhaps waiting for someone more predictable to deal with in 2020.”
Trump’s administration has set itself apart from its predecessors by confronting China over what it sees as an unfair trade practices, accusing it broadly of undervaluing its currency, forced technology transfers, intellectual property theft and market-distorting state intervention in the economy.
Authorities in Beijing deny US allegations of economic malfeasance and in turn accuse Washington of attempting to stymie its development. Part of the challenge for China, says the former diplomat, is that there are multiple voices – “different individuals with different objectives and agendas” – pulling strings within the US administration.
Among them is controversial White House trade adviser Peter Navarro, one of the architects of the president’s “America First” trade agenda, who critics see as a protectionist ideologue. Treasury Secretary Steven Mnuchin, by contrast, holds a more traditional Republican pro-business mindset toward China, Chamorro noted.
As the Chinese side tries to decipher which US officials are steering policy and where America’s uniquely mercurial president stands at any given point, authorities in Beijing must also contend with an administration that has given hardliners more room to maneuver than previously.
“You expect the intelligence agencies and the Department of Defense to be hawkish on China, but typically others, treasury, state, have not been so. Now, what you see is across the board in key positions, not necessarily the top-most positions but the under-secretary level, is that most of these people are in the hawkish camp.
“If you look at defense, state, treasury, commerce – these are all people in key day-to-day positions, not at the Cabinet-level but one step below. The people who actually enforce and put into effect a lot of this hold very similar sentiments to Navarro. As a result, you get this whole-of-government approach to the relationship with China.
“Those people have always been there,” Chamorro said, “but they haven’t had the voice or the influence that they have in the current administration. It’s not just one person or someone you see on television like [national security adviser] John Bolton, but its people who are arguably more effective because they actually know how the bureaucracy works.”
“As an ex-administration person, not from the current one but from a past one, said to me, ‘If you had a thing with China and you weren’t able to get that through before, now you can. It’s open season on China.’”
That’s not to say that some of Washington’s gripes with China’s economic model aren’t justified, said the ex-diplomat. The issue, he argues, is the bungled way in which the administration has attempted to make progress as it pursues a course correction of trade ties.
“I think on trade particularly, on investment restrictions, intellectual property and things like that, actually, the president’s policy is right on the mark. I don’t think many people disagree with the issue or the fact that China has acted, as most countries have, as getting an unfair advantage from the international system.
“What’s unique is, since President Trump was elected, the response to that. If you have a coherent response across government departments and functions to get to that objective, nothing wrong with that. But one of the problems with this administration on almost every front has been a lack of coherence, a lack of continuity,” Chamorro said.
“A secretary will tell you one thing, then President Trump will counteract it overnight with a tweet,” he added. “It’s very difficult for people within the administration and government, our own as well as foreign governments – doesn’t matter if its China or somebody else – to have any kind of predictability as to what they agree or what they think they understand because it can be counteracted so quickly depending on who they talk to.”
Warren Maruyama, a trade partner at Hogan Lovells and former United States Trade Representative (USTR) general counsel, told Asia Times that the biggest problem now facing US, European and Chinese multinationals is “uncertainty”, given that various trade actions have reduced predictability of supply lines and sourcing.
“The China tariffs are a big problem since so many US multinationals were sourcing a lot of their products and parts and components out of China. The first three [tariff] lists were primarily industrial parts and components and technology, so that has led to a major scramble to find alternative sourcing arrangements, apply for product exclusions, and find ways to work around the tariffs,” he said.
The surprise August 1 announcement that List 4 tariffs would be implemented came after the US and China ended trade talks in Shanghai the day before with little progress made. Before that, analysts had widely expected the trade war truce achieved in late June at the G20 summit in Osaka to result in a more sustained lull.
“It just blindsided everyone, that includes the markets, the companies and, to be honest, people who have served in trade jobs in the government in the past,” Maruyama said. “I think it’s pretty clear that it has blindsided USTR career-people at the working level too, because they’ve been scrambling to put together List 4.”
Trump recently denied that the tariffs were affecting the American economy, instead criticizing the US Federal Reserve and pinning the blame on “a lot of badly run companies.” He has called for US firms to move their operations out of China, but there are few signs yet of existing operations actually being divested.
A recent survey by the US-China Business Council found that 81% of American companies doing business in China have in some way been affected by the escalating trade tensions, an eight percentage point increase from 2018. Nearly 40% said they lost sales due to their Chinese partners’ concerns about doing business, a seven-fold increase since last year.
Despite Chinese customers increasingly questioning the reliability of US companies as business partners, according to the survey, 97% of member companies reported increased profitability in China in 2019 despite the trade dispute, findings that suggest American firms are not yet running for the exits even if they are actively searching for alternatives.
Another survey, however, published in late August by Chief Executive magazine found eroding confidence in future business conditions among chief executive officers (CEOs), with 62% viewing the trade war as becoming highly detrimental to their outlook and business strategy, an indication that many believe conditions will worsen prior to US elections in 2020.
Maruyama believes US companies were encouraged when they saw Trump and Xi agree to a new round of meetings at the end of last year, but noted that sentiments have since changed. “I think they are starting to move now and if a US company moves its production out of China, that’s not coming back,” he said.
“Likewise, I think the big fear for US farmers is that once you’ve spent decades building up these markets, if China’s purchases of soybeans or pork or corn or nuts go somewhere [else], it’s going to be very hard to pull it back if there are questions about your reliability as a supplier. That’s a political problem for Trump because he needs them [farmers] next year.”
Pork farmers have been unwittingly sent to the front lines of Trump’s trade war. Photo: iStock
American pork farmers have been unwittingly sent to the front lines of Trump’s trade war. Photo: iStock
Opinion polls suggest still strong but falling support for Trump among American farmers, who have outsized political influence in the US electoral system. A poll published late last month by Farm Journal Pulse found 71% of farmers polled supported the president, an eight percentage-point drop from July, and only 43% strongly approved, a ten percentage-point drop from a month earlier.
“US farmers were big Trump supporters in 2016 primarily because of opposition to some of the [Barack] Obama administration’s environmental policies,” said Maruyama, who added that backing from farmers allowed Trump to “override support for Hillary Clinton on the east and west coasts and in urban areas.”
“At first there was a fair amount of confidence in President Trump’s abilities as a negotiator, but as things drag on, I think they’re getting more and more anxious. Farmers have ridden this out so far, but we may be getting closer to a tipping point where they could turn against the tariffs,” the former USTR general counsel believes.
Maruyama, who advises US and multinational firms on the use of American trade policy and trade law mechanisms, sees mixed signals ahead as both sides spar but also push to continue dialogue. In any case, the veteran trade lawyer doesn’t see “things going back to the way they were” before Trump.
“People may disagree with some of Trump’s and [US Trade Representative Robert] Lighthizer’s tactics, but I think there is broad bipartisan agreement that it was an appropriate diagnosis of the problem that these systemic issues with China needed to be dealt with in some fashion.”
“If they do restart [talks], there are some major gaps they would have to resolve that aren’t easy and are going to take time. They may not be able to resolve them if one side or the other overreaches. We could be looking at something that’s going to last a while,” Maruyama believes.
“What’s going on right now is great for trade lawyers, but almost no one else.”