President Trump’s aggressive moves were met in Beijing with fury and puzzlement, echoing the mood in Washington.
In the Zhongnanhai leadership compound, officials were infuriated by U.S. charges that they had reneged on a deal. From their vantage point, the United States was pressing a one-sided agreement and had humiliated their chief negotiator, Liu He, by hiking tariffs when he was visiting Washington to try to repair ties. Some likened Liu’s trip to the infamous “Banquet of Hongmen,” an ancient Chinese tale where a general invites his rival to a feast to kill him.
As soon as Liu flew back to Beijing, President Xi called a Politburo meeting for May 13, not waiting until the end of the month, when the twenty-five-member body usually meets. The officials unanimously agreed to denounce the United States. The Politburo ordered state media to come up with forceful hit pieces targeting American hegemony. A defiant commentary aired by China Central Television two days later called out “the trade war initiated by the U.S.” and declared: “Having experienced five thousand years of winds and rains, what circumstances has the Chinese nation not witnessed before?”
The Politburo also directed policy makers to prepare plans to deal with an America that tries to isolate China, reduce its trade and investment, and cut it off from new technology. Adding to Zhongnanhai’s concerns were growing democracy protests in Hong Kong that started in April, which some officials believed were abetted by Washington. Another front in a new Cold War.
To prepare the populace, the Politburo also ordered two batches of party-building sessions beginning in June. In the meetings, different parts of the party, with 90 million members, were required to study the Xi Jinping Thought that concentrated on ensuring the party’s leadership. Since coming to power in late 2012, Xi had sought to reinvigorate the party’s “fighting spirit” by stressing the struggle between China and the United States. Over time, China’s socialism would prevail over U.S. capitalism, party ideologues argued, if party members stayed united and vigilant. With stepped-up American aggression, inculcating Communist Party values became an urgent priority.
Even officials who had long admired the United States and who had used American pressure to lobby at home for economic liberalization felt betrayed. Liu He had done his best to push for reform in the fractious Chinese bureaucracy, where warring factions can block change out of their own interests.
To help forge consensus, Liu had put together a negotiating team that represented different Chinese institutional interests, including state-owned firms, financial regulators, technology industries, and the foreign policy establishment. “The Americans failed to realize how hard it had been to create a bureaucratic consensus, and to get where we were before they decided to throw it all away,” says a Commerce Ministry official involved in negotiations. “It took a lot of time just to reach a consensus among ourselves.”
Liu’s team had painstakingly divided U.S. demands into 118 major categories, with 698 subcategories. Each subcategory had to be analyzed. “We’re talking about thousands of products here,” says another negotiator. In June, Beijing published an 8,300-word white paper blaming the breakdown in talks on a “U.S. breach of consensus and commitments.” 1
The American actions had also threatened to weaken Liu at home, making it even more difficult for him to form a new consensus on reforms and purchases that might satisfy the Americans. Some officials whispered that he lacked the chops to face off with someone as tough as Robert Lighthizer.
Xi came to his defense, in classic Chinese fashion. A week after the May 13 Politburo meeting, Xi toured rural Jiangxi province, where the Communist Party’s Long March of the 1930s began. Images of Liu standing by the leader’s side were broadcast nationally. Without saying a word, Xi sent a powerful signal that he trusted his longtime colleague to continue to lead the battle with Washington. More than a few Chinese officials drew a contrast between the way Xi embraced his embattled lieutenant and the way Trump denigrated cabinet officers who worked for him.
In Washington, the Trump team cleared away other trade battles so they could focus on China.
On May 17, the United States delayed for six months a decision to impose 25 percent tariffs on European and Japanese cars, hoping to use the time to negotiate limits on imports. (In an astonishing finding, the Trump administration decided that imports of cars and car parts threatened U.S. national security, a ruling that especially outraged Japanese carmakers who had spent billions of dollars building plants in America.) The same day, the administration removed steel and aluminum tariffs on Mexico and Canada, after intense lobbying by Senator Chuck Grassley, an Iowa Republican who headed the Senate Finance Committee. Unless the tariffs were withdrawn, Grassley warned the president, his renegotiated NAFTA wouldn’t pass the Senate. Trump, who was wedded to tariffs, finally relented.
Lifting the tariffs means a “victory with Mexico and Canada,” Grassley later told the Wall Street Journal’s Will Mauldin. “It ought to give some credibility for the negotiations with China.”
Less than a week later, Lighthizer met in Paris with trade ministers from the European Union and Japan to continue talks on how to confront Beijing on subsidies, state-owned enterprises, and other aspects of Chinese economic policy. For Washington, the meetings were as much about signaling to Beijing that it couldn’t peel away U.S. allies, as they were about actual results.
