With the two sides moving closer to a trade war, some officials looked for a way out. In Washington that job fell mainly to Treasury Secretary Mnuchin, who had been overshadowed on trade issues first by Commerce Secretary Ross and then by Trade Representative Lighthizer. In the past, the Treasury secretary took the lead on China. Mnuchin’s mentor, former Treasury Secretary Hank Paulson, urged him to reassert Treasury’s primacy. Treasury was the cabinet agency responsible for overseeing the health of the U.S. economy and, especially, the U.S. financial sector, which had complained for years that it was largely shut out of the enormous Chinese market.
During the George W. Bush administration, Paulson had what he called in his book on China a “‘super-Cabinet’ position to lead and coordinate other Cabinet members” because he ran the annual Strategic Economic Dialogue talks involving dozens of U.S. and Chinese officials. Although the Trump team had rejected Paulson’s advice to restart the dialogue, Paulson still pressed his protégé to show more bureaucratic backbone. Earlier in their careers at Goldman Sachs, the two men had worked closely together. As CEO, Paulson promoted Mnuchin to the firm’s management committee, had him work on corporate strategy, and put him in charge of the firm’s information technology. According to Mnuchin’s public calendar, he spoke more frequently to Paulson than to any business leader.
On March 23, the day after Trump unveiled the Section 301 report and threatened tariffs, Mnuchin called Liu He at 8 p.m., at Paulson’s suggestion, and spoke to him for thirty minutes. The two went over the contents of a letter Mnuchin and Lighthizer had sent Liu pressing China again for a $100 billion reduction in the trade deficit and an end to forced technology transfer, among other items. Mnuchin also congratulated Liu on his recent promotion to vice premier. Liu responded that he hoped both sides would remain “rational” and keep trade relations stable. The two were to play leading roles as peacekeepers. In schoolyard terms, they were trying to keep the combatants from taking the first swing and making a battle inevitable.
Two weeks later, Xi Jinping made his own attempt to mend relations. In an April 10 speech at the Boao Forum, an annual gathering of world political and business leaders on the resort island of Hainan, he promised a host of changes that could appeal to Americans. They included increased imports, financial sector opening, lower tariffs, and other parts of Liu He’s five-point plan. While Xi didn’t mention Trump or the trade fight with the United States during his forty-minute speech, Washington was the clear target.
Although Xi wanted negotiations, he would bend only so far. “While we’re crossing the river by feeling the stones”—a reference to Deng Xiaoping’s metaphor for China pragmatically opening its economy—“we’re also strengthening top-level planning,” Xi said at Boao. In other words, don’t expect Beijing to ease the party’s control over the economy, as Washington sought.
Sensing an opening, Mnuchin lobbied the president to send him to Beijing to start negotiations. “The Treasury secretary’s job is to look across the economy—all the things that impact the economy,” says Mnuchin in an interview. “And trade is obviously one of them.”1
But he faced opposition from Lighthizer, who thought the United States would have a better chance of forcing China to change if negotiations were delayed until tariffs were ready to be imposed, which was still months away. White House adviser Peter Navarro was also deeply opposed. He doubted China would live up to any deal it signed. As he wrote in Death by China, “based on China’s abysmal track record to date, with Beijing we must appropriately ‘mistrust and constantly reverify.’”
The struggle between Mnuchin and Navarro over China policy continued for the next two years and came to define the differences between the nationalist and globalist wings of the administration. Not only was the Trump administration tangling with China; it was tangling internally.
The two men couldn’t be more different personally. Mnuchin, who turned fifty-seven years old in 2019, seemed perpetually ill at ease; his dark glasses gave him the look of a high school debate coach. He was born to wealth and privilege. His father, Robert, was a star Goldman Sachs trader whom the U.S. government turned to for help in preventing panic after the market crashed in October 1987. Mnuchin had been publisher of the Yale Daily News and a member of the college’s Skull and Bones secret society. He made partner at Goldman Sachs in his thirties. He later ran a hedge fund backed by mega-investor George Soros, invested in Hollywood hits, and married a glamorous actress. Fortune magazine estimated his net worth at as much as $500 million.
Navarro, thirteen years older than Mnuchin, was lean and aggressive and looked constantly angry. He was raised by a single mother who often worked in low-paying retail jobs, went to Tufts University on a scholarship, served in the Peace Corps in Thailand, and then earned a PhD from Harvard.2 At the University of California, Irvine, he initially focused on electric utility regulation. Despite writing a series of investment books with titles like If It’s Raining in Brazil, Buy Starbucks, his net worth was less than $600,000, according to government filings.
