The president has tied his own hands, foreclosing the alternative strategies that could affect the outcomes he ostensibly wants.
The president has tied his own hands, foreclosing the alternative strategies that could affect the outcomes he ostensibly wants.
A fter concluding a Phase I trade deal with China in January, President Trump has lately taken to hinting that there might not be a Phase II. “I’m not interested right now in talking to China,” Trump told CBS news last week, before pivoting to criticize Beijing’s handling of the coronavirus pandemic. His sudden souring on the trade-deal negotiations recalled nothing so much as his engagement with North Korea, which likewise started with a passionate, public commitment before fizzling out without having accomplished anything concrete. Andy Warhol once opined that “Art is whatever you can get away with.” Trump apparently feels the same way about trade policy.
How did things fall apart so quickly?
On January 15 of this year, the Trump administration signed a “Phase I” trade agreement with China, so named because it represented only the first steps in what would supposedly be a longer process. The deal included commitments by China to increase purchases of U.S. goods by $200 billion over two years, to step up efforts to protect intellectual-property rights within its borders, and to improve American companies’ access to its financial-services market. For its part, the U.S. committed to reduce the 15 percent tariff on some $120 billion in Chinese exports to 7.5 percent, while leaving in place the 15 percent tariff on another $250 billion in Chinese exports.
But in the months since, the coronavirus pandemic has hit the global economy hard and caused the U.S.–China relationship to deteriorate, to the point where one wonders whether China will comply with all of its commitments under the deal. Think of two scenarios:
1. China honors half of its commitments, and either the U.S. complains or it decides it can live with that outcome, at least for now. Perhaps Trump spends the four months through Election Day claiming he achieved something meaningful with the deal, thereby decreasing the likelihood of actually achieving something meaningful down the line. In this scenario, China receives kudos from global peers and competitors for successfully pulling a fast one on the U.S. Even if the U.S. then complains and China is forced to improve its compliance with the deal, the perception that Beijing outsmarted Washington will have made the gambit worthwhile for President Xi Jinping.
2. China honors all of its commitments under the agreement and there is some sort of photo op along with some self-congratulatory messaging. The view in China remains that American goodwill is an ephemeral prize. There does not appear to be much in the way of mutual respect between the two governments, but China’s Phase I compliance makes the prospect of a Phase II that much more tantalizing. Trump can claim his strategy has been validated.
Game theory tells us that the second scenario is unlikely, as it produces the worst outcomes from China’s perspective. Indeed, if you were in the Chinese Foreign Ministry, you would have two guiding principles regarding compliance: (1) Do as little as possible to comply without appearing to be non-compliant; (2) Make the process protracted and complicated to reduce U.S. appetite for additional negotiations.
Thus, the first scenario or something like it is all the U.S. is likely to get out of Phase I. There is no basis to believe that the benefits will exceed costs to the U.S. economy of the tariffs Trump imposed, making the entire process a self-inflicted wound. Trump can claim a victory in Phase I, but it will be hard for anyone objective to take the claim seriously.
Here’s where you might ask: What about those tariffs? Can’t Trump more or less apply any level of tariffs to any amount of Chinese exports to the U.S., and doesn’t that power give him leverage over China in these negotiations? In theory, yes. But the leverage that the threat of tariffs provides him is only preserved so as long as it remains a mere threat. Actually making good on the threat would hurt both economies equally. It is true that Trump has shown a willingness to impose tariffs in the past, economic cost be damned, but the Chinese seem inclined to bet that he is unlikely to do so again, given the fragile state of the American economy.
The Chinese are also likely to believe that the U.S. will not remove those of its tariffs on Chinese goods that remain in place, because that would be tantamount to stating that the issues the administration has with Chinese trade policy have all been resolved. Breaking with America’s traditional focus on market access, the Trump administration now defines success in terms of eliminating the trade deficit, a goal that no Chinese policy change could actually accomplish.
In other words, the Trump administration has painted itself into a corner. It doesn’t have the ability to make the bilateral trade situation either better or worse. It has squandered whatever leverage it started with, and there is no particular reason for China to be responsive to its demands (as opposed to pretending to be responsive).
Given this predicament, it’s fair to ask: Rather than raising tariffs on China, why doesn’t Trump lower tariffs on those countries that play by the rules, making Chinese goods less competitive without hurting the U.S. economy? If he were wise, he would. But since the same logic animated the Trans-Pacific Partnership (TPP) agreement that Trump scrapped upon taking office, he is unlikely to adopt it now.
Finally, there is the question of honor. Regardless of the economic merits or foolishness of what Trump has done, doesn’t the Chinese side feel an obligation to live up to its commitments? You would think, but history suggests you would be wrong. In several-thousand years of interactions with foreign nations, China has regularly faced belligerent outsiders who make threats and demands. As a result, the Chinese have perfected the art of hosting hostile powers, offering accommodating gestures and some tea, and sending them on their way — the art of identifying the smallest price that can be paid to get the other nation to leave it alone. China in all probability sees the Phase I deal as one more such gesture, and is more concerned with appearing to comply with its terms than with actually complying.
That is the bottom line: Actual compliance is not in China’s self-interest, so we should not expect it. Trump has tied his own hands, foreclosing the alternative strategies that could affect the outcomes he ostensibly wants from trade talks with Beijing. China will make a few empty, conciliatory gestures, offer the Americans some tea, and send them on their way.