Lighthizer’s boss wasn’t nearly as disciplined. On May 30, about two weeks after he lifted tariffs on Mexico, President Trump threatened Mexico with new tariffs unless it did a better job of halting migrants from crossing into the United States, as described in earlier chapters. After lobbying from Lighthizer, Treasury Secretary Mnuchin, and a slew of CEOs, Trump quickly relented.
Clearing away minor disputes to concentrate on China was a Lighthizer priority. “Going after Mexico and Canada was like going after Bulgaria in World War II,” rather than Germany, Lighthizer told colleagues. “China is the threat.”
* * *
President Trump regularly claimed that his tariffs were battering China and enriching the United States. “We’re taking in billions and billions of dollars for the first time ever against China in the form of tariffs. I’m very happy with that,” he told Fox’s Maria Bartiromo in March. In early June, at a dinner in London with British royals and Prime Minister Theresa May, he boasted that Chinese retaliation helped him. “I hope China will come down hard on U.S. companies, so they can come home,” Trump told the group.
But the reality was far different. When he boosted tariffs to 25 percent on $200 billion of Chinese goods in May 2019, some of his bedrock supporters suffered the most. Political pressure on him mounted and he often changed course.
When China retaliated with additional tariffs on farm goods and other products, the president sought first to take care of rural America, his firmest base of support. The administration approved a $16 billion program to reimburse soybean and other farmers for lost sales. In all, the administration committed nearly $30 billion to keep farmers happy, about as much as the United States received from China tariffs. The farmers wouldn’t have needed any aid if Trump hadn’t started the battle with China.
Rather than fattening Treasury’s coffers, import duties were going to mollify an important political constituency. If farmers broke with Trump over the trade war, administration political tacticians worried, his political support would begin to erode. “It was a blatant vote buy,” says Scott Henry, a young soybean and corn farmer in Nevada, Iowa, and helped farmers keep their losses to a minimum.
But the administration couldn’t pay off everyone.
Hickory, North Carolina, the furniture-making center, was one of the earliest casualties of the massive Chinese import surge of the 1990s and early 2000s. Catawba County, which includes Hickory, was Trump country. In the 2016 presidential election, two-thirds of the voters there chose him. Nevertheless, the president’s tariffs delivered another blow to the region.
Century Furniture in Hickory, which had survived Chinese competition by revamping its production and marketing, was hit twice. Its import bill for Chinese fabrics and metalwork soared because of U.S. tariffs, and its furniture exports to China plummeted because of Chinese retaliatory tariffs.
Immediately Century lost a $1.3 million order from a Chinese retailer. Over the following six months, as tariffs increased, lost sales amounted to $2 million to $2.5 million—a substantial hit for a company with $100 million in revenue. One of Century’s largest Chinese customers pressed the North Carolina manufacturer to build more furniture in China to avoid tariffs. But Century balked. Once Century taught Chinese subcontractors how to manufacture its furniture profitably, says Century’s CEO, Alex Shuford IIⅠ, “that will make them more competitive against us.”
Without the trade war, Shuford says Century’s exports would have continued to grow. “That should have been sales growth for our domestic factories,” he says. “This hasn’t helped Hickory. It has helped Vietnam dramatically” as well as other furniture-making nations.
Moody’s Analytics chief economist, Mark Zandi, tracked the impact of Chinese tariffs by county for this book, by examining how tariffs affected the counties’ top employers. The pattern was startling. The higher the vote totals for Trump in the 2016 election, the greater the blow from Chinese levies.
Counties that voted by more than a 90 percent margin for Trump were hit four times as hard by Chinese tariffs as the average county. Those that he carried by 80 percent felt three times the impact. Conversely, counties that Hillary Clinton won by at least a 60 percent margin suffered less than the national average.
Zandi then recalculated the impact by adding in U.S. tariffs imposed on Chinese goods. While those tariffs were supposed to protect U.S. manufacturers that competed with China, they also hurt U.S. companies that depended on Chinese imports, like Century Furniture. Adding the effects of those tariffs didn’t change the pattern: Trump country hurt; Clinton country was spared.
“I don’t think the president could have drawn up a policy that would have done more damage to his base of voters than the trade war,” Zandi says.
Economists had long theorized that businesses reacted to uncertainty by reducing investment and employment. It was a simple theory. If an executive wasn’t sure whether an investment or new hire would pay off because of some uncontrollable threat, the executive would choose to hold off until there was more information to make a decision. By mid-2019, it was becoming clear that the theory was reality at businesses around the globe.