Mnuchin never showed much interest in public policy, according to those who worked closely with him. As the Trump campaign’s finance chairman, he figured he had a good shot at a top government job if Trump pulled off an upset win. “It’s like a cheap option” to become Treasury secretary, he told his market colleagues. As he explained to Bloomberg Businessweek: “Nobody’s going to be like, ‘Well why did he do this?’ if I end up in the administration.”
Navarro was a policy wonk—though his policy beliefs changed so often that his opponents labeled him a political chameleon. He initially made his reputation as an environmentalist who started the group Prevent Los Angelization Now!, or PLAN, which tried to slow development in San Diego. In losing bids for local office in San Diego, he ran as a Democrat, a nonpartisan, a Republican, and then again as a Democrat.
He was also a free trader. In his 1984 book, The Policy Game, he attacked tariffs and protectionism for raising consumer prices, destroying jobs and investment, and harming national security. Those were the same arguments that leading economists used against him after he enlisted in the Trump campaign.
“The economics of protectionism clearly indicate that the best trade policy is one that resumes the process begun after World War II—but aborted in recent years—of steadily lowering trade barriers through international cooperative efforts,” Navarro wrote. 3He told Axios in 2018 that “the turning point in my trade thinking” came when he saw the impact of China on the U.S. economy in the early 2000s.4
In emailed comments for this book, Navarro says he was “one of the first academic economists to conduct significant analytic work that revealed China for the mercantilist and protectionist it is.” He says he considers himself a pioneer or visionary, rather than a chameleon.5
In 2019, Navarro admitted to unusual conduct of a different kind. In some of his books—supposedly nonfiction—he created a fictional character, Ron Vara, and quoted him to make dramatic points. In Death by China, he also prominently quoted a Leslie LeBon, which was his wife’s name. He told the Chronicle of Higher Education, which broke the story, that he considered Ron Vara, which is an anagram of the name Navarro, to be a “whimsical device and pen name.”6 Vara is identified as fictional in one of his books, though not the ones on China.7
Mnuchin and Navarro were similar in one regard—they used flattery to stay in Trump’s good graces. Mnuchin praised Trump’s “perfect genes” and claimed the administration’s tax cut would pay for itself by spurring economic growth that would boost tax revenue. (It didn’t.) He endorsed Trump’s attacks on National Football League players who kneeled during the national anthem. He defended Trump from accusations that he encouraged anti-Semitism after Trump said neo-Nazis were some of the “very fine people” who marched through Charlottesville during riots there. Former Treasury Secretary Larry Summers tweeted that Mnuchin “may be the greatest sycophant in Cabinet history.”
Navarro proved his allegiance to the president by attacking his critics in scathing language. “There is a special place in hell” for Canadian Prime Minister Justin Trudeau, Navarro said, after Trudeau clashed with Trump at a Group of Seven (G-7) leaders’ summit in Canada in June 2018. (Navarro apologized a few days later.) Later in the year, he called Wall Street executives pushing for negotiations with China, some of whom were Trump’s friends, “unpaid foreign agents.” (He didn’t apologize for that one.) Only “Donald J. Trump,” as he invariably called the president, had the guts to take on China, he argued on television.
Navarro blamed Mnuchin for trying to get him cast out of the White House for a job in the Commerce Department’s basement and attacked him ferociously. He called Mnuchin “Neville Chamberlain” behind his back for appeasing China and convincing Trump to ditch his campaign promise to label China a currency manipulator. Word of that got back to Mnuchin, who is Jewish and who found the label particularly insulting. “I take great offense to that,” Mnuchin says in the interview.8
By the end of April, the president approved Mnuchin’s plan to negotiate with the Chinese, but with important caveats. Trump wanted Lighthizer and Navarro to go, too. Looking for allies, Mnuchin convinced the president to add Commerce Secretary Ross to the negotiating team. Mnuchin’s plan of mano-a-mano negotiations with Liu He had come apart. Not trusting either his nationalist or globalist advisers to cut a deal, Trump sent them all, though that was bound to deepen Trump White House infighting. The president thought the Mnuchin wing (Wall Street Trump) was too soft and the Lighthizer-Navarro wing (Blue-Collar Trump) too harsh.
The divisions also flummoxed the Chinese, who weren’t sure who was in charge and whether any concessions they might offer would be enough for the president. Trump wasn’t sure, either. He would judge the results of the trip and decide.
Inside the Chinese bureaucracy, there were also divisions over how to deal with the Trump team. Some officials argued that offers of market openings should be tied to China getting something in return. Others thought that wasn’t necessary because the changes would benefit China anyway. Still, the Chinese were much better at presenting a united front than their American counterparts.
