What’s Next In The China Trade War – Lipstick On Pork Exports?


One month ago, President Donald Trump announced that U.S. and Chinese negotiators had reached a “substantial Phase One deal.” They just had not managed to write down the details yet.

In the month since, there has often appeared to be a three-way battle raging to define the substance of that deal. There were the Chinese, of course, who said there was agreement that the deal would involve tariff cuts. There were the market-oriented Trump officials, such as Larry Kudlow, who confirmed a deal would include tariff cuts. And there were the Trump administration China hawks, such as Peter Navarro, who denied there was any agreement to reduce tariffs.

Then, Tuesday, there was President Trump declaring in a New York speech that “If we don’t make a deal, we’re going to substantially raise those tariffs.” The deal in question, of course, being the Phase One agreement he had announced a month before.

The problem facing the President is two-fold. First, the U.S. domestic costs of the tariffs are mounting and may pose a threat to his reelection. While President Trump has repeatedly argued that tariffs are good for the U.S. economy, he cannot have failed to notice that financial market participants seem to believe otherwise.

Second, the President’s negotiating approach has led Chinese leaders to believe that, even if they were to make significant concessions, they could not sate U.S. demands and would not win lasting trade peace. This dynamic has precluded the sort of deep Chinese reform that motivated the trade war in the first place. It means there will not be a Phase Two or a Phase Three trade deal with China, at least not in the remainder of President Trump’s first term; those are just marketing concepts to make a limited agreement more palatable to a U.S. audience. Chinese offers are now mostly limited to things they want to do anyway, like buying pork, or unwinding tariff hikes that they never wanted in the first place.

So where does the trade war go from here?

Maintaining the status quo was already a difficult option, since President Trump had scheduled a set of tariffs due to come on December 15. It got even harder to sustain with President Trump’s renewed vow to raise tariffs this week.

President Trump’s choice thus boils down to two possible outcomes:

1)  A shallow “Phase One” deal. This would likely involve a rollback of some existing tariffs, Chinese promises of renewed purchases of agricultural and other goods, and perhaps Chinese pledges to make sincere efforts to protect intellectual property rights.

2)  An escalation of the trade war. At a minimum, the December 15 tariffs would be applied. At that point, U.S. tariffs would cover almost all imports from China. Without room for new product coverage, the only remaining option would be raising tariff levels. At a minimum, President Trump would likely reinstate the escalation of tariffs on other goods that had been planned for mid-October.

The second option would seem highly problematic for the Trump administration. American farmers have already been promised relief. Financial markets have been promised a resolution. The failure to reach a deal would portend a prolonged period of continued economic pain. That could undercut the President’s claims of both economic success and negotiating prowess.

But the first option comes with its own pitfalls. While market participants and farmers would likely welcome the reprieve, the President would be excoriated for having needlessly inflicted trade war pain with nothing to show. After all, farm state supporters were willing to endure the costs of lost markets because they believed President Trump was ‘fixing’ the China problem. What if the whole exercise turns out to have been for naught?

The Chinese have clearly calculated that the President’s premature declaration of a deal a month ago revealed his strong desire for something to sign. So, perceiving their increased leverage, they upped their demands to include tariff rollbacks, not just holding off on announced increases.

President Trump’s New York speech Tuesday was an attempt to regain leverage. The President explained to the Chinese how desperate they were for a deal and threatened them with new tariffs if they did not relent. These same tactics have proven ineffective for the last year and a half, but the President evidently thought they were worth another try.

Assuming the Chinese remain true to form and fail to accommodate, this will leave the President to choose between declaring victory with a distinctly limited “Phase One” deal – putting lipstick on pork exports, as it were – or doubling down on his trade war and accepting the consequences.

I am Chief Economist for Flexport. I previously served as Senior Economist for Trade for President George W. Bush’s Council of Economic Advisers and handled internationa...