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Trump playing 'a game of chicken' on China trade, economists say

While Trump will “100 percent see how far he can take it,” one of the only ways he keeps his seat in the next election is if the economy is doing really well, global trade analysts point out.
Image: Donald Trump
President Donald Trump, meets with Chinese Vice Premier Liu He, far right, at the White House in Washington on Jan. 31, 2019.Susan Walsh / AP file

President Donald Trump defended his trade policies on Tuesday, attempting to calm fears that an economically devastating trade war with China could be on the horizon.

“We can make a deal with China tomorrow, before their companies start leaving so as not to lose USA business, but the last time we were close they wanted to renegotiate the deal. No way! We are in a much better position now than any deal we could have made,” he tweeted early Tuesday.

The market appeared somewhat assuaged by his assertion that a trade deal with China could still materialize, rebounding somewhat Tuesday morning after all three major indices ended Monday down significantly.

International trade experts say the reality is that the two sides appear to have fundamentally different priorities, which could make reaching an accord difficult — especially with heated rhetoric on both sides. “For this negotiation to actually have an end, both sides are going to have to make concessions,” said Monica DeBolle, a senior fellow at the Peterson Institute for International Economics. But at the moment, it isn’t clear that either side has a path forward to do so.

Although Trump has made much of market access for U.S. products, especially agricultural goods, the focus of corporate America has always been on more fundamental sticking points surrounding intellectual property rights and protectionist Chinese financial and regulatory policies that benefit domestic industries at the expense of American companies.

“We understand that the differences between the two governments still relate to how changes will be made to China’s laws and regulations on a variety of issues, and enforcement,” said Doug Barry, spokesman for the U.S.-China Business Council. “China is outside the world norm on all of these issues and China’s policies hurt all of its trading partners.”

This is a conclusion that lawmakers have more or less embraced across party lines, but a resolution remains elusive. Multilateral enforcement strategies that could have exerted robust pressure on Beijing were built into the Trans-Pacific Partnership, but in rejecting the accord, the Trump administration threw out one of its most promising levers for influencing Chinese policymaking.

“American firms want to do business in China, but there’s an enormous difficulty doing business there, and this trade war is about trying to get China to be a more compliant member of the World Trade Organization,” said David Lindauer, an economics professor at Wellesley College. “This trade war is really about creating a system where American firms can do business in China without all sorts of fears. Protection of IP is high on the list. The Chinese are notorious for producing counterfeit goods, reverse-engineering or requiring technology transfers,” he said. “There’s a great deal of corporate espionage in China [which] appears to be state-sponsored, and the Americans would like to see this curtailed and those who violate the system punished.”

But the United States might have to adjust its expectations, or dig in for a protracted fight, DeBolle said. “At the moment, the U.S. wants China to do a lot… particularly on intellectual property,” she said. “The issue here is for China, this is all about their long term strategy and their long term development goals,” such as its Made in China 2025 initiative, which emphasizes high-tech manufacturing.

How long this all could take to resolve is anyone’s guess. China has more at stake economically, since exports comprise a greater share of its economy, but there are political considerations in the U.S. that could complicate negotiations.

Strategies that could have pressured Beijing were built into the Trans-Pacific Partnership, but the Trump administration threw out one of the most promising levers for influencing Chinese policymaking.

“As far as a timetable on all this… I don’t believe it’s going to take that long,” said Dom Catrambone, CEO of Whitford Asset Management. He pointed to Trump’s suggestion that he could meet with Chinese president Xi Jinping at the G-20 Summit in June and China’s target date of June 1 to implement retaliatory tariffs. “If you think about the amount of time it takes product to get from China to here… they all know they have a couple weeks to figure something out,” he said. “I think there will be some type of resolution within weeks."

Other experts are less optimistic. “A lot of this right now is Trump and 2020 and his bid for reelection and his sense of wanting to have the rhetoric of ‘I was tough on China.’ I don’t see the U.S. backing down either, which means this could last a while,” DeBolle said. “That could become politically complicated for Trump very, very quickly.”

If Monday’s rout in equities signals the start of a prolonged crisis of confidence, Trump could give China what it wants to further his political ambitions. “President Trump 100 percent is going to see how far he can take it, but he won’t, in my opinion, let the economy be hurt because one of the only ways President Trump keeps his seat in the next election is if the economy’s doing really well,” Catrambone said.

Meanwhile, as the recent market volatility indicates, the current and future costs are piling up. Goldman Sachs analysts described higher prices as being borne “entirely” by American households and companies in a recent note, and Morgan Stanley analyst Michael Wilson warned that a wholesale escalation of tariffs on all Chinese goods imported by the U.S. could trigger a recession. Even Trump’s National Economic Council director Larry Kudlow conceded “both sides will suffer on this,” in a Sunday interview.

“There’s no question. As in any war, both sides are being hurt by this. American consumers are being hurt as prices go up. American consumers are bearing the costs of the tariffs,” Lindauer said. “I think the U.S. administration is going to feel under tremendous pressure for a resolution,” he told NBC News.

“In trade wars, it’s very often a game of chicken and who will blink first," he said.