By the early fall of 2018, Xi Jinping was trapped in a dilemma. His tit-for-tat strategy hadn’t stopped Donald Trump from ratcheting up tariffs on Chinese imports. But the Chinese leader couldn’t back down. Xi’s popularity depended on turning China into a global power and standing firm against foreign forces, especially the American hegemon.
The spiraling trade fight with the United States was starting to take a bigger bite out of China’s growth. Business and consumer confidence was plunging, and foreign companies grew increasingly jittery about their operations in the country. The leadership urgently felt the need to resume negotiations with Washington. “The instruction at the time was to try to stabilize the bilateral relationship as soon as possible,” a Chinese official says. To that end, Beijing sought out intermediaries. If Beijing’s old friends in business couldn’t get the Trump team to stop punching at China, perhaps they could at least get the White House to listen.
In early September 2018, Beijing tapped Blackstone’s Stephen Schwarzman, who tried again to play couples therapist to the United States and China.
The estrangement between the two nations was growing deeper. President Trump had already put in place 25 percent tariffs on $50 billion of Chinese goods. When Beijing responded with its own $50 billion hit list, an angry Trump threatened even more tariffs—25 percent on $200 billion of Chinese imports.
If Trump gave the final okay, about half of what China shipped to the United States annually would suddenly cost 25 percent more, delivering a potentially crippling blow to Chinese exporters and a powerful message to U.S. importers to ditch China. Bound for a campaign rally in Fargo, North Dakota, the president told reporters on Air Force One, he would put levies on all Chinese imports if China didn’t budge soon. No president since the 1930s had used the tariff cudgel the way Trump was swinging it.
On September 6, Schwarzman met first with Chinese Vice President Wang Qishan in the ornate Ziguang Hall, the building in Beijing’s leadership compound used to greet foreigners. Later in the day, he conferred with China’s top trade negotiator, Liu He. In his autobiography, Schwarzman doesn’t provide much detail about the discussions, other than to say they focused on “finding a way to restart formal talks.” Convinced the Chinese were trying to patch up their relationship with the United States, he says he passed along a positive message to President Trump, who asked him to set up a meeting in Washington for Liu and U.S. negotiators. Why play hard to get?
Treasury Secretary Mnuchin also wanted to restart negotiations. In a September Oval Office meeting, Trump told him of a Schwarzman call. In Trump’s retelling, the Blackstone CEO had said the Chinese economy was in the toilet and Beijing wanted to settle. “Invite them right now, and here’s the letter you should send,” the president told Mnuchin, who scribbled down notes and sent an invitation to Vice Premier Liu He.
Talks were set for the end of September, and confident Treasury officials told Schwarzman and other business executives that the $200 billion tariff hit was on hold. (According to Mnuchin’s calendar, he and Schwarzman spoke by phone on September 10, though the calendar doesn’t disclose the subject.) If the talks were fruitful, maybe the tariffs would be shelved. Between September 10 and September 14, Mnuchin and Chinese Ambassador Cui Tiankai conferred daily by phone.
But Treasury, once again, had overestimated its influence with the president on China. During mid-September meetings in the Oval Office, Mnuchin and Trade Representative Lighthizer squared off. This wasn’t the time to back off on tariffs, Lighthizer argued. To get China to move, the United States needed the leverage that only tariffs would provide. Mnuchin countered that hitting China with tariffs was a mistake. Beijing would probably cancel Liu’s visit, and the negotiator would lose face back home. All the preparation would have been for nothing.
Trump had different qualms. How far had negotiations progressed since U.S. negotiators flew to Beijing in May and delivered their surrender-or-die demands, he wanted to know. Not very far, was the answer. The Chinese had turned U.S. demands into some 142 items to be negotiated, including more purchases of American goods, better U.S. access to Chinese markets, and elimination of all Chinese subsidies. They divided the items into three baskets: up to 40 percent could be done immediately; another 40 percent could be negotiated over time; and the remaining 20 percent were off-limits because they involved national security. But here was the kicker: the Chinese wouldn’t say what items were in what category, other than to note they considered 122 of the 142 to be negotiable.
Clearly unimpressed, Trump told the group, “They’re tapping you along.” All you have to show for five months of talks is a list, Trump lectured the group, and the Chinese won’t tell you what’s on it?
Beijing wasn’t ready to negotiate, the president felt. His national security advisors were convinced that the Chinese were waiting until the midterm congressional elections in November 2018 before tabling a serious offer. If the Republicans took a drubbing in the election, Beijing figured, Trump would be ready to make concessions for a deal he could claim as a victory. “They do not want me, or us, to win because I am the first president ever to challenge China on trade,” Trump later told the United Nations Security Council, reflecting the conclusion of his senior national security officials.
