Free Trade

As the U.S. and China Reopen Trade Talks, Trump Ought To Change His Strategy

The economy is doing well enough—except for all the sectors hurt by the trade war.


The unemployment rate is at a 50-year low, and the U.S. economy added about 161,000 jobs last month—yet three sectors of the economy are effectively in recession, according to Moody's Analytics chief economist Mark Zandi: manufacturing, farming, and shipping.

If only there were a common thread that could explain why they are lagging behind!

That dynamic—a generally strong American economy, but one that's obviously showing the effects of a trade war that's lasted for 18 months—sets the stage for this week's meeting between trade negotiators from the Trump administration and the Chinese government. The meetings planned for Thursday and Friday in Washington, D.C., will be the first face-to-face trade policy discussions in more than two months. And they are happening with the threat of another tariff increase looming: Trump has promised an escalation of the trade war in mid-December.

Observers are skeptical that a trade deal will be in the offing. "If you're looking for good news, they didn't cancel the trip," Tom Block, a trade policy strategist, told CNBC, underscoring how little real good news there is.

Indeed, the U.S. and China are now feuding over much more than soybeans and steel. The Commerce Department on Tuesday announced that it would blacklist 28 Chinese-owned companies in retaliation for China's treatment of Uighurs and other Muslim minority groups. An executive for one of the teams in America's largest professional basketball league tweeted criticism of China's crackdown on Hong Kong, causing controversy. South Park is involved, too.

In some ways, the heightened tensions between the two countries may give a domestic political boost to Trump's trade war. Challenging China may seem more urgent now than ever. But tariffs are still the wrong strategy, and the trade war is still doing more damage to America than to China. Rather than doubling down, the Trump administration should use this week's meetings to work toward undoing the damage already inflicted.

Consider what the trade war has done: Instead of resurrecting steelmaking, saving Rust Belt manufacturing from decline, or providing a better deal for the country's farmers, Trump's tariff policies have led to uncertainty and imposed higher costs on American businesses and consumers. Tariffs have caused layoffs at steel plants and lumber mills, triggered declines in both exports and domestic business investment, and drained $34 billion (equivalent to the entire economy of Iceland) out of Americans' wallets and bank accounts.

Equally important is what the trade war has failed to do. Trump promised that hiking tariffs on imports from China would bring manufacturing jobs back to the United States. Wrong. Even though China is feeling some pain from the tariffs, 87 percent of American companies doing business in China plan to stay there—and the ones that are leaving are relocating to places like Mexico and Vietnam. There's virtually no evidence of companies shifting production to the United States. Overall, the U.S. has added about 5,000 manufacturing jobs per month during 2019, well below the rate of 22,000 per month added in 2018.

Trump also promised to reduce America's trade deficit—the difference between the value of goods a country imports from another country and the value of goods it exports to that same country—with China. Most economists agree that there's no need to worry about the size of a trade deficit (for the same reason that you wouldn't worry about running a deficit with your local grocery store), but Trump has been fixated on America's trade deficits since before taking office.

How's that worked out? American exports to China (largely farm goods) have decreased during the trade war, while imports from China have remained relatively flat. The result: The trade deficit widened by 12 percent during 2018, and has grown by another 8 percent so far this year.

As Reason's Peter Suderman put it yesterday: "It's not just that Trump can't be counted on to live up to his word. It's that Trump can't even be counted on to comprehend the promises he's made."

Suderman was talking about a different policy issue—specifically, Trump's claim that he would be able to wipe out the national debt within eight years. In reality, the deficit has grown tremendously under his watch. But the same point is true when it comes to trade. Chinese trade negotiators have little reason to trust Trump at this point, and trust is a necessary precondition for the kind of trade deal the president has promised—one that would completely reshape the relationship between the world's two biggest economies. American voters have little reason to continue trusting (if they ever did) that Trump is capable of hammering out such a deal.

Continuing to escalate the trade war in order to appear "tough on China" would be folly as well. The trade war is hurting China's private sector and empowering greater retrenchment against liberalization, argues Weijian Shan, CEO of a Hong Kong-based private equity firm, in Foreign Affairs.

"China may well agree to commit to purchasing large quantities of U.S. goods as part of a settlement. But such purchases can be made only by the government, not by the private sector," he writes. "The United States should recognize that securing such a commitment would basically compel the Chinese government to remain a large presence in economic affairs. The trade policy of the Trump administration threatens to undermine its own stated objectives."

Beyond that, it makes little sense for Trump to continue punishing American consumers and businesses in order to reach a trade deal with China when a trade deal seems increasingly unreachable. Even if you agree with the goals of the trade war, it's clear the tactics have failed. Besides, continuing the tariff strategy means risking his best argument for his re-election: a strong economy.