Rather than spurring corporate executives to look again at pulling out of China, the president’s tweet had them scurrying to call their Washington lawyers and lobbyists. Did the president actually have the power to force them to move out of China? Perhaps not directly, trade experts argued. But Trump had broad, untested authority under the International Emergency Economic Powers Act to block financial transactions, acquisitions, exports, imports, and many other business activities during a “national emergency.” This was the law that the Treasury used to sanction terrorist groups and nations like North Korea and Iran—and which Treasury Secretary Mnuchin had refused to use in the trade war.
To make sure corporate America heard him even more clearly, the president followed up his tweet with another one citing IEEPA as the basis for his power. “Case closed!” he tweeted.
China hawks in the administration, especially those working in the Pentagon, Justice Department, and National Security Council, also sensed a firmer resolve by the president. They were especially cheered by his August 18 remarks, which he repeated on September 4, that the United States wouldn’t do business with Huawei because it was a national security threat. “He killed any ambiguity with that remark” that he would use Huawei as a bargaining chip in the trade talks, asserted one senior security official, although others in the administration weren’t nearly as certain.
A meeting between the National Security Council’s Asia chief, Matt Pottinger, and semiconductor industry executives on September 19, 2019, demonstrated how empowered the hawks felt. Pottinger had played an important behind-the-scenes role in China policy since the presidential transition, when he helped prepare position papers for the new administration. He developed a quiet rapport with the president and, as a Mandarin speaker, often acted as a note taker for important meetings with Chinese officials. Soon after the meeting with the board of the Semiconductor Industry Association (SIA), he was named deputy national security advisor.
Pottinger felt that the United States had been complacent about the China threat before Trump took office. He told people that the foreign policy establishment in both Democratic and Republican administrations had misunderstood China in three important ways.
First, they assumed that deeper economic ties between China and the West would inevitably lead Beijing to liberalize politically and economically. That hadn’t happened. Second, China experts downplayed ideology as a fundamental driver of Beijing’s behavior. Under Xi, Pottinger argued, ideology was becoming as important as it was under Mao. Third, the experts believed that the Chinese Communist Party was simply interested in survival. Pottinger believed the party had global geopolitical designs.
At the SIA meeting at the Hay-Adams hotel near the White House, Pottinger stressed the administration’s intention to keep up pressure on Huawei and the Chinese leadership. He warned the members, who were seated around a U-shaped set of tables, that they didn’t take seriously enough the threat that Huawei products could be used for spying. Citing recent studies, he said the company was beholden to the Chinese defense establishment, if not owned by it. The executives should worry more about reducing their dependence on Huawei and less about making money supplying the company.
U.S. policy toward China over the past thirty years was “well-intentioned but naive and way too optimistic,” Pottinger told them. Once China joined the WTO in 2001, he said, it stopped market reforms and became more authoritarian and intent on stealing American technology. “The conscience of everyone sitting around this table should be shocked,” Pottinger said. “There are consequences when you invite the [Chinese] KGB into your networks.”
In an interview afterward, Pottinger explained his thinking. U.S. technology companies should be looking for “ways to support an ecosystem for telecom infrastructure and IT infrastructure that the free world can trust instead of saying, ‘We need the China market so badly that we need to deprioritize our national security,’” he says. Letting Huawei dominate global telecommunications systems “would be equivalent to Reagan and Thatcher saying [during the Cold War], ‘Let’s let the KGB build all our telecom networks and computer systems because they’re offering such a great discount.’”1
Many in the group pushed back against Pottinger’s arguments. U.S. government policy toward China had become a big problem for them, executives told Pottinger. They were losing ground in China, as U.S. pressure forced Chinese companies to become more efficient and less dependent on them. The Chinese would turn to European and Japanese suppliers instead. Rather than working alone, some executives said, the Trump administration should recruit allies and deal with China multilaterally. That would get better results.
As for Huawei, the executives argued that Trump was being overly dramatic and unrealistic. Washington wouldn’t be able to “kill off” Huawei and prevent Beijing from using its technology to spy. Huawei’s technology was so embedded in European telecommunications networks, which are linked to American ones, they said, that blocking Huawei from the United States wouldn’t end the threat.
Did China want to put them out of business? Pottinger asked the executives. “No, that’s not what’s happening,” said the trade association’s CEO, John Neuffer. “They want to replace our stuff with their stuff, but they don’t want to drive us out of business. We can compete with them if we have the right policies.”
* * *
While Trump’s national security team was getting more assertive, his trade team was playing out a familiar pattern. Stocks, government bond yields, and commodities fell sharply on Friday, August 23, the day of Trump’s “hereby ordered” tweet. The Dow Jones Industrial Average plunged 623 points, or 2.4 percent, while the yield on benchmark ten-year U.S. Treasury notes fell to its lowest level since August 2016. Both were signals of trouble ahead.
By Sunday, August 25, National Economic Council Director Larry Kudlow was on CBS’s Face the Nation, trying to walk back what Trump had said. He claimed that the president hadn’t threatened using emergency power to compel companies to leave China. (Trump did.) Was Trump thinking of using such authority? the host, Margaret Brennan, asked. “You know, I . . . I don’t even want to go down that road,” Kudlow replied.