As for the chance of upsetting the Liu He visit, Trump told cabinet officials in the Oval Office, “I don’t really care if he comes.”
Trump did approve one Mnuchin proposal. Tariffs would begin at just 10 percent through the Christmas season, a level that wouldn’t hurt most importers. Only on January 1, 2019, would they jump to 25 percent. That gave the two sides several more months to negotiate before the tariffs bit hard.
The president later explained his thinking. “They were not ready to make a deal,” he said of the Chinese. “Steve [Mnuchin] is doing an excellent job,” he added, “but I disagreed with him on this.” 1
* * *
In Beijing, the tariff decision deepened a debate among Chinese policy makers, government advisers, and academics about U.S. intentions and how China should respond. Many of them felt the Americans were trying to squeeze Beijing before another round of negotiations. What should Beijing do?
On September 16, a day after the Wall Street Journal broke the story of Trump’s decision to go ahead with more tariffs, China’s quandary was on full display at the Diaoyutai State Guesthouse. In one part of the complex’s villas in western Beijing, a senior official publicly unloaded on Washington. In another part, senior Chinese officials quickly put together a meeting with Wall Street executives to convince them to lobby against tariffs. Beijing wanted to act tough in public while quietly maneuvering to get the Trump team to back off.
The official who made the public speech was Lou Jiwei, the former finance minister whose bluntness earned him the nickname “Cannon Lou.” Lou (pronounced “low”) used a special session of the China Development Forum, a high-level policy conference held at Diaoyutai, to deliver his broadside. The United States wanted to contain China’s economic rise, not simply rebalance trade relations, Lou said. “That is not going to change in the near term. But that’s not going to work, either.”
He then shocked many in the audience by proposing that China limit sales of materials, equipment, and other parts essential to U.S. manufacturers—known in trade circles as “export restraints”—in addition to hitting them with retaliatory tariffs. Even Apple Inc.’s China operations, which employs tens of thousands of Chinese workers to assemble iPhones, shouldn’t be off-limits, he hinted to the book’s coauthor Lingling in a brief chat after the speech.
Beijing so far had been fairly restrained in its retaliation, fighting Trump with the same tariff weapons that Trump had deployed against China. But Beijing had many other weapons in its arsenal; American companies operating in China could easily be held hostage. “Let’s see who feels the pain first,” Lou said.
Lou’s influence is sometimes discounted because of his tendency to veer off script. He lost his job as head of China’s national pension fund in early 2019 because he openly criticized the “Made in China 2025” plan as having “wasted taxpayers’ money.” But his luncheon speech at the development forum—held to mark the fortieth anniversary of Deng Xiaoping’s “reform and opening-up” policy—was highly scripted. His tough talk was approved ahead of time by senior officials.
So was the behind-the-scenes maneuvering to keep negotiations on track. Inside another villa in Diaoyutai, central bank governor Yi Gang, top financial regulator Guo Shuqing, and Liao Min, the top aide to chief negotiator Liu He, held a closed-door session with a group of Wall Street executives. They wanted American banks and private equity firms to fight the tariffs.
The session was so hastily arranged that the officials didn’t send out invitations to the “China-U.S. Financial Roundtable” until early September—not nearly enough time to get CEOs to commit to traveling to Beijing. Second-in-command executives attended instead. The Blackstone Group was represented by its president, Jon Gray, not Schwarzman. Goldman Sachs’s newly named president, John Waldron, showed up, not then-CEO Lloyd Blankfein. 2
The Chinese used the meeting to talk up their plans to liberalize the financial sector. They also peppered some of their American guests privately with questions that showed how little they still understood the Trump team. Were any U.S. officials able to cut a deal with China, they wanted to know. This, despite nearly a year of evidence that Trade Representative Lighthizer had Trump’s confidence on China trade, not Beijing’s preferred intermediary, Treasury Secretary Mnuchin.
Liu He and his team were rightly worried that any offer Beijing made to Mnuchin, who had sent the invitation for the Washington talks, would be opposed by trade hawks led by Lighthizer and trade adviser Peter Navarro, and then turned down by President Trump. Even so, Beijing made little effort to reach out to Lighthizer—and vice versa. “They know our telephone number,” one of Lighthizer’s aides said at the time.
Several blocks away in the Diaoyutai complex, a third meeting was taking place. Members of the Chinese Economists 50 Forum convened to commemorate the twentieth anniversary of the think tank cofounded by Liu He, who made a brief appearance at the event. Some attendees constituted a kind of peace wing of the Chinese intelligentsia; they wanted China’s economy to become more market driven. These moderates thought the U.S. trade offensive could help them further their goal of rolling back the economic power of the state and party. They urged the leadership to carry out promises Xi had made to give market forces a bigger role in the economy.
