SINGAPORE: To understand where we are on the US-China trade war, you need to keep in mind two points.
First, both US political parties agree that China’s unfair trade practices and plan to use the power of the state to dominate key sectors of the 21st century (through a Made-in-China 2025 plan) needs to be checked.
Second, Donald Trump believes in tariffs. “I am a Tariff Man,” he has said.
To think about where we may be going, understand Donald Trump’s primary objective is to get re-elected.
However, the political scene in the US is not the only one at play. Just as Mao Zedong worried about challenges to his rule, Xi Jinping also must also keep in mind his politics.
With this as background, one can try to understand the dynamics at work in the current installment of the US-China trade war and think about what may be next.
THE THINKING IN BOTH COUNTRIES
Trump’s tweets seem to indicate that he may have given up on doing a deal with China. “We would be better off without them”, he said.
He may have decided that a deal is not going to happen because Xi won’t back down and, above all, that it is politically expedient for his re-election to campaign on the idea that China is simply a bad actor unwilling to correct the error of its ways and that Donald Trump is “the chosen one” to take on China.
If Trump believes China will make concessions, he certainly did not encourage his Chinese counterpart to make them when he referred to “Chairman Xi” in another tweet as an “enemy.”
Further, it is doubtful Trump understood that the timing of one of his new tariff hikes is the trade equivalent of a thumbed nose at China, falling on Oct 1, the day China celebrates its 70th birthday.
China’s tariffs in response, from soybeans to autos, are undoubtedly designed with the US 2020 presidential campaign in mind. “Politically motivated!” as Trump tweeted.
But they also are as much about China’s domestic politics – responding to the thumbed nose – as they are about trade negotiations.
CHINA’S RESPONSE MAY NOT BE LIMITED TO TARIFFS
The deep interconnections between the US and China could enable the two countries to inflict considerable asymmetric pain on one another.
While China’s main response to the trade war has been retaliatory tariffs, that may not last. The US has gone beyond tariffs already, and now President Trump has “ordered” US companies to look at ways to close their operations in China.
Looking forward, China has a wide range of options to discomfit American interests, including non-tariff barriers such as the promised “unreliable entities list”, to signaling that US defence contractors will be sanctioned for weapons sales to Taiwan.
It can enact possible retaliation against US tech firms that curtail business with Huawei or companies that support Hong Kong protesters.
Businesses are also nervous for informal, citizen-organised boycotts of American goods, and possibly demonstrations against iconic American companies, which have been practised in the past.
HOW THE 2020 US PRESIDENTIAL ELECTION MAY IMPACT TRADE WAR DIRECTION
Trump desires be re-elected President (as did every other US president).
The state of the US economy going into and during the election year impacts whether an incumbent president will be re-elected.
While Donald Trump won the presidency in 2016 by winning the Electoral College over Hilary Clinton by a margin of 304-227, he lost the popular vote by nearly 3,000,000.
If approximately 79,000 votes had gone the other way in Michigan, Pennsylvania, and Wisconsin, he would have lost the vote in the electoral college as well.
His campaign understands that he cannot afford to lose any votes in those three key states. So far, his trade war has played well with his base. More importantly, he won't drop the trade war lightly because he believes in it.
We can surmise the trade war will continue unless and until the economy really begins to tank and threatens his re-election.
At that point, it's possible he will do anything he needs to do, including a deal of some kind with Xi Jinping, to take enough action to positively impact the markets.
TRUMP’S HELP TO FARMERS A KEY BASE
One of the US sectors getting hit hardest by this economic confrontation is agriculture, and farmers are one of the key components of Trump’s base.
Why are farmers hurting so much? First, there are the existing Chinese tariffs. Second, there is the cessation of purchases from China.
Third, the Comprehensive and Progressive Agreement on the Trans Pacific Partnership (CPTPP) is now in effect, which is opening up markets for non-US competitors, especially in Japan.
Looking at his policies to mitigate the harm to American farmers, we can see the lengths the Trump administration will go to keep the tariffs he has unilaterally imposed on China.
The US government has given and will give about US$25 billion in subsidies to farmers.
Now, the US is trying to open Japan’s agricultural market to CPTPP levels with a bilateral trade agreement in which Japan will lower its tariffs on US beef and pork to levels set by the revised Trans-Pacific Partnership. That agreement could be reached soon.
But will that be enough? If not, then Trump may have no choice but to come to a deal with Xi.
THE ECONOMY TRUMPS ALL
Will Trump find new ways to stimulate the US economy and avoid the economic slump that the trade war has abetted? If so, he may double down on his strategy to stand firm in the China trade negotiation.
But if the economy slows significantly, let alone tips into recession, this could change the President’s calculus.
Just yesterday, Trump expressed regret about the status of the trade war with China, answering “yes” when a reporter asked if he regretted the way things had played out.
No one knows how Trump, the political maverick, calculates things. He may have figured that if he can’t do a defendable deal, why not keep China as a bogeyman that only he can deal with? Or he may be more conventional by doing what he can to strengthen the economy heading into his re-election.
At the end of the day, the re-election trumps whatever is necessary. The question is if the re-election will trump the China tariffs. Tune in to the US 2020 campaign to find out.
Steven Okun, Senior Advisor, McLarty Associate, advises clients on issues throughout Asia. He has lived in Singapore since 2003, is in his fourth term on the board of AmCham Singapore and served in the Clinton Administration. He appears regularly as an analyst for CNA.
John Holden, Senior Director, McLarty Associates, lead its China practice. He was an Associate Dean at Peking University’s Yenching Academy and also served as the President of the National Committee on United States–China Relations.