President Trump's trade war with China has entered the winter of its discontent. The U.S. and China imposed another round of tit-for-tat tariffs on one another earlier this summer, and the White House is threatening more duties on Chinese exports to come. Our trade deficit with China, which Trump consistently rails against, shows no sign of closing. The president's approval ratings are down, and the recent August jobs report left everyone a bit underwhelmed.
The grim results seem to have pressured the White House into accepting another round of talks with China, set for early October. Stocks are recovering on the news, but of course we've seen this movie before.
Why has Trump's trade war slipped into the doldrums? And why, despite the latest outreach, is it likely to stay there? One big part of the puzzle is that the White House itself can't really agree on what its tariffs are for to begin with.
As economist Jared Bernstein recently pointed out, the president and his negotiators are working off two different theories of what counts as victory in the trade war. Trump himself is pushing something like "full import substitution" — jobs will return to America, the trade deficit will close, and stuff that gets made in China will be made here again. Meanwhile, the administration officials actually carrying out the negotiations are pushing an entirely different set of goals: To get China to respect U.S. intellectual property more, to stop demanding U.S. firms share technology before they can do business in China, and to generally lower rules and regulations that discourage American companies and investors from opening operations in China's domestic market.
These two theories of victory aren't just different; they're almost entirely non-overlapping. They serve two completely different sets of interests and beneficiaries.
Trump's certainly not wrong that closing the trade deficit and bringing more production of tradable goods back to America would benefit a lot of blue-collar workers. The problem is Trump's tariffs aren't achieving either effect. Not only is the trade deficit with China not closing, Americans in manufacturing are actually working less now relative to service workers — who are far less exposed to the dynamics of trade — than just a year ago.
Tariffs are just a poor tool for achieving what Trump wants to achieve. Sure, Chinese labor is cheaper than American labor; but lots of countries' labor is cheaper. Impose tariffs on Chinese exports, and instead of returning to the U.S., those jobs will just move to Vietnam or wherever. It's like a giant game of whack-a-mole, except with global supply chains. Free trade has been underway for a while now, and those supply chains are so complex at this point it's not entirely clear how one could unwind them and then rebuild them entirely within American borders. That complexity also means a lot of America's remaining manufacturing jobs rely on intermediate inputs imported from other countries — China very much included. Which is likely why the era of Trump's trade war has actually seen the fortunes of American manufacturing workers decline a bit. Rather than a mechanism to remake global trade flows, tariffs are far more useful as temporary punishments to push a country into changing its behavior.
That brings us to the second theory of victory being pushed by Trump's negotiators. Strategically, it makes more sense: Impose enough pain on China that the government relents and changes its domestic rules and regulations. It's not clear it will succeed, but it's much more likely to work than using tariffs to rebuild American manufacturing or rebalance trade with China.
But assuming it does work, who does it benefit? If China starts respecting American intellectual property and technology ownership, it will pay a lot more fees and such to U.S. corporations. That will employ more lawyers and accountants. And it will certainly bulk up the profit margins of American firms, along with their payouts to shareholders. But it's hardly going to lead to a renaissance of blue-collar jobs. Meanwhile, if China's domestic market becomes more hospitable to U.S. investors, that will lead those investors to move even more of their supply chains into China.
If Trump's trade war is causing everyday workers pain, there's an argument for enduring that pain in the short-term if it will lead to long-term benefits for those same workers. But under the theory of victory being pursued by Trump's negotiators, U.S. workers will endure the costs while CEOs and executives and rich shareholders reap the rewards. "I see no reason why any U.S. worker should sign onto the near-term pain of the trade war for alleged long-term gains that, if they appear at all, will more likely lead to more offshoring of U.S. jobs, not less," Bernstein observed.
By all accounts, the president himself is too ignorant of policy, and too in love with his vision of global trade as a zero-sum conflict between national tribes, to recognize the disconnect between the trade war he's selling and the trade war his officials are actually fighting. And the right-wing officials that staff his White House are happy to use Trump's rhetoric as cover to go after a set of long-standing elite policy preferences.
All of which is unfortunate, because there's a third theory of victory that could make all of this coherent: Rather than use the tariffs to force China to play nice with U.S. multinationals, use them to force China to reform its currency policy, and raise the value of the Chinese yuan relative to the U.S. dollar. This would simultaneously make Chinese exports more expensive in America's domestic market, and make U.S. exports more competitive in China. Unlike attacking individual parts of global supply chains piecemeal, rebalancing the currencies actually would go a long way toward closing the trade deficit, while systematically shifting the makeup of global supply chains at least somewhat back in U.S. workers' favor.
Trump's theory of victory actually would help American workers, but his chosen strategy is doomed to fail. Trump's negotiators are pushing an alternative theory of victory that's much more aligned with the chosen strategy. But that victory will, at best, leave the workers Trump claims to defend no better off. At worst, it will leave those workers in even more dire straights than before Trump's trade war began.