Trump has been up to what he seems to like to do best: whipsawing those who might be affected by his plans. On Friday, he put Mr. Market and huge swathes of Corporate America in a tizzy by retaliating against China’s tariff increases. China announced that it would impose new tariffs on $75 billion of US goods and the restart of tariffs on autos and auto parts. Trump tweeted that he would increase tariffs on Chinese goods already subject to tariffs: the $250 billion at 25% would go to 30% on October 1and the $300 billion at 10% would go to 15% in phases, on September 1 and December 1. Trump also “hereby ordered” US companies to pull out of China, suggesting that he’d rely on the International Emergency Economic Powers Act of 1977.
Then, as most of you have likely heard, Trump made remarks at the G-7 summit that we widely interpreted as an indicator that he’d back off again, by admitting to regrets about how the trade spat was going. When the press took up that line, Trump doubled down, with the White House releasing a statement that Trump’s sole regret was not raising tariffs higher.
Needless to say, the all-too-typical Trump to-ing and fro-ing made for an easy target. From the Washington Post:
Former treasury secretary Lawrence Summers, a veteran of the Clinton and Obama administrations, said the White House’s conflicting statements were just the latest in a string of mixed messages that had made it impossible for people to understand its agenda.
“Deeply misguided policy and strategy has been joined for some time by dubious negotiating tactics, with promises not kept and threats not carried out on a regular basis,” Summers said in an interview. “We are at a new stage now with very erratic presidential behavior and frequent denials of obvious reality. I know of no U.S. historical precedent.”
And despite rousing himself to make a show of his resolve, the Administration did back down on one part of Trump’s Friday missives, that of “ordering” US companies to get out of Dodge, um, China. From the Wall Street Journal:
Aides to President Trump said Sunday he has no plans to invoke emergency powers and force companies to relocate operations from China…
“What he is suggesting to American businesses,” [economic adviser] Mr. [Larry] Kudlow said, is that “you ought to think about moving your operations and your supply chains away from China and secondly, we’d like you to come back home.”…
Treasury Secretary Steven Mnuchin also weighed in, telling “Fox News Sunday” that the president didn’t have plans to invoke emergency powers to force U.S. companies out of China.
“I think what he was saying is he’s ordering companies to start looking,” Mr. Mnuchin said.“
The Journal also pointed out that Trump might have trouble forcing companies to exit:
Both Messrs. Mnuchin and Kudlow said that the president could theoretically force U.S. companies to leave China by invoking a law known as the International Emergency Economic Powers Act of 1977, or IEEPA….
According to the Congressional Research Service, IEEPA can be used to deal with “any unusual and extraordinary threat” outside the U.S. “to the national security, foreign policy or economy of the United States, if the president declares a national emergency with respect to such threat.”…
The president is required “in every possible instance” to consult with Congress before exercising authorities granted by IEEPA, and to specify in a report to lawmakers why the circumstances constitute a threat and why the actions are necessary, CRS said in a briefing paper on the law issued earlier this year. The president must submit follow-up reports every six months….
Rod Hunter, a partner at Baker McKenzie and expert on international trade, said Mr. Trump could declare a state of emergency and issue the order, but that doesn’t mean it will stand.
“Congress could effectively override such a decision, and private parties would certainly challenge the action as an unconstitutional takings, a violation of due process rights and beyond the statutory authority granted to the president by Congress,” Mr. Hunter said in an email.
Mind you, just like Brexit, there is a way to do what Trump wants to do that would not be so destructive and shambolic. Trump’s China policy appears to be intended to make American more economically self-sufficient so as to improve the prosperity of US workers, as well as curb a competing imperialist.
But as we’ve described at some length in earlier posts, restoring America’s manufacturing capabilities isn’t just a matter of weaning itself off cheap Chinese imports. The US has ceded a tremendous amount of know-how, from the factory floor on up. Getting that back is a generation-long undertaking, requiring commitment to a national strategy that would include significant government investment in fundamental research, renewed emphasis on education, including much cheaper higher education and vocational training for those that aren’t suited or inclined to go to college, and a reorientation of government spending and subsidies to favor productive sectors over the connected. Not only would it be difficult to get any Administration to embrace open industrial policy, particularly one that would break a lot of rice bowls (such as in our hugely wasteful arms industry and our bloated financial sector), maintaining it beyond even a two-term Presidency would be an even taller order.
But where is the Trump tariff cage match likely to wind up? Given how often Trump has backed off when Mr. Market has had a hissy, most commentator appear to have assumed before Friday’s tit for tat that Trump would back down, if nothing else, in the form of allowing a lot of exceptions, and the US and China would find a way for Trump to get enough concessions from China that he could declare peace with honor.
That assumption looks to be incorrect. New Deal Democrat sent us the latest post from China Law Blog, written by lawyers who specialize in Chinese law with an eye to helping businesses get set up and operate in China. The post by Dan Harris is every bit as firm as its headline: Repeat After Me: There Will be No US-China Trade Deal. It also contains a good summary of key developments and detail on the various goods targeted. Key sections:
The US-China Trade War Is and Will be the New Normal
I hate to say we told you so, but for nearly a year, WE TOLD YOU SO. Since October, 2018 we have been all but screaming at anyone and everyone who has product made in China and sold into the United States to get out of China fast, if at all possible. We say this and we set out the below timeline to prove this not so much to show that we have been right all along, but to try to convince you that we are right when we now say there will be no resolution to the US-China trade war for a very long time and you need to act accordingly.
