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CSIS Commentary
China Again, and Again, and Again
Special Contribution
By William Alan Reinsch
Xi Jinping with Donald Trump

Once again it is impossible not to write about China. The president has a gift for focusing everyone's attention on his priority of the moment and ruining everyone's weekend in the process. Today, however, I want to comment as much on the politics of the issue as the economics.

The events of the past week and a half, where we managed to go from an agreement that was nearly finished to one that had fallen apart to one that was still hanging in there by its fingertips roiled the markets, distressed retailers and manufacturers, and left all of us confused. Looking at the way it played out, I draw several conclusions.

First, it is apparent that we were not as close to a finished agreement as the president was tweeting. It seems that while the so-called structural items were not entirely resolved, neither was the package of Chinese purchases fully nailed down nor the agreement on what would happen to the existing tariffs. This was not news to close observers. The U.S. Trade Representative (USTR) had been telling people for some time not to assume an agreement was imminent, but the president kept tweeting away anyway.

Second, for once the president's cranky tweet was not entirely gratuitous. The Chinese clearly signaled their intent to pull back from commitments we thought were settled. There has been a good bit of speculation about why they did that, but the opacity of the Chinese system makes it very difficult to say with certainty what happened.

Third, one clear consequence is that the two presidents have effectively declared themselves the chief negotiators. Trump has been overruling his various representatives for some time, and it looks like Xi Jinping did the same to Liu He. The result is that both negotiators know they do not have full authority, and anything they agree to risks being countermanded.

Fourth, that means reaching an agreement can only be done at the top. If you're going to act as the negotiator, then eventually you actually have to negotiate. This is also one of those cases where each president thinks he can get the better of the other. Xi probably thinks, correctly, that he will know the details better than Trump and can outwit him. Trump thinks, less correctly, that he is a better negotiator and can intimidate Xi. Not a recipe for a successful outcome, but the two presidents have, by their own actions, made a meeting inevitable.

Fifth, now that the increased tariffs have actually been imposed, I suspect they may be with us for some time. Trump cannot remove them without progress in the talks, and it is not apparent at this point that that is imminent. That means that the short-term pain the administration has acknowledged is not going to be so short, and the long-term gain is farther away than ever.

In terms of politics, the president has painted himself into a corner. The path to political success is a narrow one. He has to produce a good agreement—which he has defined as addressing the structural issues as well as reducing the bilateral trade deficit—and the Chinese have to honor it.

Any agreement will produce a short-term market bump, but the important question is where we will be a year from now when it will be clear whether the agreement has loopholes and whether the Chinese have complied with it.

The odds of the agreement being the brilliant success the president will proclaim are long because, as I have argued previously, the Chinese are not going to make concessions that require fundamental changes in their economy or weaken its ruling Communist Party's control.

In the short term, it is beginning to look like there are two possible outcomes. The president can sign a weak agreement that gives him less than he wants, or he can walk away and maintain or increase the tariffs. This is a potential bonanza for the Democrats. If there is a weak agreement, they will attack the president for being soft on China and a poor negotiator.

If there is no agreement, they will label him a failure who has produced significant economic pain only to achieve nothing. It is no doubt tempting for Democrats to chuckle about the political potential, but there is nothing funny about the economic damage the president's policies are causing Americans.

That has been well documented for our farmers, but we are now starting to see manufacturers dependent on Chinese parts and components moving offshore to avoid the tariffs—exactly the opposite of what the president intended.

Right now, we appear to be in a slow-motion train wreck, with both sides sticking to their positions—on the Chinese side to avoid loss of face and loss of control and on the U.S. side to prevent the political consequences of failure. As is often the case, however, the losers will not be the negotiators or the presidents, but the people.

The above writer, 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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