US-China Trade: A Pause in Escalations, an Olive Branch from Beijing, and Washington’s Weird Left Turn

By Brady Fox

The world has been on edge since the Trump administration announced in early March that it would be implementing tariffs on steel and aluminum entering the United States. The policy, criticized almost universally, was introduced with Trump’s signature, simple bluster: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”

Alarm bells went off from London to Shanghai. As most know, trade wars are not easy to win. Generally, they end with everybody losing.

A bucket of yelllow soybeans is shown as a truck rolls by Deerfield Farms Service on Thursday, April 5, 2018, at the facility in Volant, Pennsylvania.[Photo: AP/Keith Srakocic]

While Trump expressed willingness to discuss the tariffs on a country-by-country basis and granted blanket exemptions to some trading partners such as Canada, no agreement was reached with China. The tariffs were worth about USD $3 billion to China. And so in response, Beijing retaliated with an equal measure of tariffs against the United States. That was the end of Round 1 between the world’s two heavyweight economies, which combine for roughly 40% of total economic activity on the planet. 

Round 2 saw much more targeted tariffs: Trump introduced the process of bringing in USD $50 billion of tariffs against Chinese tech, transport and medical goods, while Beijing responded by identifying USD $50 billion in US goods such as agricultural products (critical to Trump’s support base) that it could target in retaliation. 

While the US’ steel and aluminum tariffs were general and somewhat aimless, the second round of tariffs clearly targeted China’s burgeoning tech industry. This is likely an attempt to steer Beijing away from its Made in China 2025 economic policy. The Chinese tariffs, in turn, simply target Trump’s base as a message to back down from starting a trade war. 

In Round 3, Trump threatened an additional $100 billion in tariffs on Chinese imports. This time, China seemed to break with the tit-for-tat pattern. No retaliation was announced. Instead, Xi Jinping delivered a reassuring speech on April 9th, promising to continue to open the country’s economy and lower import tariffs on products like cars. While the two economic juggernauts paused to reassess, the rest of the world sighs in relief.

Trump then surprised observers on April 12th by announcing that the United States would reconsider the Trans-Pacific Partnership, an 11-nation agreement that he campaigned heavily against during the 2016 election. He removed the US from negotiations on the third day of his presidency. After the fallout from his push for protectionism, it appears Trump may have warmed to one of his largest economic bogeymen – the multilateral deal.

The TPP is significant in the context of US-China trade because it partially designed to act as a source of economic leverage for member states when negotiating with China. The question, then, is whether Trump is suddenly talking TPP as an alternative or in addition to tariffs. The timing indicates it may be an alternative to escalating toward a trade war, which almost no state wants. It is certainly a welcome development for prospective TPP member countries, all of which are massive trade partners of both the US and China.

For China, the threat of new tariffs is clearly not an economic policy but a negotiating shield. It is direct rebuke to Trump’s combative approach to bilateral trade – a threat not to go down that road. Coupled with Xi’s reassurances, the Chinese commitment to promoting free trade is clear. China is still an economy in transition and still has plenty of progress to make on subsidies and tariffs in certain departments; pressure from other states and multilateral organizations to uphold those commitments is normal, so long as it occurs through predictable and productive channels.

And so Beijing too, despite reservations, may be slightly pleased to see the US return to discussing the TPP. While Chinese policymakers generally view the agreement as exclusionary and perhaps even threatening, it is within international norms. It is transparent, predictable, and manageable. For top thinkers in Beijing, this is at least the devil they know. 

Indeed, the threat of a trade war between China and the United States highlights the difficulty of communicating with Washington under the Trump administration. For decades, the Chinese government has been meticulous about cultivating official and non-official communication channels with economic leaders in the United States, but most of those have now been shut-out of Trump’s inner circle. Even Jared Kushner, the Trump confidant with which China was closest, has recently been sidelined. The public nature of the confrontation over tariffs speaks to a breakdown in private communication, which is worrisome.

Unpredictability is the greatest foe of a prosperous world order. Norms allow countries to operate with certainty and thus enable cooperation and healthy competition. For the US-China relationship, working to maintain communication, reliability, and norms-based action is essential to world prosperity. The erratic economic policies of the Trump administration have brought those principles under assault. 

Indeed, it is truly a bizarre day when Washington returning to the TPP might be the best news Beijing has heard all month.

(Brady Fox is a Canadian expert on Asia Pacific affairs.)