Multinational businesses had spent a quarter century building supply chains that crisscrossed the globe, with the biggest hubs in China and the United States. Now they were waiting to see how the tariff battle would play out and affect their costs.
One team of economists measured the uncertainty by scanning transcripts of investor conference calls held by nine thousand firms worldwide. They looked for words that referenced global trade wars and other uncertainties. Their index of trade risks perceived by executives, stable for more than a decade, jumped by 60 percent after the beginning of 2018. For U.S. firms it was up 43 percent.2
Just as the theory predicted, business investment and hiring—crucial to economic growth—began to slow. U.S. business investment contracted in the second quarter, according to Commerce Department data, and orders by U.S. businesses for long-lasting durable goods like trucks or machine equipment also headed down. Companies weren’t laying people off, but they also weren’t hiring as aggressively as they had been doing in the lead-up to the trade war. By August 2019, U.S. job openings had declined 7.5 percent from their peak of the expansion reached in November 2018.
A September 2019 analysis by five Fed economists calculated that uncertainty over Trump trade policy had reduced global GDP by 0.8 percent in the first half of 2019 and could lead to a total reduction of slightly more than 1 percent through early 2020. 3That was a big blow to a president who had campaigned on pumping up the U.S. economic growth rate, which had been stuck near 2 percent since 2001, to 3 percent or higher. After large cuts in individual and corporate U.S. tax rates, growth had perked up in 2018, but the chances of sustaining the higher growth rate were quickly evaporating. The trade war had become another drag on growth.
Markets reflected the corporate wariness and economic uncertainty. After the president tweeted in early May 2019 that he was raising tariffs, the Dow Jones Industrial Average fell about 1,500 points by the end of the month. Stocks had soared after Trump’s election and continued as Congress approved his tax cuts. But the rally had stalled as his trade confrontations heightened in 2018. Afterward, markets moved up and down on the latest tweet or news about talks and retaliation.
Beijing also sought to make clear to the president the political cost of continuing the battle. On June 17, state media announced that Xi Jinping planned to make a state visit to North Korea, the first time a Chinese leader would travel to the reclusive state in fourteen years. North Korean leader Kim Jong Un had taken four trips to Beijing in the previous fifteen months, mostly to consult with Xi on how to deal with Trump. But Xi hadn’t reciprocated, despite repeated invitations from Pyongyang.
The two-day visit started on June 20 and had been planned for some time. It was timed for the seventieth anniversary of the start of diplomatic relations between China and North Korea. Now it offered an opportunity for the Chinese leader to send a strong reminder to his American counterpart. China could help Trump with his much-prized nuclear diplomacy—especially at a time when the United States was having trouble renewing talks after the failed summit between Trump and Kim in February—or China could undermine American plans.
Shortly after Beijing’s announcement of Xi’s Pyongyang trip, Trump tweeted on June 18 that he and the Chinese leader “had a very good telephone conversation” and the two would have “an extended meeting” at the G-20 summit scheduled for June 28 and June 29 in Japan. Trump once again needed a summit to calm markets. For the preceding week, he had been signaling to Xi through televised interviews that he wanted to meet. In Trump fashion, he held out the possibility of easing sanctions on Huawei Technologies if Xi showed up and threatened more tariffs if he didn’t. China subsequently confirmed the meeting. Markets rallied.
The two leaders were looking for a reprise of their summit in Buenos Aires, which had led to a truce in the trade war. That one didn’t hold up. Maybe a truce this time would lead to a settlement.
* * *
Xi Jinping had plenty of reasons to seek a meeting.
The trade war had led to some 5 million lost jobs in China’s industrial sector between July 2018 and May 2019, according to an analysis by China International Capital Corporation, a big state-owned investment bank. That represented 3.4 percent of the employment in mining and manufacturing, which rely heavily on international trade. The report surely understated the impact because it didn’t take into account the latest tariff increase.
Beijing also worried that the trade war would prompt U.S. multinationals to shift production out of China to avoid U.S. or Chinese tariffs. The companies were big employers, as well as repositories of technological and management expertise sought by Chinese partners. China needed to create 11 million new jobs in 2019—a target announced by the central government early in the year—to ensure employment for important groups like college graduates, migrant workers, and discharged military personnel.
Meeting that target was crucial for social stability, the party believed. Signaling its concern, China’s State Council, the top government body, created a committee in late May to oversee employment, headed by Vice Premier Hu Chunhua, who was in charge of foreign trade and investment.
Hu began by actively courting foreign firms.4 In July he spent more than two hours in a closed-door meeting listening to executives from U.S. companies including Cargill Inc., GE, Harley-Davidson Inc., and Microsoft, along with European, Japanese, and South Korean companies.
