A year and a half into the trade war, China
seems to have a winning strategy: Stay tough and let the Trump administration
negotiate with itself.
By
Keith Bradsher
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A
cargo ship with containers at a dock in China’s Shandong Province.
Credit
Agence France-Presse — Getty Images
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BEIJING
— President Trump’s initial
retreat from his trade-war threats has handed hard-liners in China a victory. A
longer, pricklier trade war and stiff Chinese resistance to economic reforms
could result.
Mr. Trump on Friday outlined a partial trade
deal that deferred new tariffs on $160 billion a year in Chinese-made goods, a
move that would have had him taxing virtually everything China sells to the
United States. He also agreed for the first time to broadly reduce tariffs he
had already imposed on Chinese goods, halving tariffs on more than $100 billion
a year worth of products like clothing and lawn mowers — a striking about-face
for a protectionist president who last year described himself as a “tariff
man.”
The White House called the deal a win. It
said China had agreed to buy large quantities of American agricultural goods,
giving farmers hit by the trade war some needed relief. It also means the
United States economy will not suffer from new tariffs threatened for Sunday on
Chinese-made goods that Americans love to buy, like toys and smartphones.
But the deal may be seen by Xi Jinping,
China’s top leader, and his hard-line supporters as vindication of the
intransigent stance they have taken since the spring, when a previous pact
struck by Chinese moderates fell apart. Since then, China has asked that even a
partial deal include tariff rollbacks. American officials resisted, debated,
then relented.
In essence, a year and a half into the trade
war, China seems to have hit on a winning strategy: Stay tough and let the
Trump administration negotiate with itself.
“The nationalists, the people urging
President Xi Jinping to dig in his heels and not concede much, have carried the
day,” said George Magnus, a research associate at Oxford University’s China
Center. “I don’t see this as a win for market liberals.”
Friday’s announcement makes it likelier that
China will resist any further concessions next year, and perhaps beyond. It
seems to affirm the belief, held by many Chinese officials, that Mr. Trump will
back off from his trade-war threats if markets tumble, or if his supporters in
agricultural states suffer too much.
Even before Friday, Mr. Trump had delayed or
canceled tariffs four times this year. Such policy shifts could ultimately
encourage Beijing to draw out negotiations even further, to reach the best
possible deal.
The effects could ripple beyond trade.
Friday’s deal essentially forestalls discussion of curtailing the Chinese
government’s support for its homegrown industries, which China hawks within the
Trump administration see as posing a direct threat to American businesses.
More broadly, the agreement could further
marginalize already weakened Chinese moderates who want Beijing to ease state
control over its economy.
Western economists warn that bloated
state-owned industries are holding down the Chinese economy and soaking up
money and attention that should go to private firms. Beijing’s tighter control
could also make it harder for American companies to do business there.
Yet a tougher Chinese stance carries big
risks for Mr. Xi. China’s growth has already slowed, in part because of the
trade war, and it could sag further as the clash drags on. Significant American
tariffs remain in place, keeping pressure on major companies to move their
manufacturing in China elsewhere.
“Xi Jinping really needs the trade deal, both
for economic reasons — to boost the flagging economy — and to strengthen his
own position,” said Willy Lam, a specialist in Beijing politics at the Chinese
University of Hong Kong.
But for now, Mr. Xi appears to have a deal in
hand that may reassure people in China that the worst of the trade war is over
— although some legal details still need to be ironed out, and could prove
troublesome. But the broad contours of the agreement are likely to satisfy
Communist Party hard-liners who insist that Beijing make no compromises that
would limit industrial policies aimed at turning China into a high-tech
competitor with the United States.
Under Mr. Xi, who took the party’s reins of
power seven years ago, the hard-liners have prospered. He has started a huge,
government-driven spending spree to make sure China becomes a leading player in
the industries of tomorrow, from semiconductors to electric cars.
One state-owned enterprise has erected 110
vast hangars, computerized design studios and other buildings on the outskirts
of Shanghai to build commercial aircraft in competition with Boeing. Dozens of
Chinese cities are erecting subsidized factories to churn out semiconductors in
competition with American giants, as well as with companies in Taiwan and South
Korea.
Trump administration trade hawks and American
business groups say state-subsidized Chinese companies could wipe out
international competitors. They point to the solar panel industry, which boomed
in China thanks in part to almost unlimited financing from state-owned banks.
Factory closings in the United States and Europe have left China in almost
total command of that industry.
But Mr. Xi and his backers argue that China
needs those subsidized industries. Mr. Trump's moves this year to deprive
Chinese companies of American-made chips, software and other essential goods of
the modern age, after allegations that the companies were linked to human
rights violations or intelligence-gathering activities, underscored for many in
Beijing that China depends too much on the United States.
The Trump administration had a two-prong
strategy for dealing with China’s industrial policy. Its first choice was for
China to agree to tight limits on subsidies. The second was to leave steep
tariffs in place across a wide range of goods as a kind of informal
anti-subsidy measure, offsetting China’s support for its homegrown companies
and giving American and other companies room to invest and compete in the
United States.
The administration has now stepped back from
the first position. And by cutting tariffs at all, the administration has shown
a new willingness to retreat — although the products covered by the halving of
tariffs on Friday were fairly low tech.
The issue of China’s state subsidies was more
prominent in earlier talks. In April, Mr. Xi’s market-oriented team of trade
negotiators accepted preliminary compromises in Washington that would have left
a lot of tariffs in place and rolled back some Chinese laws that the White
House said favored Chinese companies unfairly.
But Mr. Xi sided with hard-liners who
demanded that the deal be torn up and renegotiated, because the deal did not
include a broad reversal of tariffs that had already been imposed and because
it demanded detailed changes in laws that were seen as violations of national
sovereignty.
In October, trade negotiators reached another
tentative deal without tariff rollbacks, only for hard-liners in Beijing to
again demand revisions again and a removal of tariffs.
People close to China’s economic policymaking
process say that as the trade talks progressed this past week, the mood among
Chinese officials gradually shifted from deeply worried to cautious and
finally, by late in the week, jubilant and even incredulous that the hard-liners’
goals had been achieved.
Even the major concession to the United
States — China’s agreement to buy more agricultural goods — could enhance the
power of the Chinese state. Those purchases would most likely be carried out by
state-controlled companies, preserving their indispensable role in Chinese
commodities trade.
China hard-liners are not the only ones who
benefit from Friday’s deal, of course.
American companies and farmers are likely to
find it easier in the coming months to sell everything from semiconductors to
soybeans to China, making corporate sales goals and executive bonus targets
easier to meet.
Mr. Trump himself may face only limited
criticism. The companies likely to be upset about backing away from the issue
of Chinese subsidies are based largely in states that vote Democratic, like
California’s technology companies. Those businesses may also benefit in the
short term from lower tariffs.
Still, the deal on Friday pushes the thorny
issue of China’s state support for its industries down the road, most likely
complicating relations between the world’s two largest economies for years to
come.
“In the long term, the U.S. is going to have
to address the practical impact, and not just the political impact, of the
industrial imbalance caused by China’s policies,” said Malcolm McNeil, an
international trade lawyer at the firm Arent Fox who advises Chinese and
American companies.
