Donald Trump is losing leverage in trade negotiations with China.
When Vice Premier Liu He travels to Washington this week, the deal he’s prepared to negotiate does not include changes to Beijing’s industrial policies. Government subsidy reform, long a talking point for US negotiators, is now off the table.
That’s according to what senior Chinese officials have discussed with US visitors to Beijing over the past several weeks, as communicated to Bloomberg by sources familiar with those discussions.
When Trump abruptly escalated the trade conflict on August 1, barely a month after agreeing to a ceasefire with President Xi at the G20 in Osaka, many worried the US president had finally overplayed his hand.
Subsequent threats to force US companies to relocate out of China and, more recently, news that the administration is pondering a menu of options for restricting capital flows, underscore the extent to which Trump is prepared to consider draconian measures if it means compelling Beijing to surrender.
And yet, with each passing month, the cracks in the US economy seem to get a bit wider. The worst ISM manufacturing print in a decade was perhaps the biggest blow yet to Trump’s economic narrative. The more fragile the US economy looks, the less leverage the administration has in the trade talks, especially headed into an election year.
Now, with the impeachment inquiry moving ahead at warp speed, Beijing may be smelling blood.
China’s decision to take government subsidy reform off the table is “emblematic of what analysts see as China’s strengthening hand as the Trump administration faces an impeachment crisis and a slowing economy blamed by businesses on the disruption caused by the president’s trade wars”, Bloomberg writes, adding that Trump’s ill-advised decision to publicly call on Xi to investigate Joe Biden “suggests why Chinese leaders, already frustrated with what they see as the president’s impetuous conduct in the trade talks, may see room to take advantage”.
Last month, Trump openly contradicted an official statement from his own administration which sought to play down reports that an “interim” deal may be in the works. Hours after the White House issued an unequivocal denial in response to Bloomberg’s original reporting on the prospects for a limited agreement, Trump told the media he would, in fact, consider such a deal, although he preferred a comprehensive agreement.
Then, about a week later, Trump appeared to change his mind, indicating during a joint press conference with Australia’s Scott Morrison that he wasn’t interested in anything short of a “real” deal. “Right now, we’re in a very important stage in terms of possibly making a deal”, Trump said late last week, adding that “if the deal is not going to be 100% for us, then we’re not going to make it”.
He may have little choice in the matter. By almost all accounts, there has been little to no progress on resolving the key sticking points that derailed talks in late April. Rather, recent efforts have centered around getting back to where things were prior to May 5, when Trump shattered months of calm with one Sunday evening tweet.
“While [Lighthizer is] unlikely to accept any Chinese offer that doesn’t address industrial subsidies or policy, people close to him say he may be willing to embrace ‘sequencing’ a deal and an ‘early-harvest’ agreement as long as broader talks continue”, Bloomberg goes on to write. Lighthizer himself had no comment for the story.
The Trump administration is still clinging to the narrative that China is “paying” for the tariffs in a roundabout way through currency devaluation and liquidity injections. That line is becoming tougher to sell domestically, primarily because it was never true in the first place, but also because the trade war, now in its second year, hasn’t yielded much in the way of real results.
America’s farmers have lost access to their most important export market and have been forced to take government handouts. The US manufacturing sector, far from being made “great again”, is now in a slump, along with factories across the globe. And the domestic economy is likely growing at just over half the 3% pace Trump promised.
“Although picking up slightly, the overall rate of growth in September remained among the weakest since 2016, commensurate with GDP rising in the third quarter at a subdued annualized rate of approximately 1.5%”, Chris Williamson, Chief Business Economist at IHS Markit, said late last month.
Of course, things aren’t going great for China either, but there’s a sense in which policymakers in Beijing have now grown accustomed to the trade tensions and have almost surely crafted a long list of contingency plans covering every conceivable escalation scenario.
Xi has repeatedly parroted some version of a speech that implores citizens and Party officials to prepare for “challenges” and steel themselves for what may potentially be a protracted conflict. America, on the other hand, hasn’t won a war of attrition since the Revolution.
Unlike Xi, Trump cannot rely on a captive central bank, and cannot roll out fiscal stimulus at will. Further, Trump does not enjoy the same control over the currency and capital markets as his Chinese counterpart. Importantly, there is little evidence to suggest that Beijing’s efforts to internationalize the yuan would be materially undermined if Trump effectively forced China to temporarily intervene in the interest of, for instance, keeping domestic equities afloat, propping up industries or stanching capital outflows. After all, Trump’s aggressive trade stance and generalized bullying is a global problem, meaning China can probably expect the international community to be at least a little bit sympathetic if Beijing ends up pulling out the 2015 playbook in a pinch.
In addition to all of that, China now knows that Trump is facing an existential threat to his presidency at home.
Little wonder, then, that the Chinese are “narrowing” the scope of the trade talks.
Finally, we’d be remiss not to note that Trump should avoid engaging in any kind of discussions with Xi or high-level Chinese diplomats involving matters not directly related to trade.
If the Chinese wanted to rid themselves of this “pompous” nuisance for good, all it would take is baiting him into saying something incriminating on a call and then making sure the details get leaked either to the US press or, worse, to somebody on Capitol Hill.