Among all the trade fights that President Donald Trump has picked, his hand against China is the strongest. That fight has economic, strategic and political logic that his confrontations with Canada, Mexico, Western Europe and Japan lack.
Yet China, incredibly, appears to be winning. Though it is still early days, China has thus far escaped the bulk of threatened U.S. tariffs while giving up almost nothing of substance.
Mr. Trump initially seemed to have more stomach for confrontation with China than his predecessors. Instead, China has shrewdly exploited his weak points: his hopes for a breakthrough with North Korea, a Chinese client; a low threshold for political pain, especially in Republican farm states; and a readiness to play China’s game of using legal proceedings as a commercial bargaining chip.
Over the weekend, the U.S. agreed to suspend, for now, tariffs on up to $150 billion in Chinese imports. China in turn agreed to buy more energy and agricultural products. That is hardly a game changer. Since both are commodities traded on global markets, China buying more from the U.S. will likely just redirect some sales that would have happened anyway.
A deal may over time prompt American farmers to change their mix of crops to garner better prices driven by Chinese demand for, say, sorghum, but total U.S. production will, as always, be largely determined by global conditions.
Similarly, if U.S. shale producers export more oil to China, they will sell less elsewhere. China may buy more liquefied natural gas, but that was probably inevitable: it is set to become the world’s largest LNG importer anyway and the U.S. one of the three largest exporters. In February Cheniere Energy Inc. signed a long-term deal to ship LNG from the U.S. Gulf Coast to China National Petroleum Corp.
The promised Chinese purchases might trim its trade surplus with the U.S., but not by anywhere near the $200 billion Mr. Trump has sought. More important, that deficit has always been less of a problem than the myriad ways China positions its own companies to grab market share from foreign rivals, for example by acquiring the latter’s intellectual property via compulsory licensing, joint ventures or theft, and limiting what foreign companies may do in China.
The U.S. Treasury is exploring how to restrict Chinese investment in the U.S., and China has said it would allow foreign companies to manufacture cars there without joint ventures. Yet it still has countless, often subtle, ways to promote its domestic champions over foreign rivals. For example, it requires foreign electric-vehicle makers to use Chinese-made batteries while permitting Chinese-owned Volvo Car Group to use superior South Korean-made batteries.
Thus, China’s biggest commitment so far is “to buy more of the things that it likely would buy more of no matter what,” Brad Setser, a trade expert at the Council on Foreign Relations, wrote on Twitter, without addressing “the structural problem in China’s global pattern of trade: its low level of imports of manufactures, and its desire…to reduce those imports further.”
U.S. officials may yet extract more substantive concessions in coming talks with China. If “we don’t get what we want, the president can always put tariffs back on,” Treasury Secretary Steven Mnuchin said Monday. Yet U.S. officials have shown little appetite for exercising their leverage over China.
Mr. Trump had initially sought to keep national security and trade relations separate. But to maximize the chance of a breakthrough on denuclearization with North Korea at a June 12 summit, he, like his predecessors, is avoiding antagonizing its patron, China.
China has long used selective enforcement of its law such as over health and antitrust as a negotiating chip with foreign companies and governments. It has deployed similar tactics in this fight, stepping up customs inspections of U.S. cars and soybeans and holding up its antitrust review of a U.S. firm’s takeover of a Dutch semiconductor company. Mr. Trump has in effect done the same. His Commerce Department banned Americans from supplying Chinese phone manufacturer ZTE Corp. because it had violated sanctions.
When China insisted those penalties be eased as part of any trade talks, Mr. Trump agreed. The proposed swap is “pretty darned unusual,” said one former U.S. trade official. “The implication is that US national security is tradable.” Mr. Mnuchin said the issues were “completely separate.”
When Mr. Trump first unveiled his sweeping actions against China last month he warned that the fight might entail “a little pain.” But his own tolerance for pain appears limited. Though the U.S. depends much less on exports to China than the reverse, China targeted farm exports from Republican states important to the outcome of November’s midterm elections. That may explain why U.S. officials have prioritized avoiding Chinese retaliation.
China still holds the weaker hand in this trade dispute—but it has played that hand far better.