The president started the following day, at a summit of the leaders of the G-7 industrial nations in Biarritz, France, by tweeting, “Talks are continuing!” Then he told reporters Chinese officials had called their U.S. counterparts and said, “Let’s get back to the table” for fresh talks. But he wouldn’t specify who, if anyone, had actually called. To ease the way for a deal, Trump said, maybe he’d cancel his tariff threat that had shaken the market. “I think anything is possible,” the president added. For good measure, he twice called Xi Jinping “a great leader.”
Chinese officials said there had been recurring talks between working-level negotiators, but not at the senior level described by Trump. “I’m not aware of that,” China’s Foreign Ministry spokesman Geng Shuang told reporters when asked about the call—a polite denial of Trump’s claim.
Wall Street Trump was in full swing. The election was getting closer, his ace card was the economy, and the trade imbroglio with China was the Joker that could screw up everything. The Commerce Department would soon report that third-quarter economic growth had slowed to 1.9 percent (later revised to 2.1 percent), well below Trump’s goal of 3 percent growth. Business investment continued to fall as executives were uncertain how the trade battle would play out.
Markets clearly wanted a settlement—any settlement—and Trump wanted to make markets happy.
About a week later, Trump ruminated that if he hadn’t taken on China, “my stock market—our stock market—would be 10,000 points higher than it is now.” But he said he didn’t regret the fight because “somebody had to do this. To me, this is much more important than the economy.” Trump’s self-reflection went only so far. His trade policies and decisions weren’t at fault for markets not climbing higher, he said. “Badly run and weak companies” were at fault because they didn’t adapt to tariffs, he tweeted. The Federal Reserve was, too, because it didn’t cut interest rates and goose the economy, as he regularly lectured Fed chairman Jerome Powell to do.
Still, Trump was correct in arguing that China’s leaders faced pressure to settle. Xi also needed a win. The year 2019 was supposed to be a time for the Chinese leader to showcase the country’s seventy-year progress under Communist rule, from a dirt-poor nation torn by war to a prosperous nation striding confidently into the future. (Although, of course, the party would leave out the horrors of the Great Leap Forward, the Cultural Revolution, and Tiananmen Square.)
Instead, Xi was mired in one challenge after another. The trade war with the United States kept getting more intense and threatened to sink the economy. The unrest in Hong Kong kept building and highlighted the erosion of political freedom throughout China under Xi. The setbacks fed quiet criticism of Xi from political, business, and academic elites, who believed Xi’s consolidation of power had discouraged policy debates and centralized too much power in one person.2 Getting a trade deal with Washington now, however narrow, could help reinforce his standing.
By early September, Washington and Beijing were ready to resume high-level negotiations, which were delayed a month until mid-October, to give the Chinese leadership time to focus on their October 1 celebration of Communist rule.
Myron Brilliant, the U.S. Chamber of Commerce’s executive vice president, was among the first American business leaders to sense a shift in attitude in Beijing in favor of a deal. A business delegation he led was due to meet with Premier Li Keqiang on September 10. Given the recent escalation on both sides, Brilliant anticipated a tough message from the Chinese premier. Senior Chinese leaders had largely avoided meeting with Americans throughout the summer.
Instead, Li sought to assure the visiting Americans that China would continue to open its markets, especially the service sector, and welcome more U.S. investments. Brilliant told the premier that he would like to look at the bilateral relationship as a “glass half-full” as opposed to a “glass half-empty.”
Li made a gesture of putting tea in his cup and said, emphatically: “It’s more than half full.” 3
* * *
As the October talks drew closer, China’s Zhongnanhai leadership compound counted on the presidential campaign to give Beijing an edge. Officials figured that Trump would be more willing to compromise to get a deal that he could brag about on the campaign trail.
Earlier in the trade fight, the chief Chinese negotiator, Liu He, had wanted to negotiate in stages. In mid-2018, he proposed to the U.S. team that 40 percent of its demands could be met right away, while another 40 percent could be discussed over time, and the remainder would be off-limits for negotiation. American negotiators rejected what they called the 40-40-20 deal, figuring that the Chinese bid would drag out talks and avoid tough subjects. They insisted on working out a sweeping deal. Trump wanted what some officials called a grand slam, not a single.
Now Chinese officials tried again to narrow the scope of the talks. 4Liu and his team worked on plans to boost purchases of U.S. agricultural products, give U.S. companies greater access to China’s financial market, and bolster protection of American intellectual property rights. All were offers Beijing had made previously and included reforms that Beijing realized it had to make anyway to keep its economy on track. Thornier questions, including limiting the power of state-owned enterprises, reining in subsidies, and opening the cloud computing market fully, would be left to later negotiations, if then.
In exchange for the offers, Liu planned to press for some reduction in tariffs, leaving to a later date Xi Jinping’s demand that all tariffs be removed. Beijing would also continue to request that President Trump lift the ban on the sale of U.S. technology to Huawei that wasn’t tied to national security, which Chinese officials believed he had promised to do.
The U.S. side thought of Huawei as a kind of trump card in trade talks. Huawei depended so heavily on American chip and software suppliers that the United States ought to be able to extract big concessions from China in exchange for easing the sales ban. But over time, Huawei was growing less reliant on U.S. approval, and its value for the American side in trade talks was diminishing.
