How Donald Trump dodged becoming the Grinch
It seems that Trump, in delaying the latest tariffs on China, may have unwittingly acknowledged that he has lost some of his leverage
Launceston, Australia — US President Donald Trump has inadvertently admitted that the US no longer holds the whip hand in the ongoing trade dispute with China, after backtracking on his latest escalation of the tariff war.
Tariffs of 10% were due to be imposed on the remaining $300bn worth of annual imports from China on September 1, but some will now only come into effect on December 15, the office of the US trade representative announced on Wednesday.
Among the items getting a reprieve are cellphones, laptop computers and clothing, and it's estimated that about half of the $300bn worth of goods will benefit from the delay.
Trump told reporters that the decision to defer the tariffs on a range of mainly consumer goods was to protect US consumers from price increases ahead of Christmas holiday shopping.
"We're doing this for Christmas season, just in case some of the tariffs would have an impact on US customers," Trump told reporters in New Jersey.
That statement alone makes a mockery of Trump's long-held assertion that China is paying for the tariffs, not the US consumers. If the US public really were not paying for the tariffs then logically there would have been no need to delay them, since doing so would only provide relief to China's economy.
Apart from undermining his own arguments that the tariffs were only hurting China, Trump also sent a message that political expediency would win out over strategy.
Delaying the tariffs appears to be a move driven by the domestic political considerations of not risking public anger at more-expensive Christmas gift shopping, and also to shore up equity markets spooked by the escalation of the trade dispute between the world's two largest economies.
It also further emphasises to Beijing that the Trump administration is fundamentally an unreliable negotiating partner, subject to rapid shifts in policy and sentiment.
While the delay to the latest tariff hikes will likely be welcome in Beijing, it's also likely that the Chinese negotiators won't see this move as an olive branch, or a U.S. willingness to compromise should the trade talks resume in September.
Beijing is facing some challenging strategy responses to Trump's latest move in delaying tariffs, and none of them are particularly appealing.
China could do nothing and continue along the current path of holding talks with the US, but not really giving ground on the key demands of the Trump administration.
China could also try to dial back tension by suspending its ban on importing US agricultural products, and by signalling a willingness to restart purchases of energy commodities, such as crude oil, liquefied natural gas (LNG) and coal.
China could make the calculation that the worst is over for its own economy from the trade war, but the pain is just starting for the US, and therefore it is best to be uncompromising and inflexible in the trade talks.
All of these strategies have risks and may not deliver an outcome acceptable to Beijing.
Commodities the key
The first option of doing very little also means that the trade war is likely to continue its current trend of escalating in fits and starts until all exports and imports between the two countries are subject to tariffs.
The second option may lead to something of a detente in the talks, but China risks giving up its best leverage over the US, namely commodity imports, in nothing more than the hope that the Trump administration will suddenly become a more rational actor in the trade dispute.
The third path probably assumes that Trump will not win a second term in November 2020 and that China can hold out and see if they can negotiate a better deal with his successor.
The risk here is that as the US economy starts to feel more pain, Trump will double down and escalate the trade conflict even further.
The assumption that Trump will lose 2020's presidential election is also at best a 50-50 bet, with most opinion polls pointing to a tight contest, depending on who the eventual Democratic Party challenger is.
While Trump's climb-down on tariffs this week is related to consumer goods, China should realise that its best leverage is commodities.
Trump will be keen to shore up support among farmers, as well as in his favoured energy industries.
China's imports of US agricultural commodities have dropped from about $20bn a year to a figure likely to be closer to $6bn in 2019.
China was buying about 344,000 barrels per day of crude oil from the US prior to the trade spat, worth about $7.5bn a year at current prices.
US LNG exports to China would be worth just under $1bn, even at the current depressed spot price, while coal exports would also be valued at about the same, assuming volumes had remained at the levels prior to the start of the tariff war in July 2018.
Commodities, and energy in particular, offer the greatest scope for China increasing the volume and value of its imports from the US.
They also happen to represent a key constituency for Trump, making him vulnerable to a loss of support the longer the trade war continues.
The problem for both Trump and China is that the trade dispute is a dynamic process with neither country able to control, or even influence all its moving parts.
It seems that Trump, in delaying the latest tariffs, may have unwittingly acknowledged that he has lost some of his leverage over China.
This may be an acceptable price for Trump to avoid being seen by the US public as akin to the Grinch in the Dr Seuss story who tried to ruin Christmas, but no doubt he will still want Beijing to see him as tough and uncompromising.