Once again, US President Donald Trump twisted the situation to suit his understanding. Earlier this week, he blamed China for the failure of the current round of negotiations to reach an agreement in the countries' trade dispute: "You had a great deal, almost completed, & you backed out!" he tweeted. Considering the fact that he had doubled tariffs on imports from China the previous Friday, a breakthrough between the world's two biggest economies was never very likely.
China has made it clear several times that it will not negotiate under duress. In response to "US unilateralism and trade protectionism," it decided to raise tariffs on $60 billion (€54 billion) of US goods effective from June. Trump said all was going to plan: The US was right where it wanted to be with China. White House economic adviser Larry Kudlow agreed. "We're in terrific shape in order to correct 20 years plus of unfair trading practices with China," he said.
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But, on Tuesday, the US president backpedaled. "We're having a little squabble with China," he said at a speech in Louisiana. Later, he tweeted optimistically: "When the time is right we will make a deal with China. It will all happen, and much faster than people think!" (On the condition that China buy more US farm products.)
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A restaurant in Guangzhou has decided to retaliate by charging US customers 25% more.
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An old strategy
Washington's strategy of countering protectionism with more protectionism and to giving in is not new. In the 1970s and '80s, Presidents Richard Nixon and Ronald Reagan tightened tariffs on Japan, which at the time had isolated itself even more than China today. Tokyo subsidized certain industries, which enabled firms to finance export offensives that US companies could not keep up with.
The car market was only one example. Within a decade, Japan's trade surplus with the US had reached over $80 billion. The trade war between the countries had become a permanent state. It didn't bring much. Washington's tariffs and Japan's "voluntary" limits even led to a worsening of the trade balance because Japanese cars were better made and cheaper and therefore more interesting for customers. But overall Japan was in a much weaker position than the US. Today's trade dispute between the US and China is different. The US depends much more on China today than it ever did on Japan. And China today has a different geopolitical status.
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With its One Belt, One Road project, China is opening up new markets all over the world. It also has a "savings account" with the biggest foreign currency reserves in the world. Beijing has been painstakingly careful to not become financially dependent on anyone. It is also the US's biggest foreign creditor, and the US has a lot of debts. This should not be underestimated in the current situation. Whereas Trump seems to think in terms of days and weeks, China is planning years, perhaps even decades, ahead. It will not be as easy as Trump seems to think to just stop doing business with China, if Beijing refuses to give in to his terms.
The countries are part of a global economy, where prices are determined by the international division of labor. One Trump tweet about China and the US can make the markets in Europe quake. Trump doesn't seem to care. Or perhaps this flatters his vanity. But all this could end up backfiring. Each year, the US imports Chinese goods worth $540 billion. Trump would like his core voters to believe that China will directly pay the tariffs he has imposed so that the US rakes in revenues worth billions more. But to begin with it's the importers of Chinese goods who will be paying. And they will pass on the costs to their customers: US consumers. Farmers and IT firms are already suffering because of the tariffs. Trump has had to promise more subsidies to keep them calm.
Instead of creating turbulence on the global markets with his tweets, Trump could learn from what happened with Japan. He could make agreements with other governments that are also interested in curbing China's violations of the WTO's rules. In 1985, the US met the leading G5 industrial nations, including Japan, and they all signed what became known as the Plaza Accord. Japan agreed to the yen being appreciated in relation to the US dollar. Thus its exports became more expensive. It spelled the beginning of the end for Japan's economic boom. The volatility of the exchange rate market triggered a recession. Speculation led to soaring real estate and stock market prices and the overheated bubble eventually burst at the end of the 1980s. Since then, Japan's economy has been stagnating. The US, thanks to the collapse of the Soviet Union and the invention of the internet, was able to make a comeback.
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Of course, these days it's much less likely that China will stagnate and that the US will be able to make a comeback. This is why Trump has also taken on Europe. He has no time to lose. He will be able to use the concessions that he gets from China in the best-case scenario to mount pressure on Europe — but this strategy borders on gambling and shows how much the US has its back against the wall.
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