China has more to lose in trade war; Trump has key weakness

“The Chinese aren’t constrained by the rule of law or a representative democracy.”

Richard McNulty of Sankey’s Feed Mill shows a bucket of roasted soybeans Thursday in Volant, Pennsylvania. (AP Photo/Keith Srakocic)

Richard McNulty of Sankey’s Feed Mill shows a bucket of roasted soybeans Thursday in Volant, Pennsylvania. (AP Photo/Keith Srakocic)

By Heather Long / The Washington Post

As the U.S.-China trade spat gets uglier, people in both countries are asking: Who has more to lose? And how does this end?

China has more to lose economically in an all-out trade war. The Chinese economy is dependent on exports, and nearly 20 percent of its exports go to the U.S. It sold $506 billion in stuff and services to the U.S. last year. In contrast, the U.S. only sold $130 billion to the Chinese.

“In a serious economic battle, the U.S. wins. There is no question about it,” said Derek Scissors, a resident scholar at the American Enterprise Institute who has helped advise the administration on China.

But this isn’t just an economic fight, it’s also political, and there’s a strong case that President Donald Trump would be less able to sustain a protracted conflict than the Chinese — especially with the 2018 midterm elections coming soon.

Chinese President Xi Jinping runs a communist country that has just granted him the ability to rule for life. He controls the media in his country and is also sitting on top of about $3 trillion in surplus cash.

All of this means Xi can react quickly to Trump. He can even aid Chinese companies that get hurt in the coming months and subsidize soybean prices so Chinese consumers don’t face massive sticker shock at the store. The Chinese used similar tactics during the global financial crisis of 2008 and 2009, spending heavily from their surplus reserves to stimulate their economy and insulate their people from pain. The Chinese cash reserves are not as large now, but they still have more than the U.S. does.

Trump doesn’t have it so easy. He’s already getting phone calls from Republican lawmakers who are angry at what he’s doing with the tariffs. He faces backlash from Wall Street, from executives of companies such as Boeing and from soybean farmers in the Midwest, many of whom voted for Trump and feel betrayed. Some GOP leaders fear Trump’s actions could cost the party seats in the 2018 midterm elections.

“Within the next 12 months, China can withstand much more than the U.S. can withstand,” said Evan Medeiros, managing director at the Eurasia Group and a former senior adviser to Obama on Asia. “The Chinese aren’t constrained by the rule of law or a representative democracy.”

While much of the focus so far has been on tariffs — Trump has threatened to put tariffs on about $50 billion worth of Chinese goods and China has responded with threats to do the same on U.S. goods — China has more levers it can pull to punish the U.S.

The Chinese could stop cooperating on North Korea, they could sell some U.S. debt to roil markets and they could make life harder for U.S. companies operating in China, such as Nike, Disney or Apple. These Chinese actions are seen as unlikely, especially selling U.S. Treasurys. For the Trump administration, corresponding moves aren’t even on the table, as the U.S. government doesn’t have as much direct control over companies operating within its borders.

Trump is in a tricky situation. He is feeling confident after his administration renegotiated the South Korean free trade deal to give U.S. automakers greater access to that market. But South Korea is the world’s No. 11 economy, and the country depends on the U.S. for military aid. China is the No. 2 economy and it does not feel the same degree of pressure to give in to Trump.

Domestically, Chinese politicians face pressure to project their country as a world power, making rolling over for a bellicose U.S. president a wildly unpopular proposal.

“There is no way on earth China can be seen to be kowtowing to the U.S. on this. Xi cannot say: All right, Trump threatened us, so we’d better give in,” said Phil Levy, a senior fellow at the Chicago Council on Global Affairs.

The surprisingly swift and strong reaction from China this week seemed to be a message to Trump that the Chinese think they can play a long game.

At the moment, Trump is threatening a relatively small amounts of tariffs. Those are unlikely to damage the overall economy or significantly raise prices (Trump has been careful to avoid tariffs on Chinese shoes, clothes and trinkets that fill so many shopping aisles), but certain places in America are about to feel great pain if the Chinese follow through with their threats to retaliate. It’s hard for farmers and winemakers to understand why they are casualties in a supposed fight against China stealing intellectual property and industrial know-how.

The Brookings Institution looked at all the products China has threatened to put tariffs on. They would impact about 2.1 million jobs that are spread out over 2,783 U.S. counties. Eighty-two percent of those counties voted for Trump in the last election.

“Xi is probably doing a more rationale analysis of the situation than the Trump Administration seems to be doing,” said J. Stapleton Roy, a former U.S. ambassador to China under former presidents George H.W. Bush and Bill Clinton. “The Trump Administration doesn’t seem to grasp the fact that they are damaging the wrong people (the farmers)” in this fight.

China’s strategy appears to be: Get farmers, business leaders and Republicans in Congress angry enough to pressure Trump to back down. This strategy seemed to work for many countries with Trump’s steel and aluminum tariffs. When Trump first announced the metal tariffs, they were supposed to apply to every country in the world. By the time they went into effect, 63 percent of imports were exempt from the tariffs, according to Chad Bown of the Peterson Institute for International Economics.

A key problem for Trump is that he doesn’t have clear and coherent demands of China. He and his team talk about three problems: The trade deficit, Chinese intellectual property theft, and China’s industrial policy (known as “Made in China 2025”).

But there’s not a specific request, and the lack of one is allowing the Chinese to play the victims in a scenario where the U.S. is supposed to be trying to correct years of wrongs.

“I want the U.S. to do more against China, but I want the U.S. to do more with a plan,” said Scissors. “We need very specifics asks of the Chinese. Instead, we just say, ‘we want you to change.’”

The president and his team sometimes say different things about trade and what the goals are. Trump likes to use confusion as a negotiating tactic, but it also opens up more ways to “win.”

“What counts for success for Trump is going to be very different than what his advisers want. Trump can probably be bought off with some package of goods to reduce the trade deficit. His advisers want China to rewrite its entire industrial policy,” said Medeiros.

Trump has famously said a trade war will be “easy to win.” Xi isn’t saying that. Xi has made it clear he doesn’t want a trade war, but he will respond to anything Trump does. Xi seems to be setting himself up for an easier political win if anything goes sour on the economic front.

But in politics, Trump has proved himself a skillful salesman. Many strategists and longtime foreign policy experts say the most likely scenario is Trump gets a few small concessions from China and declares victory.

Chinese Premier Li Keqiang said last week that China is prepared to ease market access for U.S. companies and stop forcing foreign companies to transfer technology. If Trump gets those kinds of concessions in writing, he would be able to say he did more for American against China than Obama, Bush or Clinton.

But those changes would do little to alter the record U.S. trade deficit with China or to deter China from plans to go head-to-head with the U.S. in many high-tech sectors soon. If Trump wants those major concessions, he has to be ready to go much harder against the Chinese.

So far, Xi appears to be betting that Trump will cave to political pressure before that happens.

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