Wu Jinglian, a prominent pro-market economist, noted that private businesses in China resented expanded state control. The government needs to “build consensus through debate and then implement reforms one by one,” Wu said, with Liu in the audience. Liu didn’t make any remarks at the event and left after Wu’s speech to catch a flight to Shanghai to attend a conference on artificial intelligence.
Others at the forum criticized Beijing’s policy of retaliating against U.S. tariffs. “We shouldn’t only care about gains and losses in the near term and adopt a tit-for-tat policy,” said Zhang Shuguang, another liberal thinker. Deng Xiaoping, Zhang reminded the group, focused on integrating China with the rest of the world, especially the United States. “Necessary concessions should be made to resolve the disputes as soon as possible,” he added.
Some of Liu’s lieutenants remained and listened to the discussion, but they had more immediate questions to answer. Does Trump really want a deal? If so, should Liu still take the trip to Washington, despite Trump’s additional tariffs? “That is the most difficult question at the moment,” said one privately.
Shortly after the American tariff decision, on September 21, Xi Jinping convened an emergency Politburo meeting of two dozen of the nation’s top officials to discuss how to deal with an increasingly hostile Trump administration. 3 The meeting was arranged so hurriedly that three of the seven members of the group’s Standing Committee couldn’t attend because they were traveling. At the meeting, Xi zeroed in on the new tariffs and another battle with Washington that had caught Beijing by surprise.
Washington had slapped sanctions on a technology-development unit of the Chinese military and its director for buying Russian fighter jets and surface-to-air missiles, which the United States said violated prohibitions on Moscow for meddling in the 2016 U.S. election. China’s Equipment Development Department, which focuses on advanced military technology, could no longer apply for the U.S. export licenses needed to buy military equipment built with U.S. parts or use the U.S. financial system. Li Shangfu, head of the unit and a trusted Xi lieutenant on China’s space program, was barred from conducting transactions using U.S. banks, owning property in the country, or even getting a U.S. visa.
U.S. officials said the sanctions were aimed at Moscow rather than Beijing. The Chinese leadership dismissed that explanation. They saw it as part of a U.S. plan to block China’s military modernization.
The Politburo members concluded that a forceful counter was essential. China canceled Liu He’s trip to Washington, suspended planned discussions with U.S. military officials, and recalled a navy chief from a visit to the United States. “There was no point in talking when the entire atmosphere was so poisonous,” recalls a senior Chinese official.
A few days later, China’s top diplomat used his New York meeting with senior U.S. corporate executives to vent about how Washington made it impossible for Beijing to continue the talks. “If you want to negotiate, then don’t impose new tariffs,” Foreign Minister Wang Yi told the group. “Wait until after the negotiations. There were very important negotiations which had a very good chance of success, because we already had consensus on many issues, and yet down came the club on our heads.”
* * *
At one minute after midnight, on September 24, the United States put in place 10 percent tariffs on $200 billion of Chinese imports. Beijing immediately responded with tariffs on $60 billion of U.S. goods. Counting previous Chinese retaliatory tariffs, about 80 percent of what the United States shipped to China now faced levies, especially American agricultural exports. The only major imports China exempted were U.S. semiconductors and large commercial jetliners—products that Beijing needed and few other countries made.
Then the White House was shaken by a surprise. The stock market started to tank rather than shrug off new tariffs as it had done in the past. The Dow Jones Industrial Average fell nearly 1,000 points in the month following the September 15 news of tariffs. China’s benchmark index, the Shanghai Composite Index, dropped another 100 points after declining the whole year. Analysts began to debate whether the continuing trade battle could eventually push the United States and the global economy into a recession.
At the time, most on Wall Street believed that the trade fight wasn’t dealing much of an economic blow. Tariffs on $250 billion of goods were akin to a tax increase on a small portion of the $20 trillion U.S. economy.
But a minority of analysts took a different view. Seth Carpenter, the chief U.S. economist at the investment bank UBS and a former Obama Treasury official, says September 24, 2018, was the day the U.S. market started taking the trade war seriously. The impact of tariffs wasn’t diffuse across the economy, he says. Tariffs targeted multinationals and other manufacturers, whose prospects greatly affected stock indices. The firms had to start planning whether to move operations out of China, at a great cost financially and in management time, and whether to slash investment at a time of great uncertainty. “The path you thought you were on was upended,” he says. “Further escalation was in the cards.”
