- President Donald Trump just went toe-to-toe with China on trade, and he was handed an embarrassing loss.
- That is largely because Trump’s team never had the leverage in the first place to get China to put aside some of its fundamental economic goals.
- The team might have, had it approached China with a bunch of allies like, say, a regional trading bloc. Neat idea, no?
The only way to counter China’s aggressive trade action is to do so multilaterally, the way President Barack Obama envisioned it. Anything else will end in tears, and that’s what we’ve been witnessing over the past week.
No need to mince words: President Donald Trump got routed by China. Even his allies acknowledge it.
Scott Paul, the president of the Alliance for American Manufacturing who has championed a tougher approach to China, told The Washington Post that he “can’t escape the feeling that the administration got somewhat played this round.”
Somewhat? Not only will the US back down from levying tariffs against China over intellectual-property theft, but it is also moving to resume selling parts to ZTE, a Chinese tech firm that violated sanctions against North Korea and Iran.
As a replacement punishment the US plans to demand that ZTE shake up its management and pay fines. This is funny, because that is exactly what the US asked ZTE to do the first time it was caught violating sanctions. The company did not do that, though. Instead of shaking up its management, it actually rewarded some of the employees who were caught breaking the rules.
Perhaps the Trump administration forgot about this. After all, Commerce Secretary Wilbur Ross made a speech about it an entire month ago, which feels like an eon in this presidency.
It was ZTE’s flagrantly abusive behaviour that had politicians, academics, and business executives from both sides of the aisle warning the Trump administration not to use the company as a bargaining chip in its trade negotiations with China. But Trump did so anyway. He had to.
You can chalk this up to Trump’s transactional nature. But it’s also clear Trump and his team needed to use ZTE to get back to the negotiating table. He was asking China to change some of the fundamental ways its economy works and some of its most important plans for its economic future.
Trump needed the leverage to come close to talking about any of that (which lets face it, he didn’t).
Until ZTE’s fate was thrown into the deal, it seemed as if Liu He, China’s trade negotiator who is a reported ally of Treasury Secretary Steve Mnuchin, was considering cancelling a key trip to Washington. This would have thrown the North Korea talks Trump so desperately desires into question too and hastened the US and China’s path toward a trade war.
So Trump had backed himself into a corner. He needed to use ZTE. Expect this to keep happening. China’s economic power has grown to the point that without putting 70,000 Chinese jobs on the table, the Trump administration didn’t have the leverage to force it into negotiations.
That gets us to our most important point here today: Obama got it right. Multilateralism is the only way to deal with China. High five to globalists, not that that’s going to save us from our embarrassment. It’s not going to stop the Chinese from stealing our intellectual property, either.
Remember the Trans-Pacific Partnership? The multilateral Asian trade deal that the US almost ratified under the Obama administration? The one that would have created an economic bloc designed to counter China in its own region? The deal that China was incredibly angry about through its creation? The one that became a political punching bag for shallow politicians trying to generate convenient sound bites they thought Americans would appreciate?
You know, the defunct deal that became Trump’s first gift to Chinese President Xi Jinping when he pulled out of it last year? The one his administration is reported to have regretted leaving once it had a few months to think about it?
I’m not saying trade deals like the TPP are perfect, but I’m saying there’s only one way to counter an ambitious and recalcitrant Chinese government, and that is multilaterally – by boxing it in, by using an immense amount of leverage.
When the trade wonks first started gaming out a trade war between China and the US, one thing I kept hearing was that China, being an authoritarian nation, could handle pain better than the US in the short term. If the US were to inflict lasting pain, it would have to make the war last.
But there are problems with that of course. Not only would China retaliate with its own tariffs, but as Mary E. Lovely and Yang Liang over at the Peterson Institute for International Economics wrote, US tariffs would end up hurting its own supply chains.
“While the problems identified by the USTR [US Trade Representative] report have plagued the bilateral relationship for years, the administration’s tactic of imposing tariffs in the sectors specified by USTR may prove more harmful than effective. Rather than hitting the administration’s intended target – Chinese firms that may have unfairly obtained American technology – the proposed tariffs would actually inflict damage on US high-technology sectors.”
Trump and Mnuchin, a trade dove, didn’t have the pain threshold for this kind of damage. What’s more, China’s trade delegation knew it was dealing with a team of undisciplined, wholly unserious, inexperienced men who fundamentally do not agree with one another. It was able to take advantage of divisions on the US team.
What these men needed was more leverage. Coming in with backup (like, say, with a bunch of China’s regional trading partners) would have helped with that. On top of putting tariffs on Chinese steel and aluminium (which it did through the World Trade Organisation), Obama was building that ability to box China in through the TPP.
This is not what hawks – like US Trade Representative Robert Lighthizer, who is still insisting on trade war – want to hear. They come from a time when the US by itself had the leverage to put the hurt on China. They are trade dinosaurs doomed to watch the world grow increasingly unrecognizable until the meteor hits.
It’s not exactly clear what Trump believes about trade at this point (which worries his allies, no doubt), but he will undoubtedly never be able to admit that his predecessor got it right. So expect all of these showdowns with China to keep ending in tears.
Business Insider Emails & Alerts
Site highlights each day to your inbox.