Trade war being waged inside the White House

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The United States and China have put a looming trade war between the world’s two biggest economies “on hold.” US President Donald Trump’s trade team has declared a temporary truce in response to China’s commitment to significantly increase imports from the US. Despite the many analyses being thrown around about who gets to gain what at whose expense with the trade talks, there is one thing we know for certain: the real trade war is happening inside the White House.  

As reported by several news outlets, hours after US Treasury Secretary Steven Mnuchin said to Fox News on Sunday that the US was suspending the proposed tariffs on Chinese imports and “putting the trade war on hold,” US Trade Representative Robert Lighthizer released a statement, saying that while China reducing trade barriers and buying more American goods is a good thing, Beijing needs to make “real structural change” to its economic model and that tariffs are still on the table.       

“Getting China to open its market to more US exports is significant, but the far more important issues revolve around forced technology transfers, cyber theft and the protection of our innovation,” Lighthizer said.

This spat over conflicting views on US trade policy toward China follows the recent exchange of harsh rhetoric between Mnuchin and Trump’s trade adviser, Peter Navarro, during their visit to Beijing earlier this month. Axios reported that Navarro cursed at Mnuchin for marginalizing him during the trip and, more broadly, for not getting on the same page policywise.

Beijing seemed too happy to exploit the internal division among Trump’s trade advisers

And Beijing seemed too happy to exploit the internal division among Trump’s trade advisers. Soon after Larry Kudlow, the director of the U.S national economic council, said on Friday that the Chinese trade delegation visiting Washington has offered at least a $200 billion reduction in trade surplus, the Chinese foreign ministry rebuffed his statement, saying that such “rumor is not true.” The government-run Xinhua News Agency took a firmer stand, saying the Chinese government has always “fought back” and “never compromised” on unreasonable American demands. Kudlow later denied reaching a deal with China, saying that $200 billion is just a “rough ballpark estimate.”

The joint statement released by the White House on Saturday after the trade talks also made no mention of the $200 billion target.

As a matter of fact, the statement was couched in vague platitudes such as the two countries reached a consensus to “substantially reduce”  the bilateral trade surplus and that they “discussed expanding trade in manufactured goods and services.” A far cry from a resolution to the ongoing trade dispute, the statement lacked any mention of protecting American intellectual property (IP) and enforcing reciprocal investment rights obligations – issues that formed the very basis of Trump’s Section 301 investigation.

Probably the most tangible concession that China has made based on the statement, if at all, seemed to be its commitment to buy more American agricultural and energy products to reduce the trade deficit.    

But even with the Chinese commitment to removing import barriers for these two sectors, it remains unclear whether American exporters themselves will have the capacity to absorb and process the change. For example, the Wall Street Journal reported that even if China increases quotas and reduces duties for American corn, US corn industries may face a feasibility challenge as the annual export value may jump from $150 million to nearly $10 billion within a few years.

Similarly, volume growth and higher oil prices are unlikely to offset the trade deficit simply because China agrees to boost American energy imports. Regardless of what the US demands, China will still have to import more of these commodities to satisfy its vast energy needs. Since 2017, it has had the distinction of being the world’s largest net oil importer and is on track to become the largest LNG importer in the next decade as well.   

Reuters reported that based on January’s data of US crude and liquified natural gas (LNG) sales to China – valued at $1 billion and $300 million, respectively – the exports would only be worth around $10 billion this year, a figure that comes nowhere near the $200 billion reduction target. Already, China’s trade surplus with the US. increased to $22.19 billion in April from $15.43 billion in March. So even if Trump manages to convince Beijing to meet his agricultural and energy targets, the deficit is still likely to expand as Chinese imports will continue to rise.

In this respect, the joint statement fails to address the structural causes of the bilateral trade deficit. Without addressing fundamental factors like domestic fiscal policies and China’s changing trade practices – such as forcing foreign companies to share their technology and achieving self-sufficiency in critical sectors through its Made in China 2025 plan – the US-China trade imbalance will continue to widen despite China importing more American goods and services.  

If anything, the statement resembles a compromise hashed out amongst Trump’s trade advisers to put forward their competing views than it does a resolution to the trade dispute; Mnuchin and Kudlow may have more than likely crafted the paragraph on deficit reduction, and China hawks Lighthizer and Navarro on IP protection and two-way investment.

Adding to the disarray is Trump himself. His 180-degree about-face on China’s ZTE severely undermined the legal justification for banning American sales to the Chinese phone company: to protect US national security. Meanwhile, Trump’s trade advisers sought to downplay his comment on exempting ZTE from penalties in return for trade concessions, saying that any decision reached around ZTE will not be tied to broader trade talks.

But Trump’s undercutting diplomacy was on display again on Wednesday. After his pro-free trade advisers touted the two-day talks as a positive, Trump took to Twitter to say that a US-China trade deal “will be too hard to get done,” and that it may possibly need a “different structure.”   

Trump has now cancelled his summit with North Korean leader Kim Jong-un, thereby giving more credence that US-China trade negotiations are directly tied to North Korea; China’s vague commitment to buy more American goods and reign in North Korea apparently wasn’t good enough for Trump.

If he has now concluded that China is more of a problem than a solution, Trump will move into the Lighthizer and Navarro camp and follow through with his tariff threats. If that happens, the trade war that so far has been confined to the White House may very well seep through its walls and over the country’s borders.

 

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