Chinese economists also worried about a sharp downturn. One of the Chinese government’s most prestigious think tanks, the Development Research Center, forecast that a full-bore trade war with the United States could shave as much as 1.5 percentage points off China’s GDP growth rate.
Wang Yiming, deputy director of the center, warned at a fall forum that the trade war was starting to hurt many aspects of the Chinese economy, including employment, manufacturing, and business investments, as well as exports. He worried that industrial firms were shifting production out of the country. “Go take a look at all those flights [from China] to Thailand, Malaysia, and Vietnam,” Wang said. “They’re all full these days.”
Companies had to plan for tariffs jumping from 10 percent to 25 percent on January 1, 2019, for items essential to their operations, including industrial chemicals, computer parts, plastics, machine parts, pumps, ceramics, and metals. Increasing to 25 percent “would have a significant impact,” Kelly Kramer, the chief financial officer of computer networking company Cisco Systems, told an investors’ conference in the fall. While a 10 percent increase could be digested, “25 percent would be a much bigger hit and that will obviously have some impact.”
U.S.-based firms started negotiating with their Chinese suppliers over who would take the brunt of the tariff hit. “We were successful to the extent there was a competition available for those goods from other suppliers,” says Earl Jones, senior counsel at GE Appliances, a U.S. subsidiary of China’s big appliance maker, Haier Group. Then “we could share the tariff costs.”
But replacing Chinese parts suppliers—even for a Chinese-owned firm in the United States—was difficult and expensive. It required finding comparable suppliers and making sure they were dependable and could produce high-quality goods. When GE Appliances looked at buying one Chinese-made part in Mexico, the supplier there bid twice the price. The company eventually convinced the trade representative’s office to waive the tariffs for that imported part.
As the economic costs became clearer, the White House and China’s Zhongnanhai leadership compound tried again to pull back from the brink. Trump was facing a difficult midterm election and wanted a summit with Xi Jinping to calm market anxieties. On October 1, National Economic Council Director Larry Kudlow, who time and again tried to buck up the market with optimistic statements, went on Fox to say that the president “may perhaps” meet with Xi at a December 1 summit of the G-20 nations in Buenos Aires. “We are willing to talk if it’s substantial and significant and serious,” Kudlow said, making the U.S. side sound tough. But with the market tumbling, Blue-Collar Trump was giving way to Wall Street Trump. He wanted a meeting.
So did Xi, whose economy was slowing faster than authorities had anticipated. GDP growth fell to 6.5 percent in the third quarter, the weakest pace since the global financial crisis and below market expectations. While much of the slowdown was due to Beijing’s campaign to reduce debt, the conflict with the United States also played a role. Industrial production, consumption, and consumer confidence all were weakening.
On October 19, the day Beijing released its economic results, China’s economic mandarins launched a coordinated effort to calm jittery investors. People’s Bank of China governor Yi Gang, banking and insurance regulatory chief Guo Shuqing, and then-top securities regulator Liu Shiyu all issued statements urging investors to remain calm. Guo said recent “abnormal fluctuations” in China’s stock markets didn’t reflect the country’s economic fundamentals and stable financial system. By then, the Shanghai Composite Index had declined 25 percent since the beginning of 2018, becoming the worst performer among global benchmarks.
Shortly after the regulators’ remarks, the official Xinhua News Agency published an interview with Liu He where he sought to dispel worries about the impact of the trade conflict. “Frankly, the psychological impact is bigger than the actual impact,” he said. “Right now, China and the U.S. are in contact.” In October, Beijing also approved sixteen Ivanka Trump trademarks, covering fashion items like sunglasses, handbags, and shoes—another sign China was getting ready to do business with the administration.
Plenty of problems remained between the two nations. Military talks were in hiatus and both sides blamed the other for a recent close encounter between their warships in the South China Sea. Vice President Mike Pence outlined a shift in U.S. strategy from engagement to confrontation with China, accusing Beijing of undermining American interests on several fronts, including meddling in U.S. elections. Beijing vehemently denied those accusations. Secretary of State Mike Pompeo exchanged testy words with China’s Foreign Minister Wang Yi in Beijing, which risked complicating a planned summit meeting between Trump and North Korean leader Kim Jong Un.
On the economic front, U.S. business executives complained that they were being strong-armed into attending a Shanghai trade fair scheduled for early November. If they didn’t go, Chinese officials warned them, their businesses could suffer. Beijing dismissed the claims as a “groundless accusation.”