He jotted down notes as the foreign executives took turns sharing their concerns, which ranged from possible fallout from the protracted trade war to worries about how the new foreign investment law would be enforced. Hu and other senior officials present, including those from the Commerce Ministry and the top antitrust regulator, promised a more liberal business environment and urged the foreign businesses to invest more.
China’s leaders had reasons to worry about a corporate exodus. About 41 percent of the 250 respondents to a May 22, 2019 survey of U.S. companies said they had relocated or were planning to relocate manufacturing facilities outside China, reported the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai. That percentage was a big jump from the 11 percent when the question was first asked in 2013. Favored destinations included Southeast Asia and Mexico.
Some months later, the consulting firm Kearney estimated that about $95 billion in exports to the United States since the end of 2013 that were once produced in China now were manufactured in other low-wage nations, mainly in Mexico and Vietnam.
To figure out how likely multinationals were to decamp, a top policy advisory body to the government, the Development Research Center of the State Council, sent a survey in June to scores of foreign companies operating in China.
It laid out Beijing’s growing concerns: What does your company think about the American high-tech “decoupling” strategy toward China? the questionnaire asked. How would you suggest China respond? The survey listed four answers for respondents to choose from: 1) Don’t worry. The U.S. strategy is not doable. 2) Improve protection of intellectual property and the business environment. 3) Strengthen indigenous R&D. 4) Strengthen cooperation with third parties.
Beijing faced a conundrum. On the one hand, officials wanted to encourage multinationals to remain in China and expand. On the other hand, they wanted to free China as fast as possible from reliance on foreign technology, even though that would make foreign firms feel unwelcome. Policy makers figured that China’s huge market would ensure enough foreign investment even if they made increasing demands of multinational companies.
Xi Jinping focused on self-reliance. He told authorities to increase funding for research institutes and to press companies to boost their R&D, especially after the United States slapped a sales ban on American technology to China’s ZTE Corporation in mid-2018. Although the Trump administration later reversed the ban, the action convinced senior leaders of China’s technological vulnerability. Chinese companies had long relied on American technology and suppliers for semiconductors, software, jet engines, and many other high-technology products.
Now as trade tensions with the United States deepened, officials urged Chinese companies to reduce their reliance on American suppliers if possible. In response, China’s large state-owned telecom carriers barred Cisco Systems, a longtime supplier, from bidding on contracts for networking equipment. “We’re being uninvited to bid. We’re not being allowed to even participate anymore,” Cisco CEO Chuck Robbins later told analysts. “It was a much faster decline than what we candidly expected.”5
Instead, the giant Chinese telephone firm, China Mobile Ltd., chose Huawei equipment. “The trade war has made Huawei the pride of China,” says a senior executive at China Mobile.
Nationalist sentiment certainly played a role, but so did Huawei’s increasing technological prowess. When China Mobile put out bids in 2004 for a $100 million contract, Huawei competed with a few Chinese and foreign firms. “Its products were much cheaper than, for example, Cisco’s, but we told them, ‘We’re China Mobile. Money is not an issue for us. What we want is quality and reliability,’” the executive recalls. Cisco won that contract. “Now Huawei stands for quality and reliability, and their stuff still is cheaper than imports,” the China Mobile executive says. “Why not Huawei?”
The leadership also pressed domestic companies to step up R&D. Shanghai’s party secretary visited three local semiconductor companies in June and called on the chip industry to “develop an innovation chain and put more efforts in realizing technological breakthroughs.” Later in the month, Miao Wei, minister of industry and information technology, instructed robotics companies in the southern Chinese city of Guangzhou to develop the technologies necessary to compete globally.
Sometimes, though, Beijing threatened tough actions on the technology front that would match the Trump administration, but wavered for fear of spooking foreign companies. After the United States sanctioned Huawei, for instance, China warned it would retaliate. If U.S. companies weren’t allowed to sell to Huawei, China would block them from doing business with Chinese firms. Beijing said it would create an “unreliable entity” list and blackball companies that failed to supply Chinese firms for “noncommercial purposes.” 6
But by early 2020, the government had yet to publish any specific companies or individuals on the list. U.S. multinationals employ more than 2 million domestic workers in China, Citigroup estimates, and Beijing didn’t want to push them too hard. Chinese negotiators told visiting Americans that Beijing wouldn’t proceed as long as trade talks were “going in the right direction.”
