Trump's China Torture Act Backfires

William Pesek

It’s time to call Donald Trump’s trade war what it is: an experiment in economic torture.

Only, the U.S. president is dabbling in both roles. On the one hand, his tariffs are giving China quite a wallop, delivering sadistic pain and humiliation to Asia’s biggest economy. On the other, the pain is being felt at home, where key Trump support groups, including farmers, are taking hits and nursing bruises.

But it’s this latter role–that of self-harm–that dominates America’s 2019 given signs that China may best Trump.

China’s Xi Jinping isn’t bowing to Trump’s demands. Rather, Trump is bowing to growing evidence that American workers are bearing the brunt of his torture economics. Trump's claims Washington is winning are belied by two new research papers that suggest the self-defeating nature of the trade war.

In one, economists including Pinelopi Goldberg of the World Bank calculate that Trump’s tariffs are erasing about $69 billion from gross domestic product, or 0.4%. In another, economists from the Federal Reserve Bank of New York, Princeton University and Columbia University found Trump’s levies on $250 billion of Chinese goods are causing a $165 billion disruption to supply chains. As such, Nobel economist Paul Krugman concludes that Trump’s taxes “made America poorer overall.”

Trump boosters counter that you should see the other guy. Didn’t President Xi just scale back China’s 2019 GDP ambitions by half a percentage point from 2018? Xi’s 6% to 6.5% target would, after all, mean the slowest growth in about three decades.

The real point, though, is how little Xi is conceding to Trump. Odds are, Xi will get away with pledges to buy more U.S. goods and police intellectual-property-right infractions a bit more. That will be a stinging blow to hardliners–including former Trump consigliere Steve Bannon–angling for wholesale changes to Beijing’s state-run-enterprise model.

There was plenty of evidence before Trump went all tariff-happy that things would end this way. In June 2017, World Bank economist Caroline Freund warned against a “misguided” obsession with bilateral trade deficits. In Trump’s zero-sum worldview, any such imbalance suggests the surplus holder is a thief. But when U.S. unemployment is historically low, as it is now, economic policy makers should focus elsewhere.

One such focus is a structural shift in the Sino-U.S. commercial relationship. Hedge fund investor J. Kyle Bass of Hayman Capital Management summed it up nicely in a recent Bloomberg op-ed. The key, Bass wrote with Daniel Babich, is prodding Beijing to dismantle “an industrial policy that grants unique advantages, namely widespread government subsidies, protected domestic markets and regulatory preferences, to Chinese government-affiliated national champions.”

That means moving to “end China’s long-standing policy of bulk economic espionage and theft, which annually costs America’s economy at least $300 billion, according to U.S. government estimates,” Bass wrote with Daniel Babich. Any such effort requires Xi scrapping the joint-venture requirement, the main mechanism China Inc. used to appropriate foreign technology.

Yet their worst fears may be coming true. Trump does indeed appear to be telling his negotiators to get a deal, any deal, to calm markets. That would defeat the entire purpose of the exercise–and forgo a historic chance to make China more of a stakeholder in global affairs than a mere shareholder.

What’s more, Xi arguably would come out the dominant in this affair. Beijing would be free to continue coddling its state-owned national champions. Xi also would have a freer hand to slow–or in some cases reverse–the market opening steps of recent decades. And all for very little. With some headline-grabbing soybean purchases or holding the yuan steady to firmer, Xiconomics can get back to business.

That business, make no mistake, is about making America the economic submissive. Xi’s “Made in China 2025” juggernaut aims to dominate the future of renewable energy, semiconductors, software, aerospace, self-driving vehicles, pharmaceuticals, robotics and artificial intelligence. Trump, by radical contrast, wants to return America to 1985. How else can one describe his efforts to bring back coal, browbeat Detroit into making less fuel-efficient cars and engineer a Plaza Accord 2.0?

This latter mention was a 1985 deal on currencies hammered out by the biggest industrialized economies. It took place at the Plaza Hotel, a New York institution that Trump would later own for a spell. Any similar move to weaken the dollar would be a pyrrhic victory, at best. Since the U.S. only manufactures domestically a fraction of what it did in the 80s, exchange rates wouldn’t get Trumponomics very far.

Nor will a weaker dollar or increased Chinese agricultural purchases do anything to increase productivity. They won’t prod Silicon Valley to focus more on true innovation than selling ads and data. They won’t repair America’s crumbling infrastructure or increase internet speeds. They won’t reduce the inequality Trump made worse with a badly designed $1.5 trillion tax cut. They won’t revitalize an American education system falling behind Asian peers. They won’t halt a runaway debt that just surged past the $22 trillion mark.

Yet indications are that Trump, up against his pain threshold, is about to cry uncle. Try as it may to spin this as a euphoric win, Trump’s White House is using its safe word to end this torture experiment. For Trump, the stopping point is Wall Street traders communicating their disgust.

The stock market really does seem to play some primal role in Trump’s psyche. In 2017, Trump cited the Dow Jones Industrial Average’s 25% rally as proof he was an economic magician. Yet the market’s 2018 stumble bore Trump’s fingerprints as his trade war crimped world growth. In December alone, the Standard & Poor’s 500 ended up or down more than 1%–a sizable gyration–nine times. That compared to eight times in all of 2017.

As scandals and investigations swirl around Trump’s White House, his legislative prospects are grim. Hopes for a win on North Korean denuclearization didn’t pan out. Hence Trump’s desire for a China trade deal be can sell as proof the “Art of the Deal” president has still got it. Yet Trump’s role as slave to stock moves make Xi master of this U.S.-China trade affair. And Xi fully knows it.

https://www.forbes.com/sites/williampesek/2019/03/06/trumps-china-torture-act-backfires/#12ff1d23254a