Huawei’s American suppliers helped bail out the firm, even if national security officials like Pottinger wanted to kill, or at least quarantine, it. Huawei was too big to lose as a customer. In 2018, Huawei estimated that it purchased $11 billion of goods and services from American firms, out of a procurement budget of $70 billion. U.S. industry lawyers examined the statutes authorizing the blacklist, formally called the entity list, and realized that American technology companies could legally use their overseas facilities to continue to supply Huawei with most of what it wanted.
As a result, Huawei did far better than anticipated. Shortly before the end of the year, the company reported that 2019 revenue rose 18 percent to $122 billion. In September, it introduced a new phone, the Mate 30, which contained no U.S. parts, to compete with Apple’s iPhone 11. Huawei developed the components it needed internally or bought them from European firms.5 Four months later, the United Kingdom decided to permit Huawei to build part of its 5G network, despite furious opposition from Washington.
With business soaring, Huawei opened a three-hundred-acre R&D campus in the city of Dongguan in the spring of 2019, with more than 25,000 employees, about an hour’s drive from the company’s headquarters in Shenzhen. The campus consists of twelve European-style towns, including ones called Paris and Luxembourg, which are connected by a train modeled on the Shenzhen metro. “We’re doing well in Europe,” a Huawei executive says, explaining the design.
In an interview with the Wall Street Journal in November 2019, Huawei’s founder Ren Zhengfei appeared unfazed by the controversy enveloping the company and invited President Trump to visit the company’s new R&D campus. “I would really like to have him here,” Ren said. The former military officer also appeared unyielding in face of the U.S. sanctions. “We don’t expect the U.S. to remove Huawei from the entity list,” he told the Journal. “They may as well keep us there forever because we’ll be fine without them.”
The company continued to receive government support. Dongguan didn’t charge Huawei for the land and changed the name of the surrounding village to Xiliubeipo (“hillside creek” in English), from Xiniupo (“rhinoceros hill”), to please the firm. Shortly after the campus opened, Dongguan awarded Huawei a contract valued at 2.74 billion yuan, or $391 million, for cloud computing, databases, and other products and services. In all, the Wall Street Journal reported, Huawei had received as much as $75 billion in state support over the years, helping it offer low-cost financing and undercut rivals’ prices by 30 percent.6 By contrast, Cisco collected only $44.5 million in state and federal assistance since 2000.
As speculation about a mini-deal grew in Washington, President Trump said no thanks. On September 20 he told reporters, “We are looking for a complete deal. I am not looking for a partial deal.” That reflected the long-held views of his trade negotiators, who had ridiculed China’s 40-40-20 offer. As far as they were concerned, China categorized most of the issues at the heart of the trade dispute into the category that couldn’t be negotiated because of national security.
For instance, the two sides had spent many days discussing the closed Chinese market for cloud computing. To China, the issue was a matter of national security. As part of the narrowing of talks, China’s leadership wanted to move those discussions to separate military and diplomacy dialogue between the two nations. That dialogue, set up during the early days of the Trump administration, had long been declared defunct by the United States. Betting on Trump’s need for a deal, Beijing was hardening its stance on negotiations by putting cloud computing again into the off-limits category.
But by the time Liu landed in Washington, D.C., for the talks on October 10 and 11, the president and his advisers were ready to reverse course. During a week of conversations, the new coalition of Mnuchin, Lighthizer, and Kudlow mapped out a strategy for getting whatever they could from the talks and pushing off tougher issues for later. That would give the Chinese more time to work on their domestic politics and give Trump a deal he could claim as a win. It would also give the United States a reason to delay any further tariffs on consumer goods like iPhones and computers, which the trio was sure would backfire domestically.
The three talked about “segmenting” the talks, and they hit on the idea of breaking the discussions into “phases.” The trio liked the term so much, that when they faced other tough issues, they joked about putting the hardest parts into “a phase two.”
Kudlow broached the idea to Trump, sketching out a preliminary deal involving farm purchases and some intellectual property protection and liberalization of Chinese financial services. “No one could possibly accuse you of going soft on China,” Kudlow added, mixing in the flattery that moved Trump. It worked. “I could be for that,” the president said, though he wanted to see what the Chinese would actually offer.
The White House’s main trade hawk, Peter Navarro, vehemently opposed any settlement along those lines, but was overruled. Trump upbraided him and told him to calm down. Asked about the incident, Navarro told Bloomberg Businessweek that he was “always a passionate defender of the president’s deep understanding of the situation and his practical solutions.”7 Later phases would tackle issues at the heart of the Section 301 report—that is, if the two sides ever got to the other phases.
During a dinner on October 10 between the two sides—once again at Lighthizer’s favorite, the Metropolitan Club—Mnuchin tried out the idea of breaking the talks into phases. The Chinese negotiators were agreeable; it was a variation on what they were suggesting anyway.
