The Trade War Is Only Getting Worse

With a heavyweight Chinese delegation headed by Vice Premier Liu He coming to Washington this week to meet with top-level Trump administration officials, the first such meeting since May, there was hope that both sides could turn the clock back to this spring, when they appeared to be successfully grappling with the contentious issues at the heart of the economic dispute between the United States and China. President Donald Trump had even offered an olive branch by deferring some U.S. tariffs on China that were set to begin on Oct. 1 to give the talks a chance.

But China now seems to have ruled out the very concessions that U.S. negotiators most want to see⁠—namely, a reform of China’s state-led economic model. Chinese expectations are so low that the delegation is reportedly already planning to cut short its stay in Washington. Making matters worse is the spat between China and the NBA over comments by the general manager of the Houston Rockets basketball team regarding the protests in Hong Kong, which Beijing views as an act of interference in its domestic affairs.

The Trump administration’s own actions aren’t helping the mood. The United States blacklisted eight Chinese technology firms and a score of other entities this week for their role in the internment of Uighur minorities in China; the administration also announced on Tuesday a visa ban on Chinese officials related to the Uighur crackdown. Previously, the administration levied sanctions on state-owned Chinese shipping firms that had done business with Iran. The administration is also reportedly mulling new measures that would restrict U.S. investment in China, a bid to further decouple the two economies.

“There is a disconnect between the Trump administration and China about the very scope of this week’s talks—Trump is holding out for a comprehensive deal, and the Chinese don’t appear to be in the mood,” said Eswar Prasad, a professor of international trade policy at Cornell University.

This week’s meeting was meant to be a chance for both sides to recapture the momentum they had earlier this year, before talks broke down over what the United States called backtracking by China in terms of concessions it was willing to make. But Chinese officials have made clear in recent days that they are unwilling to quit using government subsidies for state firms or to abandon its state-run industrial policy—the very reforms that the Trump administration has sought to wrest out of China by steadily increasing tariffs on Chinese exports.

For some China watchers, Beijing’s apparently hardened stance simply reflects that the Trump’s administration’s objectives were always too ambitious.

“The idea that we were going to get a change in China’s development model was not realistic,” said Derek Scissors, a China expert at the American Enterprise Institute. “We were never going to get that.”

But there are two self-inflicted administration actions that could make it even harder to get the kind of comprehensive deal that Trump and especially his top trade officials have repeatedly called for.

First, while pushing China to undertake free-market reforms, end currency manipulation, and stop subsidizing state-owned firms, the United States under Trump is itself moving away from the free market. Trump has embraced protectionism on questionable grounds of national security, interfered with the Federal Reserve, sought to weaken the U.S. dollar to gain an edge on exports, showered favored constituencies with billions of dollars in handouts, and aimed to use emergency powers to compel American businesses to relocate and tear up their supply chains.

“The Chinese recognize that there is a yawning gap between what the administration is asking China to do, and what it is doing itself,” Prasad said. “The domestic space to make these concessions has been squeezed, because even the United States is increasing government interference in the running of the economy. … It’s definitely made it harder for the reformers to push their narrative.”

At the same time, Trump’s political woes give China less reason to be conciliatory. The expanding impeachment inquiry into the president and a brewing battle between the White House and Congress over lawmakers’ investigations into the administration’s actions weaken Trump’s hand.

“The impeachment inquiry adds to the idea in China that Trump needs to make a deal, so they can hold out for a better price,” said Benn Steil, the director of international economics at the Council on Foreign Relations. “Anything that makes Trump weaker makes them stronger.”

Trump further complicated things last week when he asked China to investigate former Vice President Joe Biden, a bizarre request that threatens to drag Beijing into domestic U.S. political squabbles.

“The Chinese want no part of that,” Scissors said. “I think it will make it harder for Trump to step up to the mic and say, ‘I have a deal with China.’”

One additional problem for the U.S. side is that its policies toward China are becoming less coherent. The latest potential plan to potentially restrict U.S. investment in China (and perhaps to limit Chinese firms’ access to U.S. capital markets) is at odds with Trump’s longtime goal of trimming the trade deficit with China. The flip side of a trade deficit, like the one the United States runs with China, is a capital surplus. Reducing one automatically means raising the other.

“The problem is that they want everything, even when the things they want are utterly contradictory,” Steil said.

But if a grand bargain is out of the question, what about a much smaller, narrow trade deal that avoids the really contentious questions and focuses instead on a few key sectors like agriculture? That’s recently become a popular option for the Trump administration, which just inked a narrow trade pact with Japan and is in talks with India over a similar mini deal. In talks with China, Trump himself has often seemed more interested in simply boosting U.S. commodity exports, including soybeans, natural gas, and crude oil, rather than overhauling the Chinese economic model.

That suggests that, ahead of elections next year, Trump might seek to snatch a limited accord and call it a victory, even if that would dismay the more hawkish of his economic advisors.

“I think Trump does actually understand that this is not good for the economy, and the Federal Reserve is not going to save him,” Steil said. “The question is whether he is willing to capitulate and try to paint it as a victory. But if he doesn’t secure any structural changes [in China’s economy] what the hell was the last year about?”

Barring some sort of unlikely breakthrough in this week’s talks or sudden willingness by U.S. trade officials to forget their more ambitious goals of reforming China’s economy, the most likely outcome is further stalemate, and “China just hunkers down until the election,” Steil said.

But U.S. tariffs on China are set to rise next week, and a further tranche of tariffs on Chinese consumer goods is slated to become effective in December, simply spelling more pain for a global economy that needs anything but.

On Tuesday, the new head of the International Monetary Fund warned that, thanks in large part to the trade wars, the global economy is now in a “synchronized slowdown.”