The Trump administration may be willing to fight a trade war with China, but even it is not promising a victory anytime soon. Officials from the president on down have repeatedly stated that they are taking the “long view” on China and that the therefore the tariffs from both sides – and the pain they cause – will likely be around for a while.
In a late August interview with Reuters, for example, Trump said that resolving the fight with Beijing will “take time because China’s done too well for too long, and they’ve become spoiled,” adding “I’m like them; I have a long horizon.” Trump made the comments just days before a Chinese delegation was set to meet with administration officials to re-start talks over a potential deal.
It is a sharp contrast to the Trump administration’s rhetoric in other trade disputes, such as the North American Free Trade Agreement renegotiation, in which it often claims a deal is just within reach, and to its usual rah-rah “we are winning” messages. Instead, the White House sees China as a long-term battle of attrition.
That’s likely because the White House recognizes a difficult truth about the fight with China: Even if Beijing’s leaders were willing to make a deal on trade, they might not be able to. China’s economy makes that too difficult to do.
“China cannot make many of the changes we want quickly,” said Derek Scissors, resident scholar at the American Enterprise Institute and an expert on China’s economy. “They can’t just wipe out dozens of huge state-owned enterprises which currently block competition. Related to that, they can’t reduce widespread industrial overcapacity very quickly. The huge trade deficit the president points to can’t be deeply cut in less than two years.”
In little-noticed comments to the Senate Appropriations Committee in July, U.S. Trade Representative Robert Lighthizer explained that China’s “dumping” of steel and other products on international markets wasn’t necessarily an intentional economic weapon. Rather, years upon years of communist central planning had created an industrial base in China far beyond what it actually needed – a development that would not easily be undone.
“As these things do, it got out of control and then they got so big they swamped the entire world,” Lighthizer told the committee, referring to China’s over-development of steel. The same scenario applies with aluminum, solar panels and other products, he added.
In other words, China dumps things like steel because they have to get rid of it somehow. Getting rid all of that excess capacity would require shuttering a major part of its industry, a wrenching change for the country and its economy. The only comparable example of a de-industrialization of that size would be Russia in the 1990s following the collapse of the Soviet Union, a period of deep economic depression. Its hard to imagine China voluntarily doing that. Just allowing modest market reforms was a big deal for them.
“China in 1980s and 90s made modest steps to have a more market-oriented economy, slashing tariffs dramatically and allowing people to keep a bit of what they produced,” noted Bryan Riley, director of the National Taxpayer’s Union’s Free Trade Initiative. “That was pretty radical for a communist country.”
The Trump administration is nevertheless bent on trying to get them to do it.
The U.S. has imposed tariffs of 25 percent on steel imports and 10 percent on aluminum ones, policies primarily directed at China. The White House has placed 25 percent tariffs on $50 billion of goods specifically from China, and is currently in the process of placing 25 percent tariffs on another $200 billion in Chinese goods. Trump has threatened to put even higher levies on top of that. “We have to create a situation where it’s more painful for them to continue their bad practices than it is to reform them. That’s the purpose of the whole exercise,” Commerce Secretary Wilbur Ross told Fox Business in August.
The administration appears to believe it is winning, too. China’s currency fell 9 percent against the dollar between April and August. When China’s moved in early August to slap tariffs of between 5 and 25 percent on $60 billion worth of U.S goods, White House officials pointed out the amount was smaller than they expected, indicating China didn’t have much to fight back with.
“Their economy’s weak, their currency is weak, people are leaving the country,” White House economic advisor Larry Kudlow told Bloomberg in August. “Don’t underestimate President Trump’s determination to follow through.”
That may be wishful thinking, said David Dollar, senior fellow at the Brookings Institution. “Technocrats over there seem pretty confident that through 2018 and 2019 they can keep their economy growing. They’re not happy about the trade war, but I don’t see them making any major concessions. It is true that this has hit the Chinese economy more than the U.S. economy but I think the hits on both sides are rather small so far and the Chinese have a lot of ability to adjust to this,” he said.
The administration’s stance talk unnerves a lot of business leaders since it implies that the tariffs will be around for a long time. “We cannot really see the winning part of this right now … But it seems like the administration is committed to moving forward,” said Edward Brzytwa, director of international trade for the American Chemistry Council.
It is worth noting, though, that Trump administration has a loose definition of what victory means, and might be satisfied if Beijing gave it enough to warrant backing down. AEI’s Scissors notes that China could offer to crack down on cyber-thieves or stop policies that coerce companies into giving over technology, issues the White House has raised, as potential deals. If not, the tariffs will be around for a long time.
“They definitely don’t want to shrink the state sector and allow open competition. So it’s very hard to justify waiting for China to change, even though any changes would legitimately take time,” he said.