Before Liu was ushered into the Oval Office on October 11, to meet with the president, Trump conferred with his senior trade advisers once again. “It was very clear to me the president had been briefed by Steven [Mnuchin] and Bob [Lighthizer] about phase one, and it was very clear to me the president was entirely enthusiastic about it,” Kudlow says in an interview.8
Then the president called in reporters to discuss the results, with Liu and U.S. negotiators by his side. Trump described the prospective deal a dozen times as “tremendous,” though the particulars fell far short of that description. China would toughen its intellectual property protection and open its financial services markets more broadly than before—improvement on commitments that China had previously made. Plus, China would revamp its foreign exchange policy so it didn’t devalue the currency to give a competitive edge to its exporters. Secretary Mnuchin had said eight months earlier, in February, that the two sides had reached that currency deal. Putting the best spin on the components of a partial deal, administration officials said they were trying to “harvest” parts of the agreement that fell apart in May.
What really got the president excited was what he said was China’s commitment to buy as much as $50 billion of agricultural products annually, about twice what it bought before the trade war began. “I’d suggest the farmers have to go and immediately buy more land and get bigger tractors,” the president boasted.
Looking to get a mention of at least some of the structural issues remaining, Trade Representative Lighthizer cited progress on resolving health regulations that China sometimes used to block purchases. But such issues were clearly secondary.
Trump said that the two sides were close to a “substantial phase-one” deal. A broader settlement, the president said, would come in later stages. The second round or third round would include such divisive issues as China’s subsidies to domestic firms, reliance on state-owned industries, and cloud computing.
The two sides planned to finish the deal by mid-November when Trump and Xi were scheduled to meet at a summit of Asia-Pacific leaders. But those plans fell apart when the host, Chile, canceled the meeting because of mounting antigovernment protests in Santiago. Without a firm deadline, the talks began to flounder, even though the two sides were negotiating over a far smaller set of demands than the United States had started with.
For weeks, the two sides haggled over how sharply Washington would reduce tariffs. Once again, Chinese negotiators divided American demands into hundreds of items. They calculated that their offer covered 72 percent of what the Americans wanted, which they argued should be matched by a similar tariff reduction. No way, said Lighthizer, who wanted to keep tariffs as high as possible for future leverage. The offer was worth maybe half that, or 36 percent. 9
On October 31, Trump inadvertently undercut Lighthizer’s position by tweeting that the deal covered 60 percent of what the United States wanted—a statement that left his negotiators dumbfounded. Still, Lighthizer held firm. He was being generous, he told Chinese negotiators. Their offer covered just 31 percent of what Trump wanted but he would give them credit for 36 percent.
Back and forth the arguments went as the real deadline drew closer. That was the December 15 deadline to assess tariffs on the rest of Chinese imports. Although Lighthizer worried that those tariffs on items like iPhones and toys would backfire and had argued against them in White House discussions, he used the threat as best he could to get Liu He to back down.
With the talks stymied around Thanksgiving, Chinese officials turned to the president’s son-in-law, Jared Kushner, for counsel, as they had since the Mar-a-Lago summit between the two presidents a few months after Trump was inaugurated. Let’s be realistic, Kushner told Chinese Ambassador Cui Tiankai, “there’s no real way to come up with an accurate estimate of percentages,” he said. “It’s an arbitrary exercise.”
More important was that the president was serious about going through with the last set of tariffs in a few weeks. Trump backed Lighthizer’s hard-line stance. “Don’t think in terms of tariff reduction,” he advised Cui. “Think in terms of what will happen if you don’t make a deal” and tariffs go into effect.10
At the time, Lighthizer was offering only to reduce 15 percent tariffs on $120 billion worth of consumer goods to 10 percent. That left in place 25 percent tariffs on $250 billion of Chinese imports, about half what China sold to the United States, and far from Beijing’s goal of having all tariffs eliminated.
But the prospective deal did have advantages from Beijing’s perspective. It offered a much-needed pause in a trade battle that had harmed the Chinese economy and distracted the leadership from other priorities. The U.S. proposal also didn’t touch issues that Beijing truly cared about. Beijing didn’t have to change laws, cut subsidies—or even fully disclose them—or revamp the way its state-owned companies operated. China Inc. would remain fully functioning despite two years of pressure, tariffs, and endless threats by President Trump.
Chinese negotiators made one more request: cut the 15 percent tariffs to 7.5 percent instead of 10 percent on the $120 billion. Lighthizer agreed, and the two sides moved ahead toward a deal. (The math used by the negotiators was convoluted. For instance, Lighthizer wanted credit for reducing tariffs even when the United States merely scrapped tariff threats. By that math, the American offer amounted to the 36 percent reduction that Lighthizer talked about, or even 50 percent, depending on how one did the calculations. In reality, the United States cut tariffs by an insignificant amount.)
Before the two sides could announce an agreement, Peter Navarro, the White House’s fiercest China hawk, tried one more time to scotch it.
Why cut tariffs at all? he argued. Weren’t they working to hurt the Chinese economy? The American economy was still doing fine. On December 9, 2019, he sent a memo to people he assumed were his allies from his personal email address, which used his Ron Vara pseudonym. “Get uncertainty out of the market by announcing NO deal until after the election and ride the tariffs to victory,” he wrote. His efforts went nowhere. One of the recipients leaked the letter to the New York Times.
Beijing wasted no time lashing out at Navarro, a China hater in its view. “Navarro, as a senior official of the U.S. government, has repeatedly used fictional characters to mislead . . . and to create a tough policy on China,” a Foreign Ministry spokeswoman said at a daily press briefing the next day. “This behavior is very ridiculous and not responsible.”
