Why Trump is losing his trade war with China

In recent days, Donald Trump has signaled eagerness to reach a trade agreement with China. The president said Tuesday that his 145 percent tariffs on Chinese imports will “come down substantially” in the near future. 

On Thursday, Trump said that his administration is already negotiating with China over trade, saying, “They had a meeting this morning.” Asked who precisely had a meeting, Trump told reporters, “it doesn’t matter who ‘they’ is.”

Yet that same day, China denied the existence of such negotiations, saying that “any reports on development in talks are groundless.” 

By most accounts, China feels little need to come to the table. Chinese leaders reportedly believe that they can wait Trump out. They’re not enticed by his floated offers of partial tariff relief, but instead favor a total pause on the tariffs, as a condition for commencing negotiations over the two nations’ trade disputes.

China’s intransigence may take some US observers (particularly those in the White House) by surprise. The Chinese economy has been suffering from deflation, due to a collapse in its property sector. Manufacturing has been one of the nation’s few economic bright spots. Now, as many as 20 million Chinese workers are at risk of losing their jobs because of a collapse in exports to the US, according to an estimate from Goldman Sachs.

Nevertheless, the Chinese government believes that it has the upper hand in this trade fight. And they’re probably right. That could have dire implications for America’s economy, if Trump cannot reconcile himself to a near total capitulation. 

China has the advantage in its trade war with the US for at least three reasons:

1. China’s stuff is more precious than America’s money

Donald Trump’s trade policies are all rooted in one fundamental — and fundamentally wrong — premise: If America runs a trade deficit with another country, then we are effectively “subsidizing” that nation. After all, in that scenario, our trade partner is receiving more money from us than we are collecting from it.

Given this reality, the president long assumed that America could easily win a trade war with China, which runs a large trade surplus with the US. Trump spelled out the logic of his position in 2018, tweeting, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” 

But this is poor reasoning. Trade is not a zero-sum game in which sellers “win” and buyers “lose.” 

This is easy to see at the individual level. Unless you own a farm or snack-food company, you probably run a trade deficit with your grocery store: Each year, you sell roughly $0 worth of goods to your local Costco or Aldi, while purchasing hundreds (if not thousands) of dollars worth of foodstuffs from them. Yet it does not follow that you are “losing” hundreds of dollars on trade with your grocer annually — the money you give them secures you life-sustaining products. 

By Trump’s logic, American consumers could comfortably cease all trade with US grocery stores — and therefore win a “trade war” with those grocers — since shoppers “lose” money on transactions with such retailers. Yet money is only useful to the extent it can be exchanged for goods and services. Bread has more utility to a starving man than a wallet full of $20s.  

Of course, trade between consumers and their local retailers is not perfectly analogous to trade between America and China. But Trump’s idea that buyers always have the upper hand is actually even more misguided when applied to the US-China relationship. Your local Kroger needs to sell things to Americans in order to exist. The same is not true of China, which sells only about 15 percent of its exports to the United States. 

Without question, Trump’s tariffs will heap pain upon an already faltering Chinese economy. But ultimately, China needs our dollars less than we need its goods, minerals, and industrial inputs.

Compensating for a decline in consumer demand is a fairly simple task. Money is not technically difficult to generate: China can partially offset the impact of lost sales to Americans by helping its own people spend more through policies that discourage saving, boost wages, and increase income redistribution. At the same time, China can work on increasing its exports to the rest of the world (a task it is currently pursuing). 

By contrast, it is not technically possible for the United States to swiftly replace what we gain from trade with China. 

Beijing has sought to hammer home this point in recent days by abruptly choking off exports of rare earth minerals and magnets to the United States. Such elements are indispensable for manufacturing electronics, batteries, military drones, and countless other essential goods. And America cannot get many of these minerals from anywhere else, at least not at the necessary scale.

According to one expert who spoke with the Washington Post, developing a China-free supply chain for all rare earths would take “10 to 15 years.” Many US manufacturers will exhaust their stockpiles of these minerals within the next couple months.

And America’s dependence on Chinese industry extends well beyond elements. We also rely on China for electronics, pharmaceutical ingredients, and myriad other goods.

A government can increase consumer demand almost instantly by electronically depositing money into its citizens’ bank accounts. By contrast, there is no button that the US can push to instantly replace the physical products that China provides us. 

2. America’s allies have little interest in joining our trade war

To the extent that Trump has a strategy for winning his trade war with China, it involves conscripting America’s allies into the fight. The administration says it aims to strike trade deals with the European Union, Japan, and other friendly countries and then “approach China as a group.” It also plans to ask its allies to reduce economic ties with China, as a condition of securing relief from Trump’s tariffs.

It is true that America and its allies have some mutual economic grievances against China, which has threatened Western export industries by “dumping” products below cost onto global markets. 

Nevertheless, America’s allies display little appetite for an economic showdown with China. On Thursday, Bloomberg reported that Japan intends to “push back against any US effort to bring it into an economic bloc aligned against China,” due to the importance of its trade relationship with Beijing. Likewise, the European Commission said this week that it has no intention of “decoupling” from China.

The reasons for this reluctance to break with China are not difficult to discern. Japan and the EU are no less dependent on Chinese exports of key minerals and goods than the United States is. And at this point, they have little reason to believe that the US is a more reliable trade partner than China. Beijing is not waging war against Europe’s exporters to protest largely fictional trade barriers; Washington is. So why pursue closer economic alignment with the US at the expense of trade relations with China?

Trump’s diplomatic task is made all the more difficult by his failure to articulate a clear set of demands. It is not evident precisely what America’s allies are supposed to be uniting against China to achieve. Trump’s ostensible complaint is that the US runs a trade deficit in goods with China. But it is difficult to conceive how such a deficit could be fully eliminated, given the structural characteristics of each nation’s economy — and even harder to understand what interest Europe or Japan would have in eliminating that deficit.

3. This trade war is less politically damaging for the CCP than the GOP

The final reason why the Chinese government has the upper hand in Trump’s trade war is that it will face less domestic political pressure to relent.

This is partly because China’s authoritarian government doesn’t need to worry about the next election. But it also reflects the fact that America is unambiguously the aggressor in this fight. Trump’s tariffs weren’t triggered by any particular Chinese action, even if they are partly inspired by Beijing’s genuine trade violations over the past two decades. 

Xi Jinping therefore should have little difficulty persuading much of the Chinese public to blame Trump for any contraction in their nation’s export industries. In fact, Trump’s tariffs may actually help Xi politically by enabling him to deflect public discontent about economic conditions away from the Chinese Communist Party and toward the United States.

For Trump’s party, on the other hand, his trade war already looks politically devastating. Public approval of Trump’s economic management has fallen to 37 percent in Reuters-Ipsos’s polling, his lowest mark ever in that survey. An Economist-YouGov poll, meanwhile, shows Americans saying Trump’s economic actions have hurt them personally more than they’ve helped by a 30-point margin. And these results are consistent with those of other surveys.

Critically, the real economic effects of Trump’s trade war with China have barely been felt yet. Manufacturers and retailers have been able to draw on their stockpiles of Chinese wares, delaying the shortages and price spikes that a sustained trade war will produce. If Trump stays the course, it is likely that his approval will fall much lower, jeopardizing the GOP’s fragile grip on the House if not the Senate.

For all these reasons, China does not feel compelled to rush to the negotiating table. Xi seems to believe that time is on his side — the longer this trade war drags on, the more desperate Trump will become for a deal. Judging by the White House’s increasingly conciliatory rhetoric — and strained attempts to demonstrate progress toward a settlement — the Chinese president seems to be right.