While some progress remains possible in coming quarters, Washington Policy Analyst Ed Mills doesn't foresee a broad resolution being reached in advance of the 2020 election.
This summer saw a new chapter develop in the trade fight between the U.S. and China, with rapid escalation in a period of just a few months. This opens the door to tariffs on virtually all Chinese goods and increasingly threatens a significant commercial decoupling between the world’s largest economies.
The driving forces of the latest period of elevated hostility are threefold:
- President Trump’s frustration with China’s lack of follow through on what he sees as key commitments.
- The trade conflict taking on additional elements of a battle for primacy in global affairs.
- Trade issues taking on greater political significance as the 2020 presidential election season intensifies.
Fears over a protracted trade war have been mitigated by the belief that Trump’s style as a “winner” will resurface closer to Election Day and make a comprehensive trade deal likely. However, we view the role of the “fighter” as more consistent with Trump’s personal brand, raising the likelihood that any resolution to the trade dispute will not materialize until after the 2020 election.
Taste of the same medicine
The post-June G20 stalemate illustrates the difficulty in de-escalating the current conflict. Large-scale agricultural purchases and an easing of the U.S. export restrictions targeting Huawei were the key short-term bargaining chips. Ultimately, neither materialized, and President Trump’s frustration at the slow pace of progress led to a new round of tariffs on an additional $300 billion of Chinese imports. Further, President Trump has called on China to make progress to stem the flow of fentanyl into the U.S. for well over a year, and the lack of follow-through has seemingly contributed to the eroded trust between the two sides.
Trump clearly views China as responsible for the continued endangerment of the U.S. population via a modern day “Opium War,” not unlike the Opium Wars of the 19th century (when western powers illegally smuggled opium into China). This reinforces the belief among the more hawkish White House advisors that the U.S. and China are fighting a much broader battle. This view can be seen in the rhetoric the administration associates with China, which is slowly undergoing a shift from a “strategic competitor” label to “foreign adversary.” If this trend continues, the case for a national emergency declaration under the International Emergency Economic Powers Act (IEEPA) to exert greater control over commercial ties with China may see increased political support.
The great wall to negotiation
The erosion of goodwill between the two sides can also be seen in unfolding geopolitical events. An ever-present barrier for China’s leaders in trade talks has been what they see as an encroachment on China’s sovereignty by the U.S. given the specific changes to China’s economic and legal system sought by the Trump administration. The sovereignty sensitivity has flared up with the latest protest movement in Hong Kong, which China’s leaders have vocally blamed the U.S. for inciting. The question of Taiwan’s independence is also a source of friction and may become a more significant issue in late 2019/early 2020. The U.S. has recently approved significant arms sales to Taiwan, and a looming January 2020 election, which is likely to pit pro- and anti-China parties against each other, appears ready to further inflame U.S.-China political tensions in the global arena.
The tension continues
These issues will be difficult to fully resolve to the liking of President Trump or China’s leaders in the next year, especially in the heat of a presidential campaign during which Trump’s policies will see intense scrutiny from political opponents. China trade issues have emerged as a central topic at the Democratic debates and are due to see greater prominence on the campaign trail going forward in agricultural/manufacturing states specifically impacted by the trade fight.
Some progress remains possible over the next year – particularly on more clear-cut issues of fentanyl flows or agricultural purchases. However, we believe a broad-scale deal will continue to be elusive until after the election given the complicating factors. If Trump is given the choice between a weak deal or showing voters in key swing states that he is a fighter, we expect him to decide to play the role of the fighter through the 2020 election.