Trump Just Got Played by China

“Look Around the Poker Table; If You Can’t See the Sucker, You’re It”

In the year and a half that Donald Trump has served as President, one of his favorite punching bags (save for Robert Mueller’s investigation) has been US trade relations with China. Almost all of us have seen his tweets criticizing previous administrations for being “dumb” “stupid” and “weak” in their negotiating tactics. Additionally, we have also all heard his promises to use his self-proclaimed superior negotiating skills to strike a better deal for the American people. And while President Trump has had an easy time talking up his ability to negotiate, he has had a much tougher time actually negotiating. As it turns out, trade deals are immensely complex, and even the most ardent Trump supporter must agree that the president doesn’t spend much time learning the details of such matters. This dynamic has resulted in the United States getting absolutely outclassed and outmaneuvered in Chinese trade negotiations, and the purpose of this article will be to detail how.

Let’s Run it Back to April 5

Just last month, Donald Trump threatened to levy roughly $100b of tariffs against China if they did not alter their trade practices. The intended result of this maneuver was to force China to offer large concessions in the forthcoming trade negotiations or risk economic hardship. Robert Lighthizer, Trump’s Trade Representative, helped do exactly this to Japan in the 1980s and had limited success. However, this 1980’s style maneuver is ineffective in the 21st century for two main reasons:

  • The world was not globalized in the 80’s, but we are now.
    1. In the 1980s, most manufacturing companies did business domestically, limiting their exposure to turbulence in the international arena. Today, however, most companies rely on international supply chains to produce goods. So, when the US levies tariffs on China, they more than likely have an equal impact on US firms; this is what is known as a “boomerang effect”. 
  • Japan has a much different relationship with the US than China does
    1. At the end of World War II, Japan was forced to scale back their military spending and give up all offensive military capabilities. As part of the agreement, the United States offered to protect Japan from foreign adversaries. To this day, Japan is largely dependent on the United States for their protection and is, therefore, more willing to make economic concessions in order to maintain their own national security.
    2. China, however, is obviously different. China does not depend on the US for security and is actually actively challenging the US military in the South and  East China Sea. China really has no need to make economic concessions to the United States, and as we will soon see, they haven’t.

Unresolved Issues

Again, international trade, especially with China, is incredibly complicated. As such, there are a number of longstanding unresolved issues that a competent negotiating team would have sought to make headway on in these talks. Trump’s negotiations however, have been filled with bluster and devoid of progress.

Intellectual Property Theft

It is a well-known fact that China has long engaged in IP theft of American companies, costing the US an estimated $600b per year according to the Trump administration. Trump previously derided the Obama administration for not resolving the issue, so surely, he would at least try, right?

Wrong.

This proposed trade deal does not mention “Intellectual Property protections” one single time.

State Owned Enterprises

One of the reasons why China is able to produce goods so cheaply is because most of their large companies are financially backed, and partially owned by the government. This allows the Chinese government to heavily subsidize these companies, allowing them to sell goods for much cheaper than they’d be able to otherwise. Again, this has been a longstanding point of contention between China and its trading partners.

Before talks began, Trump demanded China curtail this practice of unfairly favoring Chinese national companies, but in keeping with the “all-bluster-no-progress” mantra, Trump scrapped that demand because it was “too hard” to negotiate.

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The Uneven Playing Field

While Chinese companies are generally given a great deal of freedom to operate in the United States, US companies in China must navigate a labyrinth of regulation that is intended to limit their ability to compete with the aforementioned State Owned Enterprises. Many policy analysts have advocated for responding in kind with Chinese companies operating in the United States by subjecting them to similar regulation. In all honesty, doesn’t this sound like something a tough negotiator would do?

Unfortunately, Donald Trump doesn’t think so, and so there is no specific mention of China’s unfair policies toward foreign companies or any specific mention of how the US will address them.

What Concessions did China Make?

The lone concessions made by China, being touted by Trump in a series of tweets, are that China has agreed to purchase more agricultural and energy products from the United States, as well as vaguely promising to reduce the deficit. By how much do they intend to reduce the deficit? Nobody has any idea, that small detail wasn’t actually negotiated, all they did was include language. As for the agreement regarding agriculture and energy, this was a brilliant move by the Chinese: take something you were already planning on doing, and then acting as if you’re making a trade concession.

China’s economy has risen meteorically in the last 25 years, and as economies expand, so too does demand for agriculture and energy. Food and fuel: literally the two things that any expanding society always needs more of. In exchange for these phantom concessions, China will be able to continue their trade practices as is. That means they will be able to treat US companies in China unfairly, that means they will be able to continue subsidizing their SOEs, and it means that they will be able to steal US intellectual property without fear of repercussion.

Conclusion

The poor outcomes of this trade negotiation should surprise nobody. Trump is much more eager to make big announcements and break news than he is to understand policy. As such, foreign governments seek to capitalize this by offering him opportunities to make headlines in exchange for a significant advantage in the substantive details of their agreements with the US. Even aside from China, Trump’s trade policies have been immensely ineffective and have showcased his ignorance of trade practices more than anything. Don’t believe me? Read this story about Angela Merkel having to explain to Trump that Germany, as a part of the European Union, could not enter into a bilateral trade agreement with the US 11 times in one meeting.

We can also look at NAFTA negotiations, which have made virtually no progress in the last 18 months. In fact, the US has actually weakened its negotiating position, as Mexico and Canada have just decided to begin trading more with other countries in a successful effort to diminish US leverage.

In the end, we are seeing the results of a president who favors public perception of accomplishment over actual accomplishment; it is difficult to accomplish things on the international stage, but it is easy to tweet. The Chinese understand this well, and they used this knowledge to absolutely play President Trump.

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