On May 3, the U.S. team arrived in Beijing bearing an eight-part list of demands for deep changes in China’s economic system. They included reducing the U.S. trade deficit by $200 billion in two years—twice what Trump had only recently demanded—and immediately ceasing subsidies in industries targeted by Beijing’s “Made in China 2025” plan. Beijing was also to end pressure on U.S. firms to transfer technology, strengthen intellectual property, stop cyber spying of U.S. companies, broadly open up its market to U.S. companies, and slash tariffs and other impediments to U.S. exports. In addition, China must agree not to retaliate or to fight U.S. restrictions on Chinese investment in U.S. technology.
Beijing thought the demands were so onerous that it promptly leaked the document, although it held back the annexes where the United States laid out specifics. The proposal amounted to “surrender or die,” said Erin Ennis, who was then senior vice president of the U.S.-China Business Council. Even Michael Pillsbury, the hawkish Trump adviser, thought the United States was expecting too much. “It would be like the Chinese flying into Washington and telling us to change our Constitution,” he says.
Chinese officials had a similar reaction. “It reads like the twenty-one demands,” says a Chinese official involved in the talks, referring to the demands made by Japan in 1915 that would have extended Tokyo’s control of China during World War I.
In response, Liu He’s team also presented a tough framework. The Chinese wanted the White House to drop its Section 301 investigation into Chinese trade practices and cease its tariff threats. Beijing also wanted better treatment for Chinese technology companies, especially ZTE Corporation, a big telecommunications firm that the Commerce Department had banned from purchasing American computer chips and components, a penalty that threatened the firm’s survival.
As a sweetener, Beijing offered pledges similar to those made by Xi Jinping in Boao, including cutting levies on imported autos and increasing the quota of Hollywood films that could be shown in China.
Although the goal of the talks was to head off a fight, the meeting was making things worse. The tough U.S. demands provoked a similar Chinese response, and the divided U.S. team made it impossible for Beijing to know who—if anyone—it could turn to for help in Washington.
The negotiating sessions went badly, too. Most were led by Mnuchin, who headed the U.S. delegation. Lighthizer attended many of the meetings but refused to say anything when prompted by Chinese officials. U.S. officials later said Lighthizer saw no advantage in tipping his hand in a negotiation that he didn’t lead.
The fight with Beijing took a backseat to fights within the U.S. delegation. After the first day of talks, the jet-lagged team met in an embassy secure room. Mnuchin and Ross discussed what kind of purchases they could count on from the Chinese and whether that would be enough for a deal. For Navarro, acting as the group’s China expert, this was just his second trip ever to Beijing. He mocked Ross for counting on the Chinese to carry out promises. The following morning, he confronted Mnuchin in a building at the Diaoyutai State Guesthouse. Mnuchin was planning one-on-one meetings with Liu. What gave him the right to do that?
The two continued their fight later on the complex’s manicured lawns. Navarro assumed that they were far enough from any building that the Chinese bugged and let loose. What the fuck, he said to Mnuchin, in a tirade laced with profanity. Why are you cutting him and others out of some meetings? Ease off, the Treasury Secretary shouted back. They could make more progress in one-on-one sessions, rather than meetings with a roomful of officials where much of the time was taken up by translation. He was the leader of the delegation and got to make these calls.
From a distance, Chinese negotiators watched the two Americans go at each other, wondering what to make of the argument. They had put their hope in Mnuchin, who was close to Paulson, who had many friends among Chinese officials. (The officials teased Paulson that if he helped Mnuchin like he had helped Gary Cohn, Mnuchin would soon be out of a job.) They despised Navarro for his anti-Chinese writing. “We definitely didn’t want to talk to someone like him,” says a Chinese Commerce Ministry official.
After two days like this, the U.S. delegation left. Xi Jinping answered Trump’s snub of Liu He during his negotiating session in Washington by not meeting with the Americans. The two sides couldn’t agree on a joint statement. The Americans had trouble agreeing among themselves what to say. Hours after the U.S. team flew off, the White House issued a statement citing “frank discussions”—diplomatic speak for disagreements. The statement claimed that the size of the delegation reflected the importance that the administration put on China trade and investment, rather than the disagreements among the Americans about how to deal with Beijing, and each other.
* * *
ZTE represented an opening.
