Trade wars can be lost. Guess by whom?

Guess what? Trade wars are not “easy to win”. They even might be lost. Donald Trump is beginning to have a sinking feeling about this possibility after a bad week. There has been, first, the announcement of new tariffs of $75 billion by Beijing on American imports. This was in retaliation to Mr Trump’s announcement of 10 per cent tariffs on the remaining $300 billion Chinese-made consumer goods not yet hit by tariffs on September 1 and December 15.

The move by the Chinese leadership is quite worrisome for the White House: It shows, first, that Xi Jinping is not ready to bend to US pressures. Second, and more importantly, he is playing Trump at his own game and turning the tables on him: The US President is shaping his re-election campaign around the theme that he is the leader making America great again and that he is the one who is — at long last — dealing successfully with the China challenge. However, the moves taken by Beijing are aimed at having a cumulative impact: On the one hand, hitting hard at core support constituencies of the President — hence the new tariffs on agricultural and farm products and the reinstatement of tariffs on cars and auto parts; on the other hand, increasing concerns about a trade-induced recession. The sharp fall of the markets after the announcement of the Chinese tariffs showed that Beijing is doing a good job in that domain.

Then the G7 was another illustration of how much the Trump administration is isolated in its trade war against China. Even Boris Johnson, the UK Prime Minister, preferred ally of Mr Trump, was compelled to state his opposition to trade wars. Of course, the American President enjoys on many occasions showing that he does not care being isolated. But in the present context this isolation can only weaken Washington’s hand towards Beijing.

Last but not least was the succession of news showing that Trump can use all the superlatives he wants about the state of the American economy, but this does not prevent the slowdown of activity and the prospects of a recession in 2020 becoming increasingly evident. And this might be what could sink the President’s re-election hopes. Media reports and leaks from the White House have been mentioning that people close to Mr Trump are increasingly concerned that the continuation of the trade war and its increasing impact on investment and economic activity could at some stage create irreparable damage to the President. His erratic behaviour, such as the repeated offer to buy Greenland, or his Twitter “ordering” (sic)“Our great American companies to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA”, is setting new heights in the kind of volatility and impulsiveness that has been a hallmark of this presidency.

The increasing concern about an economic evolution that could ruin his hopes of winning a new mandate in November 2020 has made Trump mention the possibility of new tax cuts to stimulate activity — at a time when the federal deficit is skyrocketing — and unleash the most virulent attacks against Jay Powell, the Chairman of the Federal Reserve, accused of being “a bigger enemy than China”. Which will remain as a unique episode in the history of the relationship between the White House (or any administration) and the Federal Reserve. 

However, to the President’s chagrin, Mr Powell has been undeterred by this kind of attacks. He, like other governors of the Federal Reserve and most of the central bankers, continues to point out that the uncertainties generated by the White House trade policy — not only against China but also against Mexico or EU countries — are a major reason for the weakening of the world economy. And Mr Powell made it very clear that it was not the job of central banks to run trade policy, and that monetary policy was of limited usefulness for countering the negative impact of trade wars.

Donald Trump tried to cheer up the markets by declaring at the end of the G7 that China wanted to resume the trade negotiations. But Beijing has been completely silent about such a thing. And when the White House tried to use a statement by Vice Premier Liu He that “China is willing to resolve issues through consultation and cooperation (…) while resolutely opposing the escalation of the trade war” to support its assertion, experts were quick to point out that this is the kind of standard statement emanating from Beijing from the beginning. 

To make matters worse some people around Trump are seemingly operating under two wrong assumptions: They think they can use the troubles in Hong Kong to pressure Xi Jinping in the trade negotiations. In reality, it is exactly the opposite as events there convince the leadership that it has to stand firm against foreign pressures when its existential interests are at stake. The same people also consider that the approach of October 1, 2019, the 70th anniversary of the foundation of the People’s Republic of China, might prompt Beijing to be more flexible to clear the trade conflict before the big event. This is again wishful thinking: It is not at the moment that Xi Jinping wants to celebrate the great rejuvenation of China under his leadership, and the restoration of its status “close to the centre of the global stage” that he can afford to look like he is bowing to the pressure of countries seen as trying to contain China’s rise.

Yes, trade wars are not so easy to win and might even be lost. 
 

The writer is President of Smadja & Smadja, a Strategic Advisory Firm; @ClaudeSmadja