* * *
On June 29, the two leaders sat down for lunch at Osaka’s Imperial Hotel during a dreary stretch of rainy weather. In some ways, the summit was similar to the one in Buenos Aires. Trade tensions were mounting. The United States was threatening another round of tariffs—this time as much as 10 percent on the remaining $300 billion in Chinese imports not already covered by U.S. duties. Only the two leaders had the power to head off further clashes. Even the aides who sat in on the meeting were mainly the same, although the United States added Ivanka Trump, who looked to burnish her foreign policy credentials. The participants were arrayed on two sides of a long table.
But this time Xi didn’t come prepared with a long list of reforms and concessions he was ready to make as part of a settlement. A sterner Xi addressed Trump. “Before we talk about trade, let’s talk about what kind of a relationship we want,” Xi told Trump at the start of the eighty-minute session. If the United States and China are partners, Xi indicated, then they should try to work toward a deal. But if the two nations see each other as enemies, there was no point in seeking an agreement because it wouldn’t last.
Xi sketched what he envisioned as an optimal bilateral relationship—one based on “coordination, cooperation, and stability.” In other words, if the two nations treat each other as partners, China would be willing to work with the United States on trade and other issues vexing to Washington, such as North Korea.
Trump didn’t push back on Xi’s vision of a bilateral relationship, although the United States preferred the term “constructive but results-oriented.” Trump focused on getting Xi to guarantee outcomes, especially when it came to buying more soybeans and other goods. Twice during the meeting he raised the issue. Xi said he would consider the request to buy more, but America needed to understand that purchases must be reasonable. He wasn’t going to order state-owned firms to buy goods they didn’t need or cut off other nations in order to please America. Xi wouldn’t make a firm commitment.
Trump pressed again, using different language: “You will buy significant amounts. That’s our understanding,” the president said. We will work out details, Xi replied.
The president was fixated on agriculture purchases and remained that way the rest of the year, which the Chinese side saw as weakness and a way to pressure him to back off on Huawei and to remove tariffs. For Trump, agricultural buys were important for two reasons: First, big Chinese purchases would help farmers and others in his political base, which he could tout as a win in a trade war that had stretched on for two years. Second, his trade team viewed purchases as a measure of whether Chinese would pursue a larger deal. If China wouldn’t increase purchases—the simplest U.S. demand to meet—why should the United States believe Beijing would ever make difficult structural changes in its economy?
When Xi pressed the United States, in return, to free Huawei from sanctions, Trump was as encouraging but vague in his remarks as Xi had been on purchases. No firm commitments, but no firm rejection. The two sides could handle the issue separately.
During a press conference afterward, Trump claimed victory. The talks had gone so well, he said, the United States was indefinitely suspending any tariff increase. “China is going to be buying a tremendous amount of food and agricultural product, and they’re going to start that very soon, almost immediately,” Trump said. He lauded farmers as “great patriots” who stuck with him during the trade war.
As for Huawei, he suggested he’d go easy on the company. American firms “sell to Huawei a tremendous amount of product that goes into the various things that they make,” Trump said. “And I said that that’s okay, that we will keep selling that product,” so long as it didn’t endanger national security. Any final resolution, though, would wait until the end of the talks.
Trump went so far as to say that America and China could once again become “strategic partners,” dredging up a term that hadn’t been used since the Clinton administration. That was a far milder description of China than the one in his administration’s National Security Strategy, which labeled China a “strategic competitor” and a “revisionist power.”
Xi was also happy to claim success. According to the official Xinhua News Agency, the Chinese leader had laid out a positive vision of U.S.-China relations, saying the countries will “maintain exchanges at all levels” and work together for stability.
Despite the positive comments, some on the Chinese side worried that Trump either misinterpreted what Xi had said on farm purchases or was trying to force Beijing to accept his version. At the conclusion of the summit, Vice Foreign Minister Zheng Zeguang made a point of clarifying to the U.S. side that Xi hadn’t promised increased agricultural purchases. Senior U.S. trade officials missed his warning. They said they never heard Zheng’s comments or dismissed him as a junior official.
The disagreement over what Xi promised at Osaka quickly turned into another front in the battle between the two superpowers. Instead of easing tensions, the Osaka summit made them worse.
* * *
On July 4, a Chinese Commerce Ministry spokesman indicated that China wasn’t in a rush to accelerate purchases—the first sign of problems ahead.
“Agricultural trade is an important topic that both sides need to discuss,” said the spokesman Gao Feng, adding that China hoped “to find a solution based on equality and mutual respect”—phrasing that meant there were no firm orders yet. Shortly afterward, when some privately owned Chinese companies inquired about buying soybeans from American farmers, none of the big state-owned trading companies bothered to call U.S. suppliers about sales. Beijing wasn’t budging.