In March 2017, the Commerce Department slapped the firm with an $892 million fine after ZTE pled guilty to violating U.S. sanctions law and obstructing a federal investigation. That capped a five-year probe, in which the Commerce Department threatened to bar U.S. companies from supplying ZTE with computer chips and other components. The penalty that could kill the company, which relied on U.S. parts to make mobile phones and other telecom gear. ZTE began cooperating, and Commerce suspended the blacklist during settlement talks.
As part of its evidence, the U.S. government released ZTE documents labeled “Top Secret Highly Confidential,” which described how ZTE set up shell companies to avoid U.S. sanctions requirements. One document included flowcharts of the operations. ZTE tried not to mention the countries by name, but slipped up. Next to “YL” on one flowchart was the name “Iran.” (YL might have been derived from the transliteration of the Mandarin name for Iran, “Yilang.”)
A second document said, “Currently our company has on-going projects in all five major embargoed countries—Iran, Sudan, North Korea, Syria and Cuba. All of those projects depend on U.S. procured items to some extent, so export control obstacles have arisen.” That document also discussed how another company, called “F7,” skirted U.S. sanctions law. “F7 found a big IT company serving as its agent to sign contracts for projects in embargoed countries,” the document said. “This cut-off company’s capital[,] credit and capability are relatively strong compared to our company; it can cut off risks more effectively.”9 F7 turned out to be Huawei Technologies Company, which would later become a big factor in the U.S.-China battle.
In April 2018, about a year after the guilty plea, ZTE admitted additional problems to Commerce. ZTE had lied about complying with the settlement. It hadn’t fired employees involved in the sanctions busting, as required; it had even given some bonuses. In response, Commerce banned U.S. companies from selling to ZTE—slipping the noose around ZTE’s neck once again.
The action effectively turned what started as a trade battle between the United States and China into a technology and national security fight, too. That was fine with Navarro, the National Security Council, and intelligence agencies, as well as hard-liners in Congress, including Senator Tom Cotton, an Arkansas Republican, and Senate Democratic leader Chuck Schumer of New York. To them China represented an existential threat to the United States—a rising, hostile power that had to be confronted economically and militarily.
The administration’s National Security Strategy, after all, labeled China a “revisionist power” and a “strategic competitor” and defined economic strength as an important part of national security. ZTE’s thumbing its nose at U.S. law was an example of what the hawks feared.
But Trump wasn’t looking to lash out at China over national security issues. Economics and trade were front and center with him. China was an economic competitor, bigger but not fundamentally different from other countries that run large trade surpluses with the United States, he believed. When Trump said, as he did often, that Europe “treats us worse than China,” he meant it because Germany has a big bilateral trade surplus.
He also meant it when he said that closing the borders with Mexico would be a “profit-making operation” because then Mexico wouldn’t any longer have a bilateral trade surplus. “He sees China similar to the way he’d see a crafty real estate developer,” says an exasperated senior U.S. security official. “It’s not like they are out for blood. It’s like they got away with a lot in past negotiations and now they have to be reined in.”
ZTE quickly became a bargaining chip in his trade battle with China. When Xi Jinping telephoned him to complain about U.S. treatment of the company on May 8—a rare move for Chinese leaders, who usually wait for Americans to initiate calls—Trump was ready to deal. The White House read-out of the call mentioned only that the two leaders discussed North Korea and made an oblique reference to Trump affirming his commitment to a balanced trade and investment relationship.
But others briefed on the call say ZTE featured prominently in the hour-long discussion. Xi looked to save the company and rattled off statistics to make his case. For the Chinese leader, U.S. help on ZTE was a precondition for continuing trade negotiations.
“President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast,” the president tweeted May 13. “Too many jobs in China lost. Commerce Department has been instructed to get it done!”
The concession was criticized inside the administration by intelligence agencies and the Navarro wing in the White House, and outside by lawmakers. Nodding to security concerns, Representative Adam Schiff of California, the top Democrat on the House Intelligence Committee, tweeted, “Our intelligence agencies have warned that ZTE technology and phones pose a major cybersecurity threat.” He criticized Trump: “You should care more about our national security than Chinese jobs.”
But for Trump, solving ZTE’s problems was a way to keep up his personal relations with Xi and preserve jobs at ZTE’s U.S. suppliers. Hadn’t he been elected president to create jobs? ZTE is a big player in the telecom world, Trump later told reporters, and buys a lot of components from American firms. “They buy those parts in the United States,” he said. “That’s a lot of business.”
On May 15, a big delegation of Chinese officials landed in Washington for the next round of negotiations. The Chinese, looking for a positive outcome, went to their go-to move. They approved about a dozen of Ivanka Trump’s trademark applications around this time, covering baby blankets, perfume, and even coffins. The White House put out a statement naming Mnuchin as the leader of the U.S. side to try to head off backstabbing among American officials that had undermined previous talks.
