May 12, 2019 - Economy

Trade talks become trade war

Trump emerging out of fire

Illustration: Rebecca Zisser/Axios

The first rule of trade negotiations is that they take place in private. The minute either side starts setting out goals and demands in public, positions become hardened and compromise becomes an embarrassing climbdown.

Why it matters: With the imposition of massive new tariffs this week, accompanied by explicit threats, Trump has taken Sino-American trade negotiations outdoors, into a public arena where they have much less chance of success. Even before announcing retaliatory countermeasures, China has similarly gone public with its own red lines. Resolving this dispute is not yet impossible, but it has become exponentially harder. Among the dangers:

  • Recession: Bank of America is already warning that "a trade war could cause a global recession." As Axios' Dion Rabouin has written, this is a war the world cannot afford.
  • Inflation: American tariffs on Chinese goods will increase the price of those goods. If that ends up contributing to domestic inflation, Trump's desire for a rate cut will look even less realistic.
  • Food dumping: As the FT's Alan Beattie notes, Trump has already started talking about using the tariffs as an excuse to dump America's agricultural surplus onto poor countries, undercutting their domestic markets.

The big picture: "When you have both sides convinced that they have the upper hand, you get the kind of conflict that you have right now," China trade expert Patrick Chovanec told Foreign Policy. He added:

"If we want China to embrace structural reform, that requires real commitment—it’s not something we can just twist their arm to do, they have to buy into it. And they have to believe that it is not going to sink them or hurt them. When you basically strongarm them into doing something they really don’t want to do, and they’re convinced it’s harmful to their interests, at some point they are going to cheat, push back, or scuttle it, and it’s just a question of when."

The bottom line: Trump's trade negotiator, Robert Lighthizer, might consider these tariffs to be a tough way of forcing China to make concessions. And the market seems hopeful that the trade war will be temporary, on the grounds that ending it would be rational for both sides. But Trump himself wanted these tariffs all along.

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