In one of the last White House meetings before the two sides announced a deal, Navarro continued to argue against settling, but he was isolated among Trump advisers. The president was looking for a pause to the trade war. Trump waved him off with a flick of the hand. Frustrated, Navarro dismissed his opponents. “Globalists!” he said.11
On the morning of December 12, three days before a new round of tariffs was scheduled to hit $160 billion worth of Chinese imports, the two sides were getting ready to announce the mini-deal. Trump tweeted: “Getting VERY close to a BIG DEAL with China. They want it and so do we!” The latter was a rare admission by the U.S. leader that he was as hungry to settle as the Chinese.
During the day, White House officials quietly started to release details. In exchange for modest tariff reductions, China would aggressively buy more products and services, and nearly double spending on farm products from pre–trade war levels. Beijing would also once again agree to tighten intellectual property protection and open further its market for financial services.
When the book’s two authors reported in the morning that Washington had considered reducing tariffs by half, which reflected some of the calculations the two sides were using, American negotiators were furious. The report got in the way of their claims that the Chinese had folded. A few days later, Lighthizer and Mnuchin issued a blistering statement slamming us by name and claiming our reporting was “totally false, untrue and baseless.” Wall Street Journal editors stood by our reporting.
Around 4 p.m., the president called his outside China adviser, Michael Pillsbury, to brief him on the details of the deal. Why lavish so much attention on him? Pillsbury was scheduled to go on Lou Dobbs that evening and Trump wanted to make sure he had a positive message for Dobbs’s television audience. Pillsbury says Trump described the deal as a breakthrough, a term that Pillsbury used four times on the Dobbs show.
“I’m very astonished at the successfulness of these talks,” Pillsbury gushed to Dobbs. The television host was wowed. “Fireworks are going off and there’s great celebration,” he said before a commercial break. Two weeks later, Dobbs was invited to a New Year’s celebration at the president’s Mar-a-Lago estate.
“The president wanted to head off the opposition and spin the news positively,” says Pillsbury.
But from Beijing, silence. The following workday, none of China’s state-owned media outlets or government agencies commented on the negotiations. Xi first had to approve the deal, which he did. Beijing then had to figure out how to present the agreement to avoid domestic criticism that China made too many compromises.
Nearing midnight on December 13 in Beijing, a half-dozen vice ministers held a rare press conference. Ninety minutes earlier, Trump had tweeted that the two sides had reached an “amazing deal.” The ministers didn’t go that far. They confirmed a deal but didn’t provide details. Still, that was enough to assure Washington that Xi didn’t have second thoughts and would stick with the agreement.
“It’s good to have the phase-one agreement,” Xi told visiting Japanese Prime Minister Shinzo Abe two days before Christmas.12 Abe encouraged the Chinese leader to use the deal to liberalize China’s economy further. America’s trade offensive against Japan in the 1980s and 1990s had helped make the Japanese economy more open, he said. But Xi sounded defensive. China had already liberalized significantly, he replied, trumpeting a World Bank survey showing that China had moved up fifteen notches in its rankings of global business environment, to number 31, during the twelve months ended on May 1, 2019.13
Still, after two years of fighting, the United States and China had finally agreed to a truce in their trade war.
* * *
The ninety-page text of the agreement was released a month later, on January 15, after it was translated into Chinese and reviewed by lawyers on both sides. President Trump and Vice Premier Liu He signed the text in the East Room of the White House before hundreds of politicians and American business executives.
Essentially, the Chinese gave each of the U.S. major players what he wanted most. For the president that meant purchases; for Mnuchin it meant finally confirming that Beijing wouldn’t use foreign exchange policy to benefit its exporters; for Lighthizer it meant enforcement measures.
Lighthizer and the administration’s other China hawks started the trade battle mainly to end Chinese pressure on U.S. companies to hand over their technology and to stop outright theft of intellectual property. The phase-one deal included numerous pledges by China to bar such practices although Beijing didn’t admit to coercion or theft. “China regards trade secret protection as a core element of optimizing the business environment,” the document said. Violations could result in criminal penalties, as the United States had long demanded.
Beijing also promised to make sure that regulatory panels didn’t leak American technology secrets to competitors. It had to ensure that members of the panels had no “financial interest in the result of the investigative or regulatory process.” China also agreed not to “require or pressure technology transfer” from American companies seeking licenses or a bigger market.
These provisions were far more detailed than promises China had ever made. But the United States dropped its insistence that Beijing enumerate the laws and regulations it was going to change and provide a schedule for making those changes. Beijing’s rejection of American demands for legal revisions had led to the unraveling of a tentative agreement in May 2019. Now, those demands were off the table. China was no longer required, as part of the trade deal, to put in place the legal and regulatory infrastructure that Lighthizer had thought necessary. Beijing would make changes according to its own schedule.
For President Trump, the deal was about deals—Chinese purchases of farm goods and other products. From the start, he had pressed China to reduce its vast trade deficit with the United States. That was an impossible demand, given that trade deficits reflected macroeconomic factors like savings rates and currency fluctuations that no government fully controlled. But China could promise to ramp up imports, which it did.
In the agreement, China committed to buying around $40 billion of farm goods annually in 2020 and 2021, and perhaps as high as $50 billion. Overall, Beijing said it would increase exports by $200 billion during that time period compared to 2017, the year before the trade war began. Back then, China imported around $186 billion in goods and services from the United States.