This time, the United States wasn’t chintzy and issued numerous visas for the Chinese, led again by Liu He. During the talks, which lasted until May 19, Liu negotiated in good faith, U.S. officials said. Liu also got his meeting with Trump in the Oval Office. Originally scheduled for fifteen minutes, the session stretched on for forty-five.
The Chinese trade envoy was surprised to see all the key members of Trump’s economic team with the president during the meeting. To the Chinese, this showed how important the U.S.-China relationship was to Trump. But to Washington veterans, it signaled once again that the U.S. trade team was so divided that they all angled to get into the room to make sure one of them didn’t get more time with the president.
There were few concrete results. National Economic Council Director Larry Kudlow predicted the Chinese would buy billions more in farm products, energy, and financial services. But after eighteen hours of negotiating on the text, Liu didn’t commit to meet the trade deficit reduction target. Instead, the two sides agreed quietly that Beijing would come up with a detailed purchasing plan within a month or so.
Still, the talks didn’t bomb, as they had the previous two times. There were plenty of positive vibes. The Chinese leadership issued instructions to state-owned media outlets to play down China’s interest in buying advanced technology and carrying out the “Made in China 2025” plan that so worried Washington. Instead they were told to run more stories about Chinese consumers’ growing appetite for quality American products. On the U.S. side, Mnuchin went on Fox News Sunday on May 20 to announce the United States was “putting the trade war on hold” and wouldn’t assess tariffs on Beijing while the two sides talked.
The Treasury secretary, looking to play peacemaker, went too far. Over the prior two weeks, the United States had agreed to give ZTE a pass, feted Chinese negotiators, and got nothing specific in return. Now Mnuchin was announcing unilateral trade disarmament. This was too much for Lighthizer. Within hours of Mnuchin’s announcement, Lighthizer’s office released a statement saying tariffs, investment restrictions, and export regulations remained important tools to “protect our technology.” He didn’t cite Mnuchin by name, but he didn’t have to. The statement was a smackdown of Mnuchin’s peace-in-our-times statement, say administration officials.
Even worse for Mnuchin, Bannon had become an outside critic and was telling his allies in conservative media that the Treasury secretary was soft on China and letting down the president. On May 21, Lou Dobbs—Trump’s guru on trade—attacked the negotiations. “The globalist wing of the White House economic team have their way in the China trade talks and so did China,” said Dobbs. “Quite a performance for the Secretary Mnuchin–led trade delegations.” To drive home his point, Dobbs also complained in a phone call with the president.
The following day the Washington Post editorial board chimed in. “President Trump’s trade war with China is over, at least temporarily,” the Post wrote. “And here’s the after-action report: Advantage China.”
Trump went ballistic. He had encouraged his Treasury secretary to make a deal and appointed him China chief for the talks. Mnuchin had encouraged him on ZTE, too. Now look at the results. Lou Dobbs, lawmakers in both parties, and even the Washington Post—the despised Washington Post!—accused his administration of weakness. If there was one thing Donald Trump couldn’t stand, it was being called weak.
After digesting the Post editorial, Trump assembled his senior trade team at the White House on May 22 and dressed them down, singling out Mnuchin for criticism. He wanted a tougher approach, including tariffs, to force Beijing to bend. “Get moving,” the president told them.
Trump kept his word to Xi on ZTE. The two sides informally agreed on a deal to save the company while Liu was in Washington. A few weeks later, the Commerce Department announced a settlement: a penalty of $1 billion plus U.S. enforcement officers posted inside ZTE to monitor its actions. In return, ZTE could resume buying parts from U.S. companies. Its life had been spared.
Trump held firm on the deal even after the Republican-controlled Senate voted to kill the agreement and reinstate the blacklist. The measure didn’t advance further.
But elsewhere, Trump prepared to crack down hard on China. Over Memorial Day weekend, Lighthizer attended a dinner with the president while a drafting team readied a statement on sanctions that Trump personally edited. Not only would 25 percent tariffs on the $50 billion in Chinese goods be ready on June 15, the White House announced on May 29, but the United States would also start proceedings to restrict Chinese investment and toughen export controls on Chinese purchases of “industrially significant technology.” The trade war was deepening. Blue-Collar Trump was in command and ready to strike the first blow. Lighthizer was his chief lieutenant (at least for the moment).
And Mnuchin? His nemesis, Navarro, went on Fox News the following day to say that the Treasury secretary’s statement that the trade war was on hold should be dismissed as “an unfortunate sound bite.”