The below is our timeline/proof of our having predicted a straight-line decline in US-China trade relations…
But what should you make of President Trump’s ordering US companies to immediately start looking for an alternative to China? He can’t really do that, can he? No, but in many respects this is exactly what Trump has been doing since the U.S.-China trade war began. Trump cannot literally require American companies to pull out of China, but he can and has made it so difficult that they all but have to leave China. And this is what most of the international lawyers and international trade lawyers at my firm have come to believe has been Trump’s plan all along.
Every step of the way, Trump has made it all but impossible for China to make a trade deal with the United States, which is why this blog has been consistently clear that there will be no trade deal between the United States and China. If the US-China trade war/cold war were really about trade imbalances, it would have ended long ago with China buying more soybeans and Boeing airplanes from the United States. But from the very beginning, the U.S. has demanded China stop stealing IP and open its markets for foreign companies, and there is just no way China will agree to either of these things. Lead negotiator Robert Lighthizer is without a doubt smart enough to have known this all along. All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well. In June, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants this decoupling, as well.
This latest Trump “order” does not have the force of law, so in that respect it is not an order at all. But in most other respects it is. This order indicates Trump’s passionate desire to rid the United States of what he sees as the China scourge. More importantly, it is yet another clear signal that he will continue to escalate this war with China until such time as he considers the United States to be victorious. The fact that Trump issues this “order” amidst rising recession fears only highlights how ending U.S.-China trade is at the top of his to-do list.
So in terms of what this means for your business, it means that you must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.
I’m persuaded by this point of view because these writers have adopted the perspective that we’ve found to be very useful in other geopolitical negotiations, which is to look at the bargaining position of both sides and see if there is any overlap. If there isn’t, there won’t be an agreement unless one of both parties makes a significant concession.
One reason that other observers have likely missed what the China Law Blog discern is that there’s an Anglo-American tendency to assume that differences can be settled and a deal can be had. But as Sir Ivan Rogers pointed out with Brexit, and you have similar dynamics with the US and China, there aren’t precedents for trade deals where the two sides want to get further apart rather than closer. Sir Ivan is of the point of view that the desire to disengage makes it much harder to come to terms.
The critical part of the China Law Blog’s reading is that the Trump Administration is deadly serious about its two big asks, intellectual property and market access. It’s credible to attribute that to Trump’s US Trade Representative, Lighthizer. As Lambert put it, Lighthizer is the closest thing this Administration has to a Jim Baker. Lighthizer started at Covington & Burling, then served in the Regan Administration as Deputy USTR before going to Skadden. Lighthizer is as fierce a China hawk as they come and has a long history of saying that the entry of China into the WTO was at the expense of US jobs (see here, for instance) and even making a full-throated defense of protectionism.
A part of the trade spat that hasn’t gotten the attention it warrants and seems to confirm the China Law Blog’s thesis is the arm-wrestling over China’s fetanyl exports to the US. It’s not hard to see that this is an inherently important issue, since as I understand it, fentanyl is so potent that it is very easy to overdose on it, making it markedly more dangerous than other addictive drugs. In other words, the high death rate of fentanyl may make reducing supply a more effective strategy than it normally is in “the war on drugs”. Substitution with just about any other controlled substance would be less dangerous. And if Trump were to make a dent in this problem, it would serve as a PR offset to some of the costs of his China strategy, like lost soyabean exports.
In April, China made a concession to the US by designating all fetanyl products as controlled substances, in the hope that that would reduce shipments to the US. The DEA has stated that China is the main source of US fentanyl. Fentanyl accounted 18,000 overdose deaths in 2018, one fourth of the total. If you count all synthetic opioids, the toll rises to 28,000. China nevertheless claimed even then that fentanyl shipments to the US were “extremely limited”.
On August 2, Trump said Xi had welshed on his promise to halt fentanyl shipments. China objected, saying it had made “unprecedented efforts” and the US was to blame for its opioid crisis. On August 21, the US sanctioned three Chinese individuals it depicted as drug kingpins, eliciting more unhappy noises from China.
Fentanyl featured in the escalation on Friday, and it could conceivably serve as the basis for a national emergency threat (even though, per the discussion earlier, it would have good odds of being overturned). One of Trump’s four tweets urged US carriers to do more to halt shipments arriving from China or other destinations (Mexico is believed to be a route for the entry of Chinese fentanyl to the US).
In other words, it’s not clear where this row ends, but there doesn’t seem to be a path to depressurization, much the less resolution.
Update 5:00 AM EDT: Just as this post went live, the Wall Street Journal reported Trump Says China Called U.S. to ‘Get Back to the Table’ After Latest Tariff Spat. Trump is still hostage to Mr. Market, so it’s awfully useful for him to talk up negotiations. From the story:
President Trump said China called U.S. officials on Sunday evening and said “let’s get back to the table,” a day after the White House said the president regretted not escalating tariffs further on Chinese goods.
Speaking to reporters alongside Egyptian President Abdel Fattah Al Sisi, Mr. Trump called the discussions a “very positive development.”….
The Chinese government didn’t immediately respond to Mr. Trump’s remarks or to requests to corroborate the president’s account of a phone call having taken place. Chinese government officials have repeatedly said that Beijing wants to negotiate differences on trade. On Monday, Beijing’s lead trade negotiator, Vice Premier Liu He, told a conference that China still wants to continue trade talks with the U.S. following heightened tensions in the past few days.