Looking for a way to get beyond the endless bickering—and ignoring his worries of just six weeks earlier about Chinese stonewalling—Trump placed a call to Xi on November 1. “What’s going on?” the president asked. “Will we make a deal?” In the conversation, Trump made clear that he wanted a settlement and was probing to see if Xi felt the same way. Though the two leaders didn’t discuss the specifics of a possible agreement, Xi told the president that there was a way to solve the problems, so long as the United States was willing to meet China halfway. The two leaders committed to a meeting in Buenos Aires.
Clete Willems, a White House trade adviser at the time, calls the phone call an “inflection point” in the trade battle. The two leaders tried to back away from the brink and committed to work toward a settlement.
A day later, Trump told reporters, “I think we’ll make a deal,” though his remarks came shortly before the midterm elections and were discounted at the time as Republican boosterism. Xinhua also carried a positive report about the discussions. It quoted Xi as saying that both sides wanted to improve U.S.-China relations and “we must work hard to turn these wishes into reality.”
Soon after the leaders’ phone conversation, Treasury Secretary Mnuchin resumed discussions with Vice Premier Liu. There were a host of substantive issues dividing the two nations. The United States wanted China to make a formal offer, not simply to hint at what it would do. China wanted to have talks first, before making an offer.
The two sides also didn’t trust each other’s leader. To the Chinese, Trump was erratic and unpredictable. Chinese officials feared he would make public, through a tweet or an off-the-cuff statement, any offer China made as a way to box in Xi, or would misrepresent what Xi said. They knew the history of China’s World Trade Organization negotiations, where China’s premier was wounded politically when President Clinton turned down his offer of a deal and the United States made Zhu’s concessions public.
The Americans worried that the more disciplined and experienced Xi would get Trump to make commitments on issues that the president didn’t understand or hadn’t bothered to study. He could get ensnared in the traditional Chinese trap of endless talks that lead nowhere. Another worry: Trump might settle for Chinese purchases of soybeans and other goods, rather than fight for structural changes in China’s economy. Jack-and-the-Beanstalk references were common in Washington at the time. Would the president settle for a cup of beans?
Trade Representative Lighthizer quietly worked to make sure the talks continued to focus on intellectual property protection, forced technology transfer, subsidies, and other structural issues. Ten days before the December 1 meeting in Buenos Aires, his office released an update of the Section 301 report, which accused Beijing of using cyber espionage and other techniques to steal U.S. technology. He followed that up with a statement on November 28, the day before Trump boarded Air Force One for the summit, attacking China’s “especially egregious” tariffs on U.S. car exports of 40 percent, which included China’s retaliatory tariffs. “China’s aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers,” the Lighthizer statement read.
Lighthizer’s twin actions were aimed as much at the U.S. delegation to Buenos Aires as at China’s: the United States won’t settle easily.
* * *
The day before President Xi was to meet with his American counterpart in Buenos Aires, he conferred with Japanese Prime Minister Shinzo Abe. Xi told Abe that he hoped for a productive conversation with Trump, but he remained defensive about China’s trade practices.
While rattling off the country’s major economic developments over the years, Xi said U.S. complaints about Chinese officials forcing American firms to share technology were unreasonable. “We don’t have compulsory technology transfer in China,” Xi told Abe during their November 30 discussions in the Argentine capital.
Xi wanted to try to replicate the personal rapport that the Japanese leader had developed with Trump and was searching for clues about what to do. When Abe visited Beijing a month earlier, in October, he had asked Xi how he was handling the U.S.-China trade issues. Xi complained about Washington’s unilateral actions. But the Chinese leader added: “I think I can maintain good relations with President Trump. I appreciate my personal friendship with President Trump.”
This time Xi asked about Abe’s golf outings with Trump. (Xi, a soccer fan, shut down many golf courses because he viewed them as symbols of capitalist excess.)
“So how many holes have you played with President Trump?” Xi asked. “Which one of you plays better?”
“I don’t want to disclose that information,” Abe responded with a smile. “But President Trump is better than me.”
For Trump and his entourage, Buenos Aires was a place to celebrate. On the first morning of the G-20 meeting, November 30, Mexico’s president, Enrique Peña Nieto, awarded the president’s son-in-law, Jared Kushner, Mexico’s highest honor for a foreigner, the Order of the Aztec Eagle, for Kushner’s work in helping renegotiate the North American Free Trade Agreement. He pinned a medal on Kushner’s blazer at the Park Hyatt Buenos Aires, as Trump and his daughter Ivanka, Kushner’s wife, looked on.
Shortly afterward, Peña Nieto, Trump, and Canadian Prime Minister Justin Trudeau lined up in front of the flags of the three nations. The leaders signed the new NAFTA accord while sitting at an ornate, French-style table. Despite Trudeau’s lobbying to get the United States to remove steel and aluminum tariffs as part of the renegotiations, Trump hadn’t budged. He got his deal and kept his tariffs.
