The Chinese are Coming! The Chinese are Coming!

It seems that every time I set out to write a dispassionate piece on some wonky area of trade policy, current events intervene, and I end up talking about the president’s latest move. This week is no exception. I have been telling people that most “trade wars” go one round: we do something; the other guy responds in kind; we glare at each other for a while; and then there’s a negotiation to try to settle our differences. Last week, the president moved into round two by responding to China’s entirely expected equivalent retaliation with a new round of possible tariffs on $100 billion of Chinese goods, literally doubling down on his earlier action of $50 billion. The Chinese are likely to respond, again, with equivalent action.

This latest move is proof of something I said a couple weeks ago—the president has untethered himself from normal administrative process and any form of adult supervision. There seems to be no one willing or able to stop him from acting on impulse or instinct. The new tariff order is also a reminder of his negotiating philosophy articulated years earlier—if you’re hit, hit back harder. His approach hasn’t changed in 30 years, and we should have seen this coming.

Less predictable is what will happen next. In both “rounds,” both sides have carefully left the door open for an actual negotiation by postponing actual implementation of the tariffs until an unspecified later date. The Chinese have said they will not act unless and until the United States does. That suggests talks are likely, although it is entirely possible that in the wake of Trump’s new attack, the Chinese will respond, at least initially, by refusing to come to the table. Let’s contemplate what might happen in both scenarios: there is a negotiation or there isn’t.

If there is a negotiation, I think the outcome will depend on what the United States wants. The president, as usual, has focused on the size of the overall deficit with his demand that the Chinese reduce it by $100 billion. That’s not an easy thing to do, but generally when a negotiation is about numbers, resolution is possible. I say 100; you say zero. We can probably find a number, and a time table, somewhere in between. However, if the United States ends up demanding what it says it wants—major reforms in Chinese behavior—then resolution will be much more difficult, because our demands strike at the heart of Chinese economic policy as well as the Communist Party’s ability to control the population. Those are not issues likely to be resolved in a trade negotiation. If you look at what the United States did with the Korea agreement, and if you look at what appears to be the current focus of the North American Free Trade Agreement (NAFTA) talks, you would conclude the president can be bought off with a short-term market access victory that he can go back to his base and brag about. If that is also true with China, the Chinese can probably find a way to accommodate him. That, as Rahm Emmanuel said, would waste a good crisis, but under the circumstances it might be better than a long and unsatisfactory negotiation.

If there is no negotiation because the Chinese refuse, or no successful negotiation for the reasons I just mentioned, then we are faced with a trade war scenario. The president apparently believes that in that case we win. China sells us more than we sell them; therefore, we can do more damage to them than they can do to us. There are so many things wrong with that logic that there is not enough room here to list all of them. To mention a few:

• Since trade is based on global supply chains, “hurting” China inevitably means hurting ourselves as well. The iPhone is the much-researched example of that, where a $500 phone contains less than $10 of Chinese value and more than $300 of U.S. value even though it is considered a Chinese import. Once disrupted, supply chains can eventually be reconstructed but at significant cost and not necessarily a superior outcome.
• Trade wars don’t have to be just about tariffs on goods. China has numerous other ways to make our lives miserable—restricting the activities of U.S. companies in China, blocking U.S. service providers, interrupting supply chains that U.S. companies depend on, and so on.
• Trade wars don’t have to be limited to trade. China could refuse to cooperate with us on geopolitical issues like North Korea; it could unload a substantial portion of the U.S. Treasury notes it holds, sending the dollar down and interest rates up and roiling financial markets. (That would probably hurt them as much as us, and they rarely hurt themselves, but they are presented with an unusual challenge.)
• Trade wars are not only “won” at the dock. They are won in the court of public opinion, where the Chinese already have an edge because they have painted themselves as the injured party adhering to the rules in the face of U.S. economic aggression. Most Americans won’t believe that; but others will.
• They are also won in the minds of investors, who detest uncertainty. From that perspective, Trump has already lost. He has created so much uncertainty that investors and companies are likely to hold on to their money and wait to see what happens, deferring the kind of economic activity that will stimulate more growth.

So, we should not buy the simplistic (and contradictory) notions that there won’t be a war or that victory is inevitable if there is one. It is true the United States also has tools besides tariffs, which means the risk of escalation makes a failed negotiation a very dangerous scenario. Meanwhile, those of us who follow trade closely watch what looks like a fight between third graders at recess and wait for the teacher to step in and break things up—except there is no teacher.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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