Donald Trump’s waxing and waning over a potential trade war with China symbolises the tussle within the United States government over the two paths he must choose between.
Art of the Deal Trump can accept cheap, easy and symbolic wins such as China pledging to buy more US goods to, ostensibly, lower the US bilateral trade deficit.
Chinese Vice Premier Liu He is likely to bear such gifts on his visit to Washington this week.
Wall Street may cheer such a compromise. Yet token victories will do little to address the deep underlying structural problems for the US in its economic relationship with China.
Alternatively, strongman Trump can dig in for a protracted and painful trade war with China in an improbable effort to force Beijing to fundamentally reform its state-driven mercantilist economic model.
Hawks pushing a hard line
Trade and defence hawks within the administration led by US Trade Representative Robert Lighthizer, Death By China author Peter Navarro and national security officials are pushing a hard line.
They want Trump to force China to open up its economy to US investment, end the pilfering of American intellectual property, stop forced technology transfer from US firms and curtail state subsidies for strategic advanced-technology industries.
Trump appeared to switch from trade hawk to dove in recent days, directing his administration to ease up on sanctions costing “too many jobs in China” at corrupt Chinese telecommunications firm ZTE Corp.
He signalled that a possible compromise was part of a “larger trade deal we are negotiating with China and my personal relationship with President Xi”.
“Trade negotiations are continuing with China. They have been making hundreds of billions of dollars a year from the US, for many years. Stay tuned!” Trump tweeted Wednesday AEST.
Opening up China might tempt Trump
US media reports suggest in return China may offer to not impose tariffs on American agriculture – against US steel tariffs – and approve Qualcomm’s pending acquisition of NXP. Opening up China more to American car manufacturers and financial firms may tempt Trump.
Yet among the long-time China trade hawks in Washington there is rising concern Trump may give up on his administration’s demands for a much more crucial prize.
Beijing’s Made in China 2025 policy is undermining America’s traditional dominance in technology and defence and is a threat to US economic and security supremacy.
American Enterprise Institute US-China economic scholar Derek Scissors says Trump must choose between a short-term win and long-term fight.
“The President’s normal tactic is to shake a big stick and have you give him stuff,” Scissors says.
“Carrying out difficult sanctions for sustained periods does not fit into his approach to negotiations. But I think the situation is still fluid.”
Trump’s obsession with the $US375 billion US merchandise trade deficit with China may lead him to accept relatively small gestures from Beijing.
Nuclear weapons might be a side deal
Perhaps attaining China’s ongoing help on negotiations over North Korea’s nuclear weapons might be quietly worked into a side deal.
A problem for Trump is that if he maintains the rage against China’s IP abuses and broader state-backed industrial policy, he is not assured of any win and may only incur pain.
Such a risky tactic will lead to American farmers and manufacturers (Trump voters) copping tit-for-tat tariffs if Trump imposes threatened levies on $US150 billion of Chinese goods.
Ely Ratner, an Asia policy expert who worked in the Barack Obama White House and is now vice-president at the Centre for a New American Security, says: “I’m sceptical China will curb its state-led economic model of supporting state-owned enterprises and restricting market access for foreign firms in critical technology sectors.”
Treasury secretary Steven Mnuchin and economic adviser Larry Kudlow, both ex Wall Street players, are said to want to avoid a trade war at all costs.
“There’s a little bit of a bromance,” between Trump and Xi , Kudlow said.
“I think the time is right for China to make changes they should have been making for the past 15-20 years.”
The US business community generally supports Trump’s attempts to reform China’s behaviour, but does not want a tariff war.
The easier road may appeal to the former-reality-television-star-turned-president to do a victory lap for before the November congressional midterm election.
“He will be able to say he got more than anyone else from China but it will be short term and just won’t be very meaningful and it will come back to bite him,” Scissors says.