Throughout the day, senior officials from China and the United States met to discuss the following night’s dinner meeting between the two presidents. Chinese officials, led by Liu, said that Beijing was willing to buy vast amounts of U.S. goods—as much as an additional $1.2 trillion over six years. While the Chinese didn’t guarantee that would halve the U.S. trade deficit with China, as the United States was demanding, it was an enormous sum. The United States sold $130 billion in goods to Beijing in 2017. The Chinese were saying they would boost purchases by about 30 percent a year. As noted in chapter 1, China had never managed that rate of increase over a sustained period.
The offer was couched as a “target” or “expectation,” Mnuchin later said on Fox.4 But it was sure to please the president, who was counting on big sales to help him politically. The U.S. team, including Lighthizer, Mnuchin, and Kudlow, wanted to know what Beijing would do to meet U.S. demands on the structural issues that were at the heart of the dispute. Here Chinese officials weren’t forthcoming. They spent all night crafting their response.
To give the two sides more time to prepare, Trump canceled an afternoon press conference, claiming it was out of respect for the death the day before of George H. W. Bush. As the president and his top advisers filed into the dining room at the Park Hyatt on December 1 around 6 p.m., they weren’t sure what to expect. Trying to keep the mood light, Trump started to introduce his advisers arrayed on one side of a long table covered with a white tablecloth and bouquets of flowers running down the middle. “As you may know, we have had different views [on the trade fight] around this side of the table,” Trump said. “There are different views around our side of the table, too,” Xi replied, prompting smiles on both sides.
Then Trump explained the role the various advisers played. Lighthizer, he made clear to Xi, was now the lead negotiator—the man to see on China trade—though Mnuchin would also remain involved. “This is the guy who is going to be my negotiator,” Trump said.
That simple statement ended more than a year of bitter infighting and reflected lobbying of the president by his son-in-law Kushner, whom Lighthizer had included in the NAFTA negotiations and who had become a Lighthizer partisan. The two men talked frequently to make sure they presented a united front in negotiations with Mexico and China.
Kushner also had become more jaded about Chinese intentions since his boosterism during the Mar-a-Lago summit of 2017, in part because he was tutored by Michael Pillsbury, whose Hundred-Year Marathon, about China’s supposed plan to overtake the United States, had become required reading in the White House.
The decision also showed the quiet influence of Matt Pottinger, then the National Security Council’s Asia chief, who had joined the Trump team during the transition and had the savvy to outlast three national security advisors. In September 2019, he was appointed deputy national security advisor. While neither man was trying to elbow out Mnuchin, they believed that Lighthizer had the negotiating skills and expertise to lead the talks.
The president then pointed to his super-hawk, Peter Navarro. “He’s my tough guy,” he told the Chinese leader. He also joked of Kushner’s role. “He’s the guy I blame if everything goes wrong,” Trump said.
The floor turned to Xi Jinping, as the group dined on grilled sirloin with red onions, goat cheese ricotta, and dates. For forty minutes, Xi detailed the reforms Beijing planned to make, many of which would address long-standing U.S. concerns, such as market access and protection of intellectual property. Unlike other Chinese leaders, he didn’t read from a detailed script, which the U.S. side took as a sign of his confidence and his personal commitment.
He told the U.S. side that he expected China to soon become the world’s largest market for services. Although he didn’t promise to buy an extra $1.2 trillion worth of goods and services, as his aides had sketched out earlier, it was clear to the Americans that he was counting on financial, computer, and other services for much of the import growth the Chinese promised. Before the Buenos Aires meeting, Xi had talked up China’s goal of increasing imports, and China’s Commerce Ministry estimated that the country would import $2.5 trillion in services globally over five years.
When Trump asked the Chinese leader whether he would also crack down on sales of addictive fentanyl, an opioid that was ravaging much of rural America, Xi quickly agreed. The same was true when the U.S. side asked whether Beijing would reconsider a merger sought by American semiconductor firm Qualcomm Inc. Beijing had dithered over the approval for so long that the deal fell apart. The Chinese side agreed to take another look if Qualcomm asked regulators. (The Americans, however, neglected to ask Qualcomm whether it still wanted the deal. Qualcomm no longer did.)
Trump and his team were impressed by Xi’s daring. Chinese leaders usually leave nothing to chance when meeting an American president. Everything is scripted during days of meetings by staffers of the two nations. That wasn’t Trump’s style. Although Trump is briefed in advance, his closest aides don’t know where he will take conversations. Xi risked rejection and embarrassment. Trump appreciated Xi’s forthright presentation, as did even his most hawkish advisers.
