The United States trade war with China appears to be at a point where the stars have aligned. Almost equivalent domestic economic and political pressure will force President Donald Trump and President Xi Jinping to stand down on their demands. In both countries, it makes sense to follow what has now become a traditional tactic of declaring premature victory.
For all his swagger over the tariffs imposed by his administration, Trump cannot ignore certain unwritten rules that control his executive authority. Foremost among these is what the late political scientist Richard Neustadt said was the ability of the president to persuade. If the other branches of government or members of his own administration see the president as politically weak, then his ability to lead becomes seriously jeopardized.
The government shutdown and his fight with Speaker Nancy Pelosi was a political disaster. This has led to the perception that, much like the tale, this emperor has no clothes. On top of his devolution of power is the special counsel investigation and the subpoena power of the Democrats who have control of the House of Representatives. Trump needs a big win to regain power in Washington. So what easier way to win than to declare victory in the trade war that most Americans do not understand?
Adding to the pressure for Trump to quickly end the trade war is that the tariffs have been a disaster for farm states that make up a key Republican base. Soybean exports to China dropped 98 percent in 2018, while net farm income has fallen by about 20 percent across the United States, according to data from the Agriculture Department. Before the trade war began, China was the number one importer of American farm products.
What makes this decline in sales worse over the past year is that if there is a truce, there is no guarantee that the American farmers will gain back the same market share. What glues the commodity seller to the commodity buyer is the relationship. Because of the trade war, Canada, Argentina, and Brazil have not only replaced the United States in agriculture exports to China, they have also demonstrated their strong reliability as suppliers.
For the American steel industry, the tariffs have been at best problematic. Steel prices are back to levels before the tariffs. Because of automation, there has been no increase in labor. The ultimate business pressure on Trump, however, comes from large American corporations. Keep in mind that China is the largest market for General Motors and the third largest market for Apple. Moreover, Starbucks opened a new store in China every 15 hours last year. If Trump had carried out his threat to increase tariffs on products imported from China to 25 percent, one of the few options that Xi has left is to go after American corporations doing business in China.
Ironically, Xi is under similar political pressure to “declare victory” through a truce. In basic economic terms, China has not suffered. Its exports to the United States have actually increased in the past year. Since the yuan fell by 10 percent, it has essentially negated the effects of the tariffs while making American imports more expensive. Even if the yuan had not fallen, it is estimated that the 10 percent tariff on Chinese exports would only have affected its gross domestic product by as little as under 1 percent.
Although the trade war is not showing up in the data, it is showing up in the powerful but incalculable force of business confidence in China. Xi is under tremendous political pressure to lift the slowing Chinese economy, which suffers from debt, housing and manufacturing oversupply, and an aging population. The continuous need for growth is a major component that makes up the legitimacy of the Chinese Communist Party. Politics since Deng Xiaoping are somewhat based on the premise that growth within a partly capitalist system can be tightly controlled and managed.
There are some quiet whispers that the Chinese economy has put Xi in jeopardy. This is probably not true, but what is true is that just like Trump, Xi desperately needs a win. A truce on the tariffs will certainly not resolve the structural problems of the Chinese economy, but it will reinforce the image of Xi as a leader and possibly reignite the elusive force of business confidence. This points to a deal to end the trade war in the near future.