Trump blinked on trade with China — and it was the right thing to do. Just ask the markets.
Not long after claiming victory in the midterm elections in which his party lost at least 39 House seats, President Trump kept up his winning streak this past weekend, this time on the world stage.
At the Group of 20 summit in Buenos Aires, he called a temporary truce with President Xi Jinping of China in the nearly yearlong trade dispute between the two countries. The United States will continue to impose a 10 percent tariff on up to $250 billion of Chinese goods but will hold fire on threats to boost that duty to 25 percent in January. China, which has countered with $110 billion in tariffs on American goods, will reportedly lower some tariffs on American-made autos and resume buying soybeans and other agricultural commodities that had been priced out of the market by the countervailing duties.
“It’s an incredible deal,” the president claimed, and yet it is not, in fact, even a deal. The two countries have given themselves 90 days to find a framework from which to construct a new trade agreement — something they haven’t been able to do over the past two years. Nor has China given an indication that it will make any big concessions in 2019.
….I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN
— Donald J. Trump (@realDonaldTrump) December 4, 2018
Mr. Trump has famously boasted that trade wars are “easy to win,” but he is currently 0-for-2 on that count. Yes, the so-called U.S.M.C.A. treaty has been signed by the United States, Mexico and Canada, but after all the bombast about tearing up Nafta and the insults delivered to America’s allies, Naft2, as it should be called, is a conventional, incremental result that isn’t markedly different from the original. “The economic implications are little to none,” noted UBS Wealth Management’s chief economist, Paul Donovan. And there’s no guarantee that Congress will approve Naft2 or that Mexico’s new president will abide by it.
Trade wars tend to be easier to prolong than they are to win or even end. And the current one is hurting both the United States and China, as well as rattling around like a loose part in the global economic machine. Both nations are heading for economic slowdowns. Growth in the United States will fall to 2.1 percent in 2019 from 2.9 percent this year, according to the bank BNP Paribas. The United States is slowing because the stimulus from last year’s tax cuts won’t be around this January to juice the stock market or consumer spending. China’s economy is cycling down just as its export machine is facing lower aggregate demand, a combination that could trim growth to 6.2 percent from 6.6 percent, Paribas says. That’s still fairly muscular compared with the rest of the world, but Mr. Xi doesn’t want China’s economic miracle to sputter under his watch.
Whatever the rationale for imposing them, tariffs are taxes, and consumers were facing a big hike in the Trump tax in January. Meanwhile, the president has little to show for his trade war. He has been obsessed with reducing the trade deficit, which stood at $566 billion last year. Yet the trade deficit is rising, not falling, because Americans like buying inexpensive goods from foreign nations (like, say, China). And the dollar has strengthened, which generally makes imports cheaper. Nor have jobs come flooding back to the United States. Instead, tariffs prompted some American companies to shift their sourcing of goods from China to other parts of Asia. Those goods will still be imported. At the same time, for companies such as General Motors and Caterpillar that rely on Chinese parts or metals, tariffs have added hundreds of millions of dollars of costs. That’s one of several reasons GM is cutting jobs at some assembly plants in the Midwest. The agriculture sector, which counts China as a major customer, has been hard hit by the loss in exports.
The uncertainty created by Mr. Trump’s threats of a trade war escalation has been even more damaging. Businesses and investors can’t abide uncertainty, and that contributed to Wall Street’s November swoon, which wiped out all of the year’s gains at one point. They wanted the saber rattling to stop; when the truce was announced, the market rallied.
China knows that if it seeks to be a dominant economic power — and it does — it will have to be better at the “partner” part of trade partner. And to some degree, it is doing that. In the months before the G-20 summit, China was already lowering some trade barriers and opening some of its closed industries. Earlier this year, Chinese premier Li Keqiang promised to “further widen market access, raise policy transparency and exercise fair and impartial regulation.” Mr. Li has also committed to improving China’s protection of intellectual property. He has to, because China needs access to high-technology industries. As Mr. Li remarked, two-thirds of that nation’s high-tech exports come from foreign-invested enterprises. And those enterprises are needed to find jobs for the eight million college graduates China produces annually.
But truce or not, the two sides remain far apart on how to address these substantive issues. For the moment, Mr. Trump has blinked and is listening to his moderate advisers such as Steven Mnuchin, the Treasury secretary. Mr. Mnuchin has the backing of most American businesses that operate in China — they would prefer a gradualist approach as long as China becomes a better trade actor. But Mr. Trump had barely touched down in Washington when he named the United States trade representative, Robert Lighthizer, to lead the truce talks. Mr. Lighthizer is one of the hard-liners on tariffs, along with Peter Navarro, director of the White House trade office, and National Security Adviser John Bolton.
But Mr. Trump has also taken trade hostage, and we’re all prisoners alongside it. He reasons that because Americans buy more stuff from our trading partners than those countries buy from us, he has the stronger hand. But as he found out with Mexico, Canada and now China, trade is more than the sum of goods and services exchanged between nations.
Instead, the clock is now ticking on the 90-day truce. That still leaves the tariffs in place, even as costs to the economy are rising and the benefits become less clear.