By the end of the meeting, the United States agreed to postpone the January 1 tariff increase deadline until March 1. That gave the two sides ninety days to work out a deal. China said it would buy more agricultural goods, crack down on fentanyl sales, and help out with negotiations with North Korea over nuclear weapons. With his typical swagger, Trump told his aides after the dinner that he had no choice but to suspend heavier tariffs. When Xi comes begging, I have to give him a chance for a deal, the president said.
Around the same time, Chinese Foreign Minister Wang Yi and Commerce Vice Minister Wang Shouwen held a rare public briefing. Xi wanted to shape accounts of what the two sides had agreed upon—and make sure the American version didn’t become the accepted account. Most important, he wanted to make sure he wasn’t viewed as making concessions to the Americans.
Foreign Minister Wang described the summit as friendly and candid, noting that it lasted two and a half hours, longer than originally expected (a signal that Xi had been shown respect by the often arrogant Americans). Commerce Vice Minister Wang highlighted the agreement to suspend new tariffs, but made no mention of a new deadline (a signal that the Chinese had held firm about refusing to negotiate under pressure). Both Wangs also said new talks, once resumed, would focus on removing all U.S. tariffs—Xi’s top priority—and Chinese retaliatory tariffs, which a White House statement didn’t mention.
The Chinese officials also said they would open markets and prevent technology theft but only in accordance with policies already approved by the government and the party. They made no mention of any U.S. requests on those issues. The coverage by China’s state media, highly censored as always, was so effective that the first thing coauthor Lingling’s mother said to her when she flew back to Beijing was “The Americans caved!”
Not according to Washington. Jetting back to Washington on Air Force One late on December 1, Trump was triumphant. “It’s an incredible deal,” he told reporters on the plane. If it works out, “it goes down as one of the largest deals ever made.” After he left the reporters, he instructed Lighthizer, his newly anointed chief China negotiator, to get him an agreement. Lighthizer pushed back. The two sides aren’t close yet on the issues, he said. “Well, get me a great deal then,” Trump replied.
As Trump’s aides worked on the U.S. press statement, Navarro sought to temper the bullishness. He had opposed postponing the tariff increase, and he feared the U.S. side was getting too giddy. An early draft of the White House statement said that if the two sides didn’t reach a deal, the United States would consider increasing the tariff. That was too weak, Navarro argued. It could give the impression that Washington was backing off. The statement was rewritten to say that on March 1, “the 10 percent tariffs will be raised to 25 percent” unless there was an agreement—meaning, don’t expect another reprieve.
Aside from dueling PR efforts, there were other storm clouds. At the Buenos Aires dinner, neither leader knew that Canada had arrested Meng Wanzhou, daughter of Huawei’s founder, on behalf of the United States, which wanted her extradited. The United States alleged that Meng, the telecom giant’s chief financial officer, had helped Huawei evade U.S. sanctions on Iran. News of her arrest produced a nationalist backlash in China and threatened once again to derail the trade negotiations. To many Chinese, the U.S.-directed action was equivalent to Beijing ordering the arrest of Ivanka Trump.
But for now, Xi instructed his lieutenants to follow through on the Buenos Aires deal, despite Meng’s arrest. China pushed for her release by stepping up pressure on Ottawa, including by arresting a former Canadian diplomat. China’s ambassador to Canada hinted that Beijing considered the arrest to be a reprisal. “Those who accused China of detaining some person in retaliation for the arrest of Ms. Meng should first reflect on the actions of the Canadian side,” wrote Lu Shaye, in the Globe and Mail.
U.S. officials also sought to separate the Huawei controversy from the trade talks, though Trump suggested he would trade away the Huawei indictment if he got a good offer. “If I think it’s good for what will be certainly the largest trade deal ever made, I would certainly intervene if I thought it was necessary,” Trump said. 5
* * *
What to do about Huawei would continue to dog negotiations. But immediately after Buenos Aires, Trump couldn’t have been more pleased. He had renegotiated NAFTA, as he had promised in the presidential campaign. He was pressuring Europe and Japan to cut deals. And, he thought, he had China starting to eat out of his hands. A time-out in the schoolyard battle made sense, the Americans believed.
As a goodwill gesture, China soon removed the punitive 25 percent tariffs it placed on U.S.-made cars, which Lighthizer had complained about shortly before Buenos Aires. The change promised to help Tesla Inc. and Ford Motor Company, as well as German automakers BMW AG and Daimler AG, which build sport utility vehicles in the United States for export to China.
