US Trade Representative Robert Lighthizer (left) and the director of the White House National Trade Council, Peter Navarro, two of Washington's most outspoken critics of China, are heading to Beijing to talk trade. Photo: AFP / Mandel Ngan
US Trade Representative Robert Lighthizer (left) and the director of the White House National Trade Council, Peter Navarro, two of Washington's most outspoken critics of China, are heading to Beijing to talk trade. Photo: AFP / Mandel Ngan

US President Donald Trump is getting discombobulated over the trade war he started with China more than a year ago. He continues to claim that the US economy remains “incredibly” strong, that “we will eventually make a very good deal with China, but we are not in a hurry.”

But Wall Street is not buying. Recent stock indices have roiled violently, dropping when Trump threatens to add tariffs on billions of dollars’ worth of imports from China and recovering when he finds excuses to delay levying the tariffs.

Trump, of course, would never blame himself as the cause of bad news on the stock market. He is blaming the Federal Reserve’s unwillingness to lower the policy interest rate for the downward volatility of the equity market. Thus he already has a designated scapegoat in place for when the stock market tanks.

As for his “easy to win” trade war with China, Trump is getting visibly frustrated that China is no longer acting like the patsy he had been expecting. But it’s probably not his fault that he thought negotiating with China was going to be a piece of cake.

In the beginning, advisers of President Xi Jinping suggested an approach to Trump based on the assumption that China was dealing with an American leader who was rational and has the interests of the American people, if not the world, at heart. Thus Xi flew to Mar-a-Lago resort in Florida to make nice with Trump and even gave him a way over-the-top state reception in Beijing.

Alas for Trump and his team, they erroneously concluded that these gestures meant that China’s negotiators would be soft and could be intimidated by harsh demands and manipulated by bait-and-switch tactics. US Trade Representative Robert Lighthizer and Secretary of State Mike Pompeo began by making outlandish demands that China renounce its national plan, “Made in China 2025,” and change the way state-owned enterprises are managed.

China revised negotiating strategy

Gradually the Chinese negotiators began to realize that being open-minded and willing to compromise was no way to deal with an American team set on negotiating in bad faith. While they continued to meet with the Americans with courtesy, the Chinese offered no new concessions and began to prepare for a long standoff by adjusting their strategy.

Judging from the results of the trade data one year after the trade war began, China appears to have weathered the storm far more successfully than the US.

For the year ending July 31, US exports to China fell by 38%, worth US$23 billion, or equivalent to 15% of annual US exports to China. China’s exports to the US dropped by 14%, worth $18 billion, which was only 3% of China’s annual exports to the US. The US trade deficit with China, the alleged reason for Trump to wage the trade war in the first place, has widened rather than narrowed.

While China raised its tariffs on imports from the US as a tit-for-tat measure, it lowered tariffs on goods from other countries at the same time. Before the trade war, China’s average tariff on all imports was around 8%. After the trade war begin, tariffs on US imports averaged 20.7%, compared with 6.7% for all the other countries selling to China.

Gaining market share in China

Thus all the exporting countries in the world except the US are enjoying increased sales to the second-largest economy. Canada is such a beneficiary. China’s import of agricultural products from Canada has increased by 63% while the US suffered a drop of 70%. A joke going around is that all the Maine lobsters are migrating north to be sold as Canadian lobsters for the Chinese dinner table at a lower price than ever.

More than half of China’s exports to the US are either made by American corporations in China or by contract manufacturers for American companies. The import duty being collected (Trump’s so-called “free money”) by the Treasury is paid by the American consumer and/or shows up as additional costs for US companies.

On the one hand, Trump can’t get enough of the free money. On the other, he’s holding off on the next levy of tariffs because it would be too close to the Christmas season and would hurt the American consumer. Another clear example of contradiction emanating from an economic ignoramus.

A way to avoid US tariffs on a Chinese product is to make it elsewhere. A popular destination for such a move is Vietnam. True, China would lose the jobs to Vietnam, but the ownership of the business would remain in Chinese hands. Such changes in manufacturing locations have been very popular, to the point that Vietnam is now enjoying the kind of trade surplus that raises Trump’s ire.

Navarro was wrong

Contrary to the original thinking by people such as Peter Navarro, only about 3% of American manufacturing has actually returned to the US as a consequence of the tariffs on imports from China. The trade war has led to an expected lose-lose outcome, but it would appear that China has managed to contain the damage far better than the US.

Somebody needs to teach Trump the economic principle of comparative advantage and the benefit of world trade. Unfortunately, it will not be Navarro, Larry Kudlow, John Bolton or anyone else in his inner circle. None care to tell the boss what the boss doesn’t want to hear.

In fact, the foreign ministers of China, Japan and South Korea would be able to give Trump the tutorial in economics that he badly needs. They are currently meeting in Beijing to promote economic cooperation and safeguard free trade. Specifically mentioned in the agenda is to strengthen cooperation on big data, artificial intelligence and fifth-generation wireless technology (5G). The very same areas where the Trump administration fears competition from China.

That three Asia powers with quite disparate domestic and global agendas can meet to discuss cooperation on matters of common interest would suggest that these foreign ministers could also give Trump lessons on international relations and diplomacy.

The Wall Street Journal on August 20 ran an opinion piece titled “Trump is losing the trade war with China.” The author, an economist and professor at Harvard University’s Kennedy School of Government, suggested that the US could more effectively deal with China by forming coalitions with other countries. (The author neglected to point out that such coalitions are virtually impossible given Trump’s go-it-alone approach.) For an economist writing in the Journal to declare that Trump is losing the trade war has to be disconcerting for the Trump administration.

Trump believes that the prospects of his re-election are tied to the stock market. Since stock-market declines generally lead actual recessions by about six to nine months, the timing of the market drop associated with a looming recession could be quite damaging to Trump’s re-election chances. Despite his bravado, members of his team such as Kudlow and Navarro have been scurrying around the media circuit talking up the economy and denying any signs of economic slowdown.

When things go wrong, somebody in the White House gets fired. When it becomes obvious that the trade war is not turning out as expected, and the stock market does tumble, someone will have to walk the plank. Most likely that will be Navarro. He sold Trump on taking on China and convinced him that a trade war was easy to win.

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