To Beijing, Trump’s neediness was a powerful tool to use in negotiations. They weren’t going to start buying unless they could get something in return. At the top of the list was a reprieve for Huawei, which they believed Trump had promised at Osaka, but hadn’t delivered.
To Washington, however, Beijing’s failure to carry out farm purchases was once again viewed as acting in bad faith, similar to when China scrapped the tentative trade deal in May. Although senior trade officials acknowledge that Trump hadn’t wrangled a commitment out of Xi at Osaka, they are adamant that in follow-up calls between Lighthizer, Mnuchin, and Liu, the Chinese side committed to making big purchases soon. They reported their understanding to the president, confirming his belief that the Chinese weren’t living up to a deal.
A senior national security official had a darker explanation for the Chinese recalcitrance. Xi was jerking Trump around in a show of power. Between the summits in Buenos Aires and Osaka, China’s state media had released a speech made by Xi shortly after he took office, where the Chinese leader talked about how Chinese socialism would prevail over American capitalism. “Xi was saying ‘I won’t apologize anymore for China not liberalizing economically and politically,’” the U.S. official says. “Between Buenos Aires and Osaka, Xi dropped the fig leaf.”
Failing to meet Trump’s expectations on agriculture, and trying to use it for leverage, was “an enormous strategic blunder,” the official said. “It poisoned the well.” He added China’s balking on farm purchases to a list he kept of broken Chinese promises that then numbered six pages, single-spaced.
As had happened in May when talks fell apart, the two sides miscalculated their leverage and the weakness of the other side. The Chinese thought Trump was more vulnerable to political pressure than he was because he kept harping on farm goods. The Americans thought that Xi would make the concessions they wanted because he was so protective of Huawei. Both thought the other side was duplicitous.
Sometimes the two sides signaled some limited flexibility. On July 21, Xinhua reported that several Chinese firms asked U.S. companies about prices for agricultural products. They also asked the government to remove tariffs on the goods, making them cheaper to buy. But still no purchases. On the U.S. side, the trade representative’s office waived tariffs on 110 Chinese industrial imports after U.S. firms argued they couldn’t get the items elsewhere. But still no decision on Huawei.
Despite their misgivings, both sides hoped to make progress when U.S. and Chinese negotiators met face-to-face in China on July 30 for the first time in three months. Liu He picked the eastern coastal city of Shanghai as the venue because of the city’s commercial vibe and historical resonance. During President Richard Nixon’s visit to China to meet Chairman Mao in 1972, the two nations reached an agreement, called the Shanghai Communiqué, which ended more than two decades of diplomatic estrangement. In a country where symbolism underlies nearly every gesture, choosing Shanghai for the talks marked China’s hope for a fresh start.
Xi Jinping also added a new face to Liu’s negotiation team: Zhong Shan, the commerce minister who had worked with Xi in the eastern province of Zhejiang. Zhong’s ministry would have the task of implementing any agreement Beijing signed with Washington. Getting him involved was meant to signal that China was serious about cutting a deal and carrying it out once one was reached.
But the Chinese didn’t realize that Trump was stewing over what he considered China’s unkept purchase promise. A Trump Twitter posting should have alerted them.
As Lighthizer and Mnuchin joined Liu and his team for dinner and informal discussions at the Fairmont Peace Hotel, a landmark on the city’s riverfront, Trump unleashed. China was supposed to start buying U.S. agricultural products but it had shown “no signs that they are doing so,” Trump tweeted. “My team is negotiating with them now, but they always change the deal in the end to their benefit,” he added. “That is the problem with China, they just don’t come through.”
Liu and his team were taken aback, though some on the U.S. side told the Chinese—incorrectly this time—that Trump’s tweets were usually aimed at his U.S. audience in the run-up to the campaign season.
The following day, the teams held four hours of discussions at the Xijiao State Guest Hotel, where Nixon stayed during his visit to the city in 1972, and took a group photo. Then the U.S. officials left for the airport without speaking to reporters. The Chinese side felt the talks went well enough. Negotiations were continuing, and the two sides said they would take into account each country’s legal and political situations—as if they hadn’t tried to do that already.
But the Americans were disappointed. As far as they could tell, Liu didn’t have any enhanced mandate to cut a deal, and the farm purchase controversy remained unresolved. The White House released an encouraging statement, calling the talks “constructive” and saying the U.S. side expected talks to continue in early September. Lighthizer approved the positive spin to boost Liu and other reformers in their domestic battles.