The pledges seemed nearly impossible to fulfill. To hit the targets, U.S. exports would have to jump by an average of 33 percent annually, which is about three times as fast as they had grown annually since China joined the WTO in 2001. The agreement gave Beijing plenty of escape clauses. The purchases had to be made at market prices and be based on “commercial considerations.” In other words, if U.S. farm prices were too high or Chinese consumer and industrial demand was too low, Beijing had legitimate reasons not to buy as much as it pledged. The coronavirus epidemic, especially, was bound to dent consumer demand.
Ning Jizhe, a top deputy at the National Development and Reform Commission, China’s economic planning agency, insisted during negotiations that the purchases must reflect demand from Chinese customers—always difficult to forecast—and comply with World Trade Organization rules that forbid China from diverting orders from other countries to meet the U.S. demands. A Chinese diplomat spelled out what that meant in practice: “We can always stop the purchases if things get bad again.”
The United States hoped to hold China to its promises through the deal’s enforcement mechanism. Given Lighthizer’s distrust of arbitration panels, the two sides agreed to settle problems during three rounds of negotiations. If the party that brought the complaint wasn’t satisfied with the outcome, it could impose tariffs.
Lighthizer didn’t quite get Beijing to give up its right to retaliate. But he did manage to insert a provision that would cause China to think twice about fighting back, a big concession by Beijing that was made during the end of negotiations. China would have to pull out of the deal before retaliating, which would surely reignite the trade war.
The new system “is a gigantic finger in the eye of the WTO,” which relies on international arbitration panels, says Mary Lovely, a China trade expert at Syracuse University. “The decider will be the trade representative in consultation with the president.”
Even so, it was uncertain whether American companies in China would be brave enough to use the system, knowing that Beijing has any number of ways to make life tough for them.
“There is a strong element of Yogi Berra’s quip about déjà vu all over again,” says James Green, a former Trump trade negotiator in Beijing. “The dispute resolution section will have the same problem we’ve always faced. U.S. companies are reluctant to become poster children for market access problems or discriminatory treatment.”
In early 2020, it was far too soon to know how the system would work in practice as the coronavirus raced around the world, but trade experts were wary. Either the enforcement mechanisms would keep both parties on their best behavior, says Scott Kennedy, a China expert at the Center for Strategic and International Studies, “or it will be the way the deal comes apart.”
In China, state media coverage of the agreement reflected the leadership’s need to fend off any criticism that it made too many concessions and only got a small tariff reduction in return. That meant portraying the phase-one agreement as a mutually beneficial agreement negotiated by two equals. Taoran Notes, a social media account of the state-owned Economic Daily, which reports to the State Council, said: “There are people on both sides that are not too happy with the agreement, but it’s still largely acceptable to both.” That message was endorsed by Vice Premier Liu He. (Taoran Notes was the social media account that correctly predicted troubles in the negotiations in early May 2019, as mentioned in chapter 1.)
A January 16 article by the party’s main publication, People’s Daily, hinted that China could use the agreement to get Washington to back off from tightening restrictions on high-tech sales to China—probably wishful thinking given that Trump officials were lobbying firms to cut off Huawei.
“If China wants to buy a certain product from the United States but can’t buy it . . . it can request consultations and invite the United States to the negotiating table,” the article says. “For example, in the past, the United States imposed export controls on us in some high-tech fields, and there was no chance of negotiations. Now, with this consultation mechanism, we can initiate consultations on expanding our imports of U.S. high-tech products.” The article circulated widely on Chinese social media.
* * *
For Beijing, the timing of the truce was fortuitous. Within two weeks of the signing ceremony in the White House, China was in a panic over the spreading coronavirus. Wuhan, an industrial city of 11 million people, was put under quarantine by President Xi along with much of the rest of the province of Hubei, in central China. Travel throughout the country was severely restricted and hundreds of millions of ordinary Chinese, who had expected to travel over the Chinese New Year holiday, hunkered down at home.
With stores, movie theaters, and restaurants shut, the Chinese economy was weakening and was bound to decline further. Chinese leaders also had to deal with growing resentment domestically and abroad that they had been too slow to act. But for now they didn’t have to worry about economic pressure from the United States.
The spreading disease, however, quickly soured any good feeling Beijing might have had toward the Trump administration over the trade deal. State media called attention to remarks by top U.S. officials that seemed insensitive. Commerce Secretary Ross talked about how the epidemic “will help to accelerate the return of jobs to North America.” China hawk Navarro expounded about the need to move supply lines out of China.
China’s Foreign Ministry criticized Washington on a near-daily basis, saying it helped fan panic over the disease while the Chinese government was doing all it could to get the coronavirus under control. “The U.S. government hasn’t provided any substantial assistance to us, but it was the first to evacuate personnel from its consulate in Wuhan, the first to suggest partial withdrawal of its embassy staff, and the first to impose a travel ban on Chinese travelers,” a Foreign Ministry spokeswoman told reporters. “All it has done could only create and spread fear, which is a bad example.”
