China bets on the blue wave

President Trump finally did it. On Monday, he announced new tariffs on $200 billion worth of Chinese imports — starting at 10 percent but eventually scheduled to rise to 25 percent. It's a major development, but not a terribly surprising one in the context of Trump's bottomless nationalist belligerence.

What was surprising? China's rather weak-kneed response: Tariffs of 5 to 10 percent on $60 billion worth of American imports.

That's not nothing. But it's also not super-impressive compared to Trump's escalation. And that suggests the Chinese are changing tactics. Specifically, they may be slow-walking Trump until the midterms.

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"Voices have been rising in Chinese policy circles in recent weeks saying that Beijing should wait to negotiate until after the November midterm elections," The Wall Street Journal reported. "Many Chinese officials think President Trump isn't ready to cut a deal, is bashing China now to appeal to his political base, and may be more willing to negotiate after the elections."

This might not be the most accurate read on Trump — one of his only core beliefs seems to be that America is getting ripped off by its trading partners — but it still make a modicum of sense.

To understand why, you have to look at the two major challenges facing China.

First, China just doesn't have a lot of room to hit back. The country imports far fewer goods from the U.S. than the U.S. does from China: $130 billion versus $505 billion, to be specific. Hence the trade deficit that so enrages Trump. That means China will run out of opportunities to match Trump dollar-for-dollar a lot sooner than Trump runs out of tariffs. In fact, the Chinese already matched Trump's initial round of tariffs on roughly $50 billion of their exports to America. Add on the new $60 billion, and China is already imposing duties on about 85 percent of their U.S. imports. Trump, on the other hand, is only about halfway through his tariff opportunities.

There are plenty of ways China could get around this problem, though. They could jack up the tariffs they do have above the 25 percent threshold. They could target the tariffs to inflict maximum pain on industries and communities that are disproportionately represented among Trump's base. They could go after specific sectors, like energy. And since China's economy is a state-directed capitalist-communist hybrid, they could go hammer and tongs at American interests through regulations. U.S. lawmakers, with their long-standing devotion to market principles, likely wouldn't be willing to respond in kind. The Chinese may not be able to match American tariffs dollar-for-dollar, but they have other ways to cause pain.

So it's noteworthy that China's latest response to Trump contains little of this.

Its $50 billion retaliation to Trump's original tariffs definitely targeted Trump country. "Nearly two-thirds of the jobs in industries targeted by China's tariffs — a total of more than one million jobs — are in more than 2,100 counties that voted for Trump," The Washington Post's Greg Sargent noted recently. But it's not clear the new $60 billion round is similarly structured.

There's some anecdotal evidence of Chinese regulators making life more difficult for American companies looking to do business over there: In a recent Chamber of Commerce report, half of 430 companies surveyed described "slower customs clearance and increased inspections and bureaucratic procedures." But that's it.

Trump's leap from tariffs on $50 billion worth of goods to $250 billion worth of goods is a remarkable escalation. But considering the full menu of how the Chinese could hit back, the way they're actually hitting back is rather underwhelming.

That brings us to the second problem the Chinese face: Trump himself.

Thus far, the president's trade decisions towards China betray almost no policy substance, but they do suggest a showman's instincts and a pugilist's impulse to hit back when hit. You could see China's initial $50 billion retaliation as a test to see how Trump would react. Once the Chinese proved their willingness to go tit-for-tat, would Trump retaliate or rethink his strategy?

Now the Chinese government has its answer: Another $200 billion in tariffs and by all accounts a near-total breakdown in diplomacy. Treasury Secretary Steven Mnuchin technically has an outstanding invitation to the Chinese to restart talks later this month, but after today's conflagration, it's not clear if either the White House or Chinese officials are still interested.

Just like Trump, the Chinese government does not want to be seen submitting to an adversary. Furthermore, if these tariffs do turn into an all-out trade war, with Trump going the full $505 billion and China throwing the kitchen sink in response, that's a protracted conflict that China would probably win. But that doesn't mean winning it would be pleasant. Trade wars aren't fun for anyone. And the Chinese have a vested interest in normalizing economic activity between the two countries as fast as possible.

Caught between those competing incentives and faced with Trump's hair-trigger policymaking, Beijing may have decided to just try waiting it out. America's midterm elections are less than two months away. Forecasts suggest the Democrats have a very good shot at retaking the House of Representatives, and may even win back the Senate as well. Even the former victory alone would humiliate Trump, bury his administration in fresh investigations, and grind his agenda to a halt. As such, the Chinese may find a post-midterm Trump much more amenable to negotiations.

That said, Trump being Trump, he may just as well respond to electoral humiliation by doubling down on his trade war.

But that outcome would just put the Chinese back in their original conundrum, with the full suite of their retaliatory options still at their disposal. It's at least possible the midterms could break Trump's will.

As close as the elections are, the Chinese risk relatively little by keeping their powder dry.