When Lighthizer and Mnuchin reported to Trump on August 1 that they had made scant progress, his response was volcanic. He tweeted that he would hit China with 10 percent tariffs on the remaining $300 billion of Chinese imports on September 1, starting a head-spinning month of escalation. He made the decision over the nearly unanimous opposition from his senior advisers during a two-hour discussion in the Oval Office. China hawks Lighthizer and National Security Advisor John Bolton teamed with the longtime moderates Mnuchin and Kudlow to oppose escalation, scrambling the usual lineup on China.
Lighthizer objected that the move was bound to undercut Liu and scuttle any chance for a deal. The trade representative had been urging the president for weeks not to go ahead with new tariffs. The imports left to be hit were mainly consumer goods like clothing, toys, mobile phones, and laptop computers. Higher prices could turn American shoppers against the trade war, he worried. Lighthizer sought tariffs that were “politically sustainable,” says Michael Pillsbury, the China expert who consulted regularly with the Trump trade team.
For Bolton, the United States had higher priorities than a trade fight, and new tariffs were bound to alienate allies the United States needed to oppose Iran. Only White House trade adviser Peter Navarro, who opposed almost any deal with China, backed the president.
Trump “felt very strongly that the talks were going unsatisfactorily,” says Kudlow in an interview. “Coming out of Osaka he didn’t see any ag buys and there were some pretty critical comments coming out of Beijing ministries.”7 Trump also believed that China wasn’t aggressively attacking fentanyl production, as Xi had pledged in the Buenos Aires summit.
A U.S. official working on the issue said, only half-jokingly, that Trump wouldn’t be satisfied until the Chinese put a stack of fentanyl on a table, put some police officers next to it, took pictures, and said, “This was confiscated from a container going into the United States.” Later, in early November, Chinese authorities did exactly that: nine Chinese fentanyl traffickers were convicted at a public hearing in a courtroom in northern China.
Another factor: Trump had wanted to announce big farm purchases at a reelection rally later in the day in Ohio. Now he couldn’t. The Dow Jones Industrial Average fell about 500 points after he announced the new tariffs at 1:26 p.m. For once, even that didn’t deter him. “Until such time as there is a deal, we’ll be taxing them,” he told reporters before boarding Air Force One for the rally.
* * *
With the trade battle once again worsening, an unusual combination of Kudlow, Mnuchin, and Lighthizer tried to restrain the president. The first two were free traders, so their opposition to fresh tariffs wasn’t surprising. But Lighthizer proudly considered himself a China hawk and had joined the administration to confront Beijing. During 2017, he pushed a reluctant Trump to endorse the Section 301 report on Chinese intellectual property theft, which functioned as the administration’s declaration of a trade war. In 2018, he fought with Mnuchin and Kudlow to impose tariffs on China as a way to force concessions.
But over time, he had come to trust Liu He and to appreciate the domestic political problems he faced. Lighthizer began to talk about how the U.S. proposals aligned with those of Chinese reformers—the same arguments that had been used by administrations dating back to Nixon and which Lighthizer had once dismissed as naive. With an agreement in sight, Lighthizer, then nearly seventy-two years old, was also thinking about his legacy as a trade negotiator. The president had instructed him to get a “great deal.” Now he was ready to take the best one available.
“Anyone who thinks that one deal will change how China operates is beyond crazy,” says Lighthizer in an interview.8
It wasn’t that Lighthizer was going soft, says his brother Jim. Rather, he realized that acting like a bad cop to China wouldn’t get him a deal. “Bad cops make for the best good cops,” his brother says, because they have credibility when they change.
When China’s central bank, acting with approval of the top leaders, allowed the yuan to slip past 7 to the dollar on August 4, U.S. officials feared that Beijing was going to devalue its currency so much that it would offset the impact of U.S. tariffs. At 8:12 a.m. the following day, Trump tweeted that the move was “currency manipulation,” which he blasted as a “major violation which will greatly weaken China over time!” By that evening, the Treasury followed up by formally naming China a currency manipulator. That was another slap in the face for China, although this one had little force. Under the law, the United States was simply required to start discussions with China over currency policy and the two sides were already talking.
Frustrated, the president started hunting for new pressure points. He considered doubling, to 50 percent, tariffs already in place on $250 billion in Chinese imports. Even the 25 percent rate was having a big impact by raising costs for U.S. companies and cutting into their investment and profits. Doubling the rates was bound to hurt more, especially since Beijing would surely retaliate with its own rate hike, which would further hurt American exporters. According to AT Kearney, U.S. exports targeted by Chinese retaliatory tariffs fell 59 percent between the third quarter of 2017—around when Trump announced the Section 301 report—and the third quarter of 2018, after initial tariffs had been put in place.
