How Wall Street lost its credibility on China

President Trump is ready to slap tariffs on another $200 billion worth of Chinese imports.

There's a lot to be learned from how America ended up in this trade war. But one of the more striking stories is how Wall Street lost its influence over American economic policy towards China.

As The New York Times pointed out, Wall Street leaders have successfully prevailed upon previous White Houses to back off confrontations with China. Once upon a time, the idea of accepting China into the World Trade Organization (WTO) was fiercely opposed by everyone from labor groups, to environmentalists, to human rights advocates. But top officials at Goldman Sachs and AIG, among other firms, urged President Clinton to liberalize trade relations with China. It entered the WTO in 2001.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Of course, after that, the United States' trade deficit with China exploded, so pressure to do something continued to mount on other White House occupants. Presidents George W. Bush and Obama both made campaign promises to crack down on China's efforts to devalue its currency. After being lobbied by finance industry officials, neither actually delivered. All three presidents also relied heavily on Wall Street input within their own cabinets: Robert Rubin and Hank Paulson, both Goldman Sachs alumni, served as treasury secretaries under Clinton and Bush, respectively. Larry Summers did a stint at a hedge fund before becoming Obama's chief economic advisor.

Certainly, President Trump has been just as friendly towards Wall Street in his appointments. Gary Cohn, another former Goldman Sachs official, was Trump's top economic advisor for a time. Still another Goldman alumnus, Steven Mnuchin, remains treasury secretary.

Yet their ability to rein in Trump on China, as their predecessors did with other presidents, appears to have all but dried up.

"What's really surprising is that the connections that used to work, the formula that used to work, just don't work at this point," Marshall W. Meyer, a management professor at the Wharton School of Business, told the Times.

Wall Street titans have been desperately trying shuttle diplomacy between the Trump administration and China to stave off the trade war. These meetings were actually a regular feature of previous White Houses until Trump put the kibosh on them. Executives from Goldman Sachs, Blackstone, and Morgan Stanley had a hastily conceived meeting over the weekend with various Chinese officials, including China's Vice President Wang Qishan. Mnuchin, meanwhile, is trying to get another round of direct official talks between the two governments to happen later this month.

Yet Trump has already imposed 25 percent tariffs on $53 billion in Chinese imports. He's poised to extend tariffs of 10-to-25 percent on another $200 billion. He's threatening to escalate to $500 billion. The White House apparently doesn't even have an organized process or infrastructure for carrying out negotiations with the Chinese, or even for communicating demands. Meanwhile, Trump is triumphantly tweeting that "we are under no pressure to make a deal with China, they are under pressure to make a deal with us," and that the costs of his trade war are "almost unnoticeable."

As Wendy Cutler, a former U.S. trade negotiator, put it in a massive understatement: "To date, these back channels don't seem to be working in moving this administration towards a negotiated solution." The entreaties of financial leaders have had all the impact of a Nerf ball hitting a rhino.

But before it complains too loudly about its predicament, Wall Street might want to consider how its previous successes led to its current failure.

Liberalizing trade with China had obvious benefits for the financial industry. It opened up investment opportunities in China's massive domestic market (albeit with some strings attached), and it allowed companies to cut costs and goose profits by shopping through Asia for cheaper labor forces.

But other populations bore the associated costs: China's entrance into the WTO knocked out as many as 2.4 million American jobs, most of them concentrated in the communities that depend heavily on manufacturing. And the U.S. economy never really adjusted to replace that lost employment with new jobs. Meanwhile, the strong dollar policy originally pushed by Rubin kept the trade deficit with China inflated through all three previous administrations. That just piled on the damage to export-dependent employment here at home. And any time any group of workers here tried to press for better pay or conditions, their bosses could always threaten that the factory would just pull up stakes for China.

We all know how this story ended: When Trump came along promising a trade war, millions of blue-collar Americans were ready to sign up.

This is not to suggest Trump has a coherent pro-worker agenda. (He doesn't.) It simply means that the economic dislocation of the last few decades, a direct result of Wall Street's previous triumphs in shaping trade policy, has shifted the politics. And thanks to that dislocation, Trump now feels free to ignore Wall Street's entreaties on China in a way his predecessors did not.

And unless Trump's trade war starts to inflict real economic pain on his own blue-collar base, that's probably how things will stay.