The spokeswoman didn’t mention a steady inflow of donations to authorities and charities in China from American companies—another sign of official anger. Those helping included Boeing (protective equipment), Honeywell International (medical masks and purification systems), Coca-Cola Co. (beverages), McDonald’s (meals), and Celanese Corp. (protective suits), to name a few. In all, members of the American Chamber of Commerce in China contributed more than $77 million in cash and in-kind donations by mid-February.
The anti-American propaganda reflected public anger at Washington, but also served to try to divert attention from Beijing’s political problems at home. Xi Jinping came under rare public criticism on social media for centralizing power so much that underlings were afraid to act quickly to contain the virus.14 Looking to muffle criticism, Xi ordered the government to “strengthen the guidance of public opinions.”15 Censorship was increased and the government targeted anyone seen as “smearing China.” American news organizations became a ready target.
On February 19, Beijing expelled three Journal reporters over an opinion piece16 headline calling China as “the real sick man of Asia.” The three journalists had nothing to do with the story or headline, which many Chinese viewed as deeply offensive. A tit-for-tat fight ensued. The administration capped the number of Chinese citizens who could work in America for Chinese media outlets. Beijing hit back by ordering U.S. journalists at the New York Times, the Journal, and the Washington Post to leave the country, including the book’s coauthor, Lingling.
Washington and Beijing also traded accusations over the source of the pandemic. The president labeled the pandemic the “Chinese virus,” and a U.S. senator speculated that the virus escaped from a Wuhan biochemical lab. Beijing officials claimed the virus might have been carried to Wuhan by visiting American military officials.
The bilateral relationship was edging toward a breaking point.
* * *
What explains President Trump’s about-face on China and his willingness to accept and hype a limited settlement?
Some Trump officials say that the president had been posturing when he dismissed a partial deal earlier. Instead he wanted a quick agreement to relieve market pressure for some sort of a resolution, however limited. Then negotiators could discuss the rest of the issues under less fraught circumstances, though it is far from clear what might be accomplished.
“They are not going to stop subsidizing state-run banks and state-owned enterprises,” says Kudlow. “But that doesn’t mean we can’t make deals along the way that might benefit both countries, which is what [Trump] was saying.”17
Lighthizer, Mnuchin, and others also were trying to learn the lessons of May, when they underestimated the political pressure Liu He faced back home. They sought to give him political cover and time to win over his bosses.
Lighthizer started using the term “workable dispute settlement mechanism”—the term favored by Liu to describe how the two sides would handle inevitable conflicts after a deal—rather than “enforcement.” The latter suggested that Americans would play judge and jury and could reimpose tariffs (which is what Lighthizer actually envisioned). In the end, negotiators rebranded enforcement as “bilateral evaluation and dispute resolution.”
All of that is surely part of the reason for Trump’s turnaround, but it’s not the entire story.
Steve Bannon, the former Trump strategist, says the answer is simple: impeachment. The president was looking for a way to show he could still score victories while Democrats were pursuing impeachment charges against him. Democrats had a veto on legislation, but he didn’t need Congress to ink a deal with China, so he moved swiftly to get one. “It’s almost psychological,” he said. “He needed a win before the 2020 election.”
Treasury Secretary Mnuchin rejected the impeachment explanation out of hand. “Impeachment is irrelevant,” he says in an interview. 18
Perhaps, but the election was clearly an important motivator. White House political advisers had been debating for months whether it was better to go into the election with a China deal, which opponents could pick apart, or with China as an unsettled issue. In the latter case, the president could argue that he was the only one tough enough to take on China, and if he didn’t get a second term, his Democratic opponent was sure to cave to Beijing.
The beauty of a partial deal, his advisers said, was that it provided both a deal and an issue. Trump’s former campaign manager, Corey Lewandowski, who continued to advise the White House, explained it this way: “Having a victory is always important going into an election. But you can also say, ‘I got the beginning stage of a deal. If you give me four more years, you’ll get so much more.’ It’s a way to split the baby.” Privately, many of Trump’s top trade officials agreed with Lewandowski’s assessment.
After the two sides signed the pact, Treasury Secretary Mnuchin said that he could imagine more mini-deals before the election. Maybe a phase 2A, where the United States would remove more tariffs and Trump would have a new victory to brag about during the presidential campaign. The president said he didn’t expect a full phase-two deal, which presumably would include fundamental reforms of China’s economic system, until after the presidential election.
For his part, Xi Jinping appeared in no rush for a substantial follow-up deal. At the end of November 2019, he met with a group of foreign luminaries in Beijing at a Bloomberg conference, which included Secretary of State Henry Kissinger and former Treasury Secretary Hank Paulson. “China’s achievements over the last seventy years show that China has followed the right path,” he told the group. “In light of this progress, why should we change policies that are working?”
The tougher approach taken by Trump’s national security team could also be a political plus, although Trump officials say that wasn’t the motivation. Trump was demonstrating that the United States could confront China on national security and human rights at the same time as it sought an economic settlement. “The press has a very hard time seeing an American foreign policy that oscillates by design,” Pottinger says. “There are simultaneous elements of confrontation and conciliation in the approach.”19
Before Liu arrived in Washington for talks in October 2019, for instance, the United States sanctioned Chinese technology companies that produced surveillance equipment used to keep a watch on Uighurs in western China. More than 1 million Uighurs had been rounded up in reeducation camps. Later in October, Vice President Pence made a speech extolling the democracy protestors in Hong Kong.