Kudlow asked Lighthizer to have lunch with the president and explain why a steep tariff increase would be counterproductive. The trade representative was convincing. Trump dropped the 50 percent rate plan, though he started talking about raising the rate by 10 percentage points to 35 percent. Then in a phone call, Lighthizer helped convince the president to limit any increase to five percentage points, or a 30 percent tariff.
Kudlow also played a direct role in keeping escalation in check. In a short interview on CNBC on August 6, he said five times that the United States wanted to keep negotiating and once that it would be “flexible” about tariffs. Then, with a Trumpian flourish, he claimed that the Chinese economy was “crumbling” so Beijing needed a deal.
Many in the administration shared that view, fed by pessimistic reports on China by Reagan-era economist Arthur Laffer, who was a close friend and compatriot of Kudlow’s, and, most significant, Chinese economist Xiang Songzuo of Remin University. At a seminar for entrepreneurs in December 2018, Xiang said that the Chinese economy was growing at just 1.67 percent—or was maybe even shrinking—not expanding at 6.5 percent, as the Chinese government was then claiming. Xiang, a former chief economist at a big state-owned bank, cited an internal report from an unidentified “important institution.”
Xiang called for deep reforms in the Chinese economic system and said the trade war was hurting China more than the government admitted. China’s censors erased a video of his talk from the Internet after it went viral on the mainland. The Trump trade team pored over a memo with an English translation of Xiang’s talk.
In an interview, Kudlow says his call for talks was approved by President Trump. “One [reason] was to signal the Chinese that we were still hoping they would come in September for negotiations” as a follow-up to Shanghai, he says. “And the second was to communicate to the markets that we wished to continue negotiations; that the door was not slammed.” 9 Wall Street Trump was once again coming to the fore.
A week later, the president made another decision that he considered a peace offering of sorts. Instead of imposing tariffs on the remaining $300 billion of Chinese goods on September 1, he delayed duties on nearly two-thirds of the goods until December 15. The decision was mainly made for domestic reasons. Best Buy and other big retailers had warned the White House that they had already signed contracts with their Chinese suppliers for Christmas deliveries. They couldn’t force the Chinese to cut prices, so the American firms would bear the full cost of the tariffs. By December 15, all the Christmas orders would have been delivered, helping the retailers get through the Christmas season.
The products that the White House moved into the December 15 category included expensive consumer favorites like iPhones and laptop computers. A 10 percent price increase risked a consumer backlash, so better to postpone the tariffs. The new peace faction of Kudlow, Mnuchin, and Lighthizer backed the tariff delay. Navarro didn’t, but this time Trump didn’t side with him.
The president thought he deserved credit for the move from Beijing. After all, he was postponing tariffs on nearly $200 billion of goods while the two sides talked. Surely this would encourage Beijing to make the promised soybean purchases. “As usual, China said they were going to be buying ‘big’ from our great American farmers,” he tweeted shortly after the announcement. “So far they have not done what they said. Maybe this will be different!”
But the move looked far different from Beijing. Still more Chinese goods—$120 billion worth—were being hit with tariffs, and the Americans continued to insist China make purchases that Beijing didn’t think were required. Chinese officials had grievances, too. Not only had Trump failed to ease pressure on Huawei, but he was moving in the opposite direction. “Ultimately we don’t want to do business with Huawei for national security reasons,” the president told reporters on August 18. Trump also said it would be “much harder” to sign a trade deal if Beijing cracked down on Hong Kong protestors, reinforcing the view in Beijing that Americans were behind the protests.
Five days later, Beijing retaliated against the new tariffs, as it had warned it would do—and as it had done every time before—with fresh tariffs on $75 billion of U.S. products. Most jarring to Washington, Beijing threatened to reapply 25 percent tariffs on U.S.-made cars and car parts, starting December 15. That would affect nearly 10 percent of U.S. exports to China, hurt Ford and Tesla, and eliminate a concession China had made after the Buenos Aires summit.
Although China exempted nearly one-third of U.S. exports, including aircraft, semiconductors, and pharmaceuticals, that didn’t matter to President Trump. Outraged at China’s temerity, he said he would boost existing tariffs to 30 percent on October 1 from 25 percent, as he had discussed with Lighthizer. That was less than the 50 percent or 35 percent tariff rates he earlier considered, but was still an increase. He also said he would raise upcoming tariffs to 15 percent from 10 percent.
The tariffs would boost the prices for consumer goods ranging from clothing to electronics and risk a cancellation of Liu’s planned September negotiating trip to Washington. But Trump wouldn’t be dissuaded. He believed that China rejected his peace offerings and thought he was weak. He would show them how wrong they were.
“Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA,” he tweeted on August 23, the same day Beijing announced retaliation. China was already worried about losing American multinationals. Now he would really give them something to worry about.