Trade Talks With China Are A Game Of Chicken Right Now, With The Outcome Either A Settlement Or A Siege

“They broke the deal” Trump tells rally crowd tonight in Florida

“We don’t have to do business with them”, Trump asserts.

And he goes on to say that:

“We can make the product right here, if we have to. Like we used to. Like we used to.

Here’s the clip (click on the photo to watch):

We do have to admire the consistency in Trump’s vision of transforming the U.S. into a manufacturing utopia, proudly standing on its own. But deep down even he’s got to know the world’s much more interconnected than that, has been for years. And there aren’t U.S. factories up and running that can immediately make the same goods that are currently coming from China. (And in many cases those goods are needed in order for the factories that are flourishing in the U.S. right now to function). So “make the product right here” is a noble objective, yes. But can’t happen by Friday, when Trump’s scheduled to put on the new, vastly higher tariffs. Or next month. Or before those tariffs wreak havoc.

The White House says a deal was close, then China tried to back out of parts meant to ensure they stick to it by imposing harsh penalties if they don’t. (This has been the biggest issue all along, because China’s made a lot of promises in the past on goods and intellectual property, and then hasn’t stuck to them.)

And that last-minute switcheroo may be a sign China feels it’s less imperative now to make a deal than when this all started. While the U.S. trade deficit in goods with China has shrunk a bit in the last month or two, both on a month-to-month and year-to-year basis, it’s still not far from record highs. That means American consumers are still buying Chinese goods at a rapid pace. Partly because Chinese manufacturers and exporters are reducing prices, so even when the tariff gets added in the price stays pretty much the same. Partly because those U.S. factories that Trump envisions immediately making the same goods don’t yet really exist. But mostly because the economy in the U.S. is booming: Americans have money, and if they want something, they’ll pay for it.

Are these latest moves telling us that China’s miscalculating Trump? Or that Trump’s miscalculating China? Or could it be both?

China does seem to have a better feel for this “negotiating with Trump” thing than they did when he took office. They do still stand to lose a lot more on balance than the U.S. in an extended, heightened trade war, simply because Americans spend so much more money on Chinese goods than Chinese spend on American goods. But China seems more confident in taking a more defiant stance these days, maybe because they’re seeing that those impacted most directly in America: manufacturers that rely on parts from China, and farmers, won’t put up with Trump’s shenanigans for much longer. So if Trump wants to raise tariffs and keep them raised, he will be forced to take a deeper dive into—ironically—socialism: using tax dollars to pay farmers off. Or he can back off a little in the interest of getting a deal done, which is something he pretty firmly told the rally crowd tonight he’s not willing to do.

And we’d argue that China, even though it has a lot more to lose in dollar terms, also has more flexibility, because it can tell its manufacturers they’ll have to suffer for a while in order to achieve a brighter future, and they will be patient, at least for a long while. So while hugely negative economic consequences could result for both the U.S. and China if there isn’t a deal, China appears to have more of a stomach for riding it out.

Trump’s now also accusing China of scheming to ride it out until “Joe Biden or one of the very weak Democrats” might be President. (If true, that would be interesting: a Presidential election where China’s hackers might actively support Democrats, while Russia’s hackers continue to support Trump. But we digress.)

With that said, we’d still bet on a deal for a several reasons:

  • Trump’s got one of his truly “best” people on it, U.S. Trade Rep Robert Lighthizer.
  • And not doing a deal would be politically and potentially economically disastrous for Trump, regardless of how he tries to play it off.

So until Friday, and maybe beyond, everything on both sides is still all just posturing. Even as the Chinese government issued a curt statement promising “necessary countermeasures” should Trump go ahead and impose more tariffs, China’s top trade reps didn’t cancel their visit to D.C. for negotiations set for the next couple of days, even after Trump’s rude Twitter provocation and subsequent outbursts.

There’s been a lot of bad behavior. But no one’s walked away from anything, yet…

With China’s top trade negotiator, Liu He, in the Oval Office about a month ago