To the president, his trade successes confirmed the importance of deploying tariffs on a massive scale. He, Lighthizer, and others believed they had proved a weapon once thought obsolete was effective for reshaping the modern economy. It was the trade equivalent of taking an old battleship out of mothballs, refitting it, and using it to bombard an adversary into submission.
“President Xi and I want this deal to happen, and it probably will,” Trump tweeted on December 4. “But if not remember, I am a Tariff Man.”
And with that tweet, Trump undid all the goodwill he had earned in global markets by easing off on China. The Dow Jones Industrial Average plummeted that day by nearly 800 points. The S&P 500 tumbled 3.2 percent—the second-biggest drop of the year. That was just the start of the rout. By Christmas, the Dow had lost 4,000 points, down about 16 percent.
Former National Economic Council Director Gary Cohn, who was once president of Goldman Sachs, told White House officials that the Tariff Man comment alone had cost the market 2,000 points.
Although the president regularly boasted that the tariffs didn’t cost Americans anything, the overwhelming evidence showed his claims were false. Chinese suppliers didn’t cut their prices for the goods they exported to the United States once Washington imposed tariffs, three leading economists found in January 2020, confirming the findings of earlier groups of academics. Tariffs added to the prices Americans paid.6
Trump’s constant badgering of Federal Reserve chairman Jerome “Jay” Powell to cut interest rates also played a big role in the market’s decline. In his interview with the book’s coauthor, Bob, shortly before Buenos Aires, Trump called the Fed a “much bigger problem than China” and hinted he might try to fire Powell—insults and threats he repeated regularly.7
Uncertainty over trade and the Fed worked in tandem to batter markets. Business investment and international trade were slowing because of tariffs, and over time that was bound to reduce employment and wages and cut into consumer spending, traders feared. Powell made it clear that he didn’t have the tools to save the economy from a trade war.
Between March and December 2018, University of Chicago economist Steven Davis and two colleagues later found, trade policy was featured ten times as frequently in the media as it had been during the prior twenty years. “Trade-policy concerns went from a virtual nonfactor [in U.S. stock-market volatility] in recent decades to one of its leading sources,” Davis wrote.8
Trump had ignored warnings by his economic team about the market impact of trade fights. In the fall, Kevin Hassett, chairman of the White House Council of Economic Advisers, put together a chart for the president showing that tariff increases produced market declines. Hassett examined ten days when tariff news hit the market. On average, he found, stocks dropped 1.5 percent, short term. Another of his studies forecast that if the United States increased tariffs to 25 percent on $200 billion of Chinese imports, it would reduce economic growth by as much as 0.5 percentage point—a huge hit for an administration that bragged it could produce 3 percent annual growth, not the 2.2 percent that the economy had crawled under Obama.
Trump examined the data, but told his aides that a deal with China was worth the costs. Besides, he figured, the markets always rebounded.
But when the market didn’t reverse course in December, Trump grew alarmed. He turned to his staff for reassurance. Kudlow treaded carefully. He told Trump there were many factors affecting the market, though he needed to be careful with his tweets. When Trump quizzed him about the market’s plunge, Kudlow rattled off headlines about the decline, rather than provoke the president’s fury by blaming Trump’s tariff threats. Wall Street Trump had now clearly come to the fore.
“What are the benchmarks for success of the presidency?” asked Cohn, Trump’s former NEC director, in a radio interview. “The stock market is the most obvious, most transparent, most talked-about-by-the-president benchmark of success.”9
Trump looked to his senior economic officials to buck up the market. Mnuchin made things worse. On Sunday, December 23, he tweeted that he had telephoned the heads of the nation’s six largest banks, who reported they have “ample liquidity” to withstand shocks. Traders, who hadn’t worried about the health of banks, fretted that perhaps they should. The S&P 500 fell 2.7 percent the following day.
A December 26 Wall Street Journal interview with Hassett helped ease market fears. “The president has voiced policy differences with Jay Powell, but Jay Powell’s job is 100 percent safe,” he said. “The president has no intention of firing Jay Powell.” The Dow Jones index jumped more than 1,000 points, and Trump called Hassett to congratulate him.
A month earlier, in Buenos Aires, Trump bragged that Xi Jinping was begging him for help. Now, faced with a volatile stock market, Trump turned to Xi for help and called him on Saturday, December 29. Xinhua reported that the call showed that two sides were continuing to try to resolve their differences. Relations between the two nations are “now in a vital stage,” Xinhua quoted Xi as saying.
To Trump’s advisers, the call was all happy talk for the markets. Detailed negotiations hadn’t begun yet; nothing had changed substantively. Nevertheless, Trump tweeted on Saturday of his conversation with Xi: “Big progress is being made!” When the markets opened on Monday, the Dow Jones average advanced 265 points.