Any Democratic candidate for president could be expected to focus on such human rights issues. The actions would help Trump get ahead on the issue. “If you want to run for president, you can’t be soft on China,” says Bannon.
The agricultural portion of the phase-one deal was especially important for Trump. The purchases promised to be a boon to farmers, so they helped secure Trump’s political base and bolster a sagging part of the economy. They also were easy for the public to understand, compared to the structural issues that revved up Lighthizer, but not the president. “It’s a challenge communicating the existential threat to America’s industrial future posed by China,” says Jason Miller, Trump’s former campaign spokesman. “That’s not something Americans wake up and worry about.”
Mnuchin tried to make things very simple when he appeared on Lou Dobbs in late September. (His appearance on Dobbs, who had attacked him mercilessly in the past, was itself notable.) He gave a nod to the importance of toughening intellectual property protection, but then said “farmers and fishermen are very important to the president.” He soon added: “So I’ve become a soybean salesman.” Vanished was the Mnuchin who had said a year earlier on CNBC that the fight with China was about structural issues, not soybeans. “The economy will have an impact on the election,” the Treasury secretary says now, with great understatement.20
To underscore that point, while the United States and China tussled to finish the mini-deal, the Kaiser Family Foundation and the Cook Political Report released a poll of voters in the battleground states of Michigan, Minnesota, Pennsylvania, and Wisconsin during the fall of 2019. By at least three-to-one margins in each of the states, those polled said tariffs were hurting their families, hardly the kind of news a tariff-happy administration welcomed.
The chance that the agricultural part of the deal yields anywhere near the sales that the president touted is close to nil.21 Purchases of some $40 billion annually were far beyond what China had spent in any one year. U.S. exports of soybeans, sorghum, pork, and other agricultural products to China peaked in 2013 at around $29 billion, falling to $24 billion in 2017 before the trade war started. Those exports further plunged to $9 billion in 2018, as Chinese retaliatory tariffs on U.S. goods kicked in.
Lu Ting, chief China economist at Nomura International, broke down the numbers: some 70 percent of China’s agricultural imports from the United States before the trade war were soybeans, and 85 percent of China’s soybean consumption went to feed pigs. But China’s hog stock plunged a whopping 40 percent from July 2018 because of the rapid spread of the deadly African swine fever, so demand for soybeans was bound to drop. “We believe meeting this target will be quite challenging,” Lu noted, before the coronavirus outbreak further sapped demand.
Commodities markets agreed with that assessment; prices for soybeans and hog futures declined after the agreement was signed even as the stock markets rallied. If markets had expected surging Chinese demand, prices would have soared.
For the 2020 presidential election, it doesn’t matter whether China hits the $40 billion target. If sales increase from the shriveled level of 2018, that would give Trump something to tout. By the time anyone could tote up U.S. agricultural exports to China for 2020, Trump would either be ensconced again in the White House or tweeting from Trump Tower as a former president.
By early 2020, the trade battle looked a lot like it did at the start of the fight. The United States was relying on tariffs to compel China to keep negotiating a deal that would address the Chinese economic policies that drive American workers and companies crazy. China was fending off the United States as best it could, and looking to help its biggest companies, especially Huawei Technologies, become world-beaters. American national security officials were warning anyone who would listen about the dangers posed by a rising China.
In some surprising ways, though, the Trump administration began to resemble the Clinton administration on China trade. Trump officials, like Clinton officials before them, had come to believe that the only way to change China was to line up with reformers and try to help them with their internal battles. Chinese leaders had to believe that change was in their interest and wasn’t being forced upon them from outside, officials in both administrations learned. “You can start the process of reform,” says Lighthizer in an interview. “The things we’re talking about are the things a reformer in China would agree to.”22
Washington needed another Zhu Rongji, the Chinese premier who used U.S. pressure during WTO talks to remake the Chinese economy. None was on the horizon.
Zhu had a rare combination of foresight, pragmatism, and political skills, which was lacking in the current Chinese leadership. Liu He also understood the importance of reform, but lacked the skills and power to get change made. Zhu’s boss, Jiang Zemin, who was relatively hands-off on the economy, had provided strong support for Zhu’s agenda. Liu’s boss, Xi Jinping, had centralized power and wanted to expand the power of the state to control the economy.
Although Zhu’s tenure is remembered harshly by many Chinese for the human costs of the changes—layoffs, uncertainty, rising inequality—there has been no one since who could convince, or bludgeon, the Chinese bureaucracy into accepting what was necessary for China’s long-term success.
Steve Bannon says he understands why Lighthizer pushed for the deal he did, even though it left Chinese economic policies intact. “Lighthizer isn’t an ideologue; he’s a realist,” he says. “His client wanted a deal, as good a deal as you could get.” That said, Bannon calls Lighthizer a “tragic figure who gambled everything on a transformative deal and came up short.”
Late in 2019, Liu He and Robert Lighthizer, opposing generals in the trade war, had a conversation that underscored the difficulty Americans face in changing Chinese behavior.
Lighthizer, a history buff, told Liu he had spent many hours studying Chinese history and society. “I know enough about China to realize that I don’t have any idea of how you think about things,” Lighthizer said.
“That’s the beginning of wisdom,” Liu replied.