After a year of pressure on Beijing, including levying tariffs on half of everything China sold to the United States, the American trade team thought it was closing in on a deal in late April 2019 to remake relations between the world’s two economic superpowers.
U.S. tariffs hurt China more than its leader, Xi Jinping, publicly acknowledged. Electronics exporters in Dongguan and other coastal cities were losing American customers. Both government-controlled and privately owned businesses were delaying or canceling investment plans. Big U.S. companies were accelerating their decisions to move production from China to Vietnam, Malaysia, and other countries far from the trade war.
Chinese retaliatory tariffs were hitting their mark too, more than the U.S. leader, Donald Trump, would say. Soybean and other farmers in the rural areas crucial to Trump’s reelection saw their Chinese market evaporating. Already the United States had spent about $10 billion compensating them. Looking to forestall a stock market plunge, Trump officials worked overtime to convince investors that the talks were on track by hyping positive news. Trump had staked his reelection bid on a strong economy and a surging stock market.
Now the economic outlook was deteriorating. In April, the manufacturing sector of Greece, racked by a decade of fiscal crisis, was growing faster than the manufacturing sectors of either China or America, according to surveys of industrial purchasing managers around the world conducted by the research firm IHS Markit. In May, purchasing manager surveys aggregated together showed that global manufacturing was in an outright recession.
American and Chinese officials hoped an end to their battle would help head off hard times. Since the two leaders had a friendly dinner in Buenos Aires at a Group of 20 (G-20) summit in December 2018, U.S. and Chinese negotiators had talked regularly by videoconference and flown across the Pacific a number of times to put together an agreement. The vibes were good, negotiators believed.
The two sides were working on a 150-page agreement covering many American complaints against China: pressure on U.S. companies to transfer technology, weak intellectual property protection, closed financial services markets, currency devaluation that helped Chinese exporters, and insufficient purchases of U.S. goods and services. Each chapter of the text started with a general commitment by China, followed by the specific laws and regulations China would amend to carry out its pledges. By some counts, the text required China to make at least sixty specific changes in its legal system. The Chinese propaganda machine portrayed offers to open up the domestic market as steps the country needed to make to keep the economy humming, not as concessions to America.
China still hadn’t agreed to many U.S. demands, especially those requiring China to give up the industrial policies and subsidies it provides to firms in favored sectors. Those demands were seen as a threat to the Communist Party’s rule and could undermine an economic system that had turned China from an economic backwater into the world’s second-largest economy.
To enforce the deal, the two sides discussed a process where disputes were handled at increasingly senior levels. If no agreement was reached, each side had the right to reimpose tariffs. The United States was even pressing China to agree not to retaliate if the United States resorted to levies. This was one of the final issues to be resolved, the U.S. side believed. The two sides had already started discussions about where to hold a signing ceremony. Trump’s Mar-a-Lago estate in Florida? Washington, D.C.?
But the U.S. side was naively optimistic and made several miscalculations about the power of the United States to force China to change. First, U.S. Trade Representative Robert Lighthizer continued to insist that Washington wouldn’t remove any of its crippling tariffs when Beijing signed a deal. The tall, blunt negotiator thought that China would relent in the face of sustained U.S. pressure, a view he shared with his boss, the president. Lighthizer wanted to keep the levies in place until China demonstrated that it was carrying out its pledges. Although Trump’s senior advisers had debated whether to remove tariffs as a good-faith gesture, so far Lighthizer hadn’t budged. For Xi Jinping, though, eliminating the tariffs was a bottom-line demand, which he had made clear at the outset of negotiations. On this, he wouldn’t bend. If he couldn’t get the tariffs lifted, a deal wasn’t worth much.
Second, the Americans misread the influence of the lead Chinese negotiator, Vice Premier Liu He, who was an ally and childhood friend of Xi’s. Simply because Liu hadn’t said no to U.S. proposals didn’t mean Beijing had said yes. Although Liu regularly briefed Xi on the terms of the deal, the Chinese leadership hadn’t signed on to the agreement, especially one that seemed so one-sided in America’s favor. Unknown to U.S. negotiators, something entirely different was happening in the inner sanctums of power back in Beijing.
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The view of the talks in Beijing was decidedly gloomier than the one in Washington. As Lighthizer and Treasury Secretary Steven Mnuchin prepared to fly to Beijing in late April for talks they hoped could help sew up a deal, Xi thought it was time to loop in the other six members of the Politburo Standing Committee, the country’s ruling body. Xi had maneuvered to become China’s paramount leader. He had sidelined many of his rivals in an anticorruption campaign and eliminated the two-term limit on his role as president. His power, as general secretary of the Communist Party, nearly equaled that of Chinese leader Deng Xiaoping and even Mao Zedong. But Deng and Mao didn’t have absolute power and had to deal with rivals, as did Xi.
Chinese politics is different from American politics, but Chinese leaders still face constraints. Especially since the death of Mao, party chiefs seek a consensus of the Politburo Standing Committee before taking dramatic actions. Xi had angered so many senior party officials, bureaucrats, and influential former officials with his anticorruption drive that he had enemies waiting to take him down a notch. He couldn’t afford to be seen as weak in dealing with Americans, especially ahead of the October 1 celebration of the seventieth anniversary of the founding of Communist China.
At a late April meeting in the gated Zhongnanhai leadership compound, close to the Forbidden City, the onetime home of China’s emperors, Xi asked his colleagues to review the details of the negotiations. Their answers were hardly reassuring; they signaled a much stronger resistance to proceeding than anyone on the U.S. side understood.
Three of the six spoke out immediately against a deal unless China could get a firm commitment from the United States to remove tariffs on all $250 billion of Chinese exports then burdened with levies.
Li Zhanshu, head of the National People’s Congress, China’s lawmaking body, objected strenuously to U.S. demands that China change specific laws by certain dates or face tariffs. China is a sovereign nation, Li argued. No country has the right to tell China what laws it must amend.
Wang Huning, a party ideologue focused on reclaiming China’s prominent place in the world, was another firm no. Wang, who makes a point of not meeting with Westerners and rarely speaking in public, said many Chinese might view the proposed deal as a sellout, similar to the unfair treaties imposed upon China by Western forces in the nineteenth and early twentieth centuries.
Han Zheng, the most senior of China’s four vice premiers, was the most surprising of the opponents. For years he had run Shanghai, a metropolis known for East-meets-West glamour. American businesