Trump’s trade war was decades in the making
This story is being published by the South China Morning Post as part of a content partnership with POLITICO. It was reported by Ben White, Nancy Cook, Andrew Restuccia and Doug Palmer and originally appeared on politico.com on July 9, 2018.
Those who know Donald Trump say it was always going to go this way with China.
The New York real estate tycoon began issuing bitter tirades against foreign countries “ripping off” the United States on trade back in the 1980s. At an expletive-laden political rally in Las Vegas in 2011, Trump hinted at a future presidential campaign and promised to tell the Chinese: “Listen you mother******s we’re going to tax you 25 percent!”
So when the clock flipped to 12:01 a.m. on Friday morning and the U.S. fired the first major shot in a trade war with China that has Wall Street and corporate America petrified, those who know the president mostly shrugged it off as Trump doing what he was always going to do, no matter the dire warnings from his “globalist” advisers.
“I always believed he was deadly serious about China from the very beginning,” said Stephen Moore, a conservative economist and outside White House adviser, recalling his time with Trump during the campaign. “I’m not at all surprised that we’ve come to this point. I am a little surprised that China hasn’t been more conciliatory. But I think Trump can’t back down, he just can’t. He has to stand toe to toe with China.”
But now that Trump is deep into the trade fight he desperately wanted, there’s no clear exit strategy and no explicit plans to negotiate new rules of the road with China, leaving the global trade community and financial markets wracked with uncertainty. As cargo ships head to ports in China with U.S. exports and Chinese ships head to U.S. ports, the new tariffs threaten to disrupt the established economic world order in ways that will soon cause pain for American and Chinese consumers.
So what?, say Trump true believers. The president is playing a long game.
“He has preached a confrontation with China for 30 years. The one thing he has been the most consistent on for his entire career is the economic threat posed by China,” former Trump senior adviser Steve Bannon told POLITICO in an interview. “This is a huge moment, a historical moment. It’s really Trump against all of Wall Street.”
While some saw a trade war with China as inevitable given the president’s history, the journey from Trump’s escalator-ride campaign announcement to the dawn of a trade war between the globe’s two largest economies took many sharp turns featuring Oval Office shouting matches, the Treasury secretary declaring the trade war “on hold” only to be rebuffed and Trump’s former top economic adviser Gary Cohn calling hawkish trade adviser Peter Navarro a liar to his face.
The recent history of the trade war began with Trump’s campaign announcement speech on June 16, 2015 in Manhattan, in which the reality TV star candidate mentioned China 25 times.
“People say you don’t like China. No, I love them,” he said. “But their leaders are much smarter than our leaders. And we can’t sustain ourselves with that. It’s like, take the New England Patriots and Tom Brady and have them play your high school football team.”
Trump shocked much of the world and rode his populist message into the White House. In his darkly apocalyptic inauguration speech, Trump made his plans clear.
“We’ve made other countries rich while the wealth, strength and confidence of our country has disappeared over the horizon,” Trump said. “One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind.”
While Trump swept into the Oval Office preaching fire and brimstone on trade, during his first year in office, his protectionist impulses were mostly held in check by advisers like Cohn and Treasury Secretary Steven Mnuchin, who advocated a more traditionally Republican approach to trade policy. With the help of Agriculture Secretary Sonny Perdue, they argued Trump out of withdrawing from NAFTA in April 2017.
Cohn argued to Trump at the time that unilaterally pulling out of NAFTA would tank the stock market and complicate White House efforts to pass a big tax cut bill that was priority No. 1 for the GOP.
Navarro saw his role diminished when Trump placed him under Cohn’s supervision at the National Economic Council. But just as Cohn and Mnuchin were winning battles on NAFTA, the wheels spun into motion for later showdowns over steel and aluminum tariffs and the larger trade battle with China.
In April of 2017, Commerce Secretary Wilbur Ross, at Trump’s direction, launched two probes that would result one year later in Trump imposing a 25 percent tariff on steel and 10 percent tariff on aluminum, angering China, the European Union, Canada and a long list of other trading partners.
They also led directly to Cohn’s resignation. The NEC director, who argued repeatedly to Trump that the tariffs would slam U.S. manufacturers, decided he’d had enough and quit in March of this year, replaced by Larry Kudlow, an affable free-trader and former CNBC host much less likely to contradict the president.
The direct path to the trade war with China began in August of last year when, at Trump’s direction, U.S. Trade Representative Robert Lighthizer launched an investigation under Section 301 of the 1974 Trade Act, which allows the president to restrict exports to put pressure on another country to change its trade practices.
In March, USTR released a report accusing China of unfairly acquiring valuable U.S. intellectual property, either through outright theft, forced technology transfers or other means.
Based on that report, Trump ordered Lighthizer to draw up a list of $50 billion worth of Chinese goods that would be hit with an additional 25 percent tariff. USTR published that list in early April, targeting a number of intermediate products used in manufacturing, but also some consumer items like birth control pills and flat-panel TVs.
However, after a public hearing on the proposed list, USTR dropped televisions, birth control and some other items from its product list, while adding new ones like semiconductors. That resulted in two different lists, one totaling about $34 billion of goods and the other totaling $16 billion subject to further review.
Beijing promptly responded by threatening increased duties on $50 billion worth of U.S. exports, including a big-ticket agricultural item — soybeans — as well as seafood, electric cars and whiskey. But once the United States divided its retaliation lists into two parts, Beijing did the same.
Senior U.S. and Chinese officials met at least three times in the following months — twice in Beijing and once in Washington — but failed to reach an agreement that would persuade Trump not to go forward with the duties, despite rising concern from the business community and many Republican members of Congress.
A trip to Beijing in May of this year laid bare the sharp divisions within the administration on China.
Navarro and Mnuchin got into a widely reported shouting match on the sidelines of the talks. And the pair brought their differences back with them. Mnuchin declared in a “Fox News Sunday” interview on May 20 that the trade was on “on hold” and urged the president to consider China’s offers to buy more American goods to reduce the trade deficit and avoid a tariff battle. Navarro quickly rebuked him in an NPR interview, calling the Treasury secretary’s remarks an “unfortunate sound bite.”
Behind the scenes, the Mnuchin-Navarro relationship grew even worse, people close to them said, with each privately blaming the other for leaking damaging information about them to the press. One person familiar with the issue said the true extent of their disdain for each other had actually been underplayed by the media.
Mnuchin’s critics in the administration cast him as a China policy neophyte who was played by Beijing. Mnuchin’s “on hold” comment also produced tacit pushback from Lighthizer, who put out a statement stressing that tariffs were a crucial option to “protect our technology” against the Chinese.
Navarro, for his part, was attacked internally as an out-of-touch hothead who couldn’t be trusted with sensitive negotiations. The long-time China critic was said to be furious about the leaking of his argument with Mnuchin on the sidelines in Beijing, believing it was intended to make him look short-tempered and rationalize his being kept out of upcoming talks with the Chinese in Washington, according to a person involved in the process.
Still, Mnuchin was not the only one hopeful about avoiding a trade war after returning from Beijing. Kudlow felt good too.
“I never felt we’d get a concrete deal,” the NEC director said in an interview from his West Wing office shortly after returning from the trip, in which the White House laid out its “asks” for the Chinese. “They engaged us on that, it’s good. This is going to be a process.”
That process never got very far.
Trump toyed with the idea of reaching a grand bargain with the Chinese that would avert the tariffs. And he stunned Capitol Hill and much of the world when he tweeted on May 13 that he was working with Chinese President Xi Jinping on a deal to get Chinese telecom giant ZTE, sharply sanctioned by the United States, “back in business.”
The White House has continued pushing to help ZTE, over congressional GOP opposition, largely as part of an effort to get Xi and the Chinese to help on diplomacy with North Korea. Trump also surprised his more hawkish advisers late last month when he took Mnuchin’s side in declining to impose investment restrictions exclusively on China.
But that decision and the efforts toward a ZTE deal were just sideshows as Trump marched toward the wider trade war with China.
People close to the president said he was always skeptical of the kind of grand bargain with China on trade that Mnuchin attempted to bring back from Beijing. In the end, Trump was unsatisfied with the early contours of the agreement, which included a demand to cut China’s trade surplus by $200 billion.
The failure of Mnuchin and other like-minded advisers to head off a trade with China concluded on Friday when U.S. duties on $34 billion on Chinese exports to the U.S. went into effect. USTR will hold another hearing and public comment period on the remaining $16 billion. China similarly divided its retaliation into two tranches to respond in kind as U.S. duties are imposed.
Trump told reporters on Air Force One on Thursday night that the U.S. was laying plans to impose close to $500 billion in total tariffs on China, a figure that would cover all kinds of consumer products from televisions to toaster ovens. The U.S. imported a total of $505 billion worth of goods from China last year.
There is little sense, even among the free-traders inside the administration, that the White House will back down from the Chinese tariffs anytime soon. It’s a defining issue for Trump, according to people close to the White House.
Administration officials told people last week not to expect the White House to “blink” on its tariffs in the near term. Right now, the president views the tariffs as a winning political issue heading into the midterms, despite protests from The Wall Street Journal editorial board, business groups and so-called elites or donors.
These various constituencies that support free trade are now trying to take the long view on the tariffs — hoping they end once an event like a drop in the stock market, an increase in prices of consumer goods or the conclusion of the midterms makes the political argument less palatable.
For a president who frequently changes direction on policy, trade is one area where advisers argue Trump is carrying out his campaign promises and setting himself up to make trade a major talking point in the 2018 midterms and even 2020.
“Obviously, Trump realizes that if you extrapolate things out over the next 10 to 15 years, the U.S. is at a disadvantage compared to other countries unless we fix the trade set ups,” said one of the Republicans close the White House. “The president is looking down the road to try to help the workers or industries most affected by this.”
For Trump’s nationalist advisers, the fierce internal debate over whether to hit China with tariffs amounted to a battle over the soul of Trumpism. And on Friday, they were privately declaring victory, arguing that the so-called globalists they have long ridiculed — and feared — had been defeated.
“Reagan had Russia; Trump has China,” Bannon said. “For over four decades the establishment said this day could never happen — with Trump it did.”
Megan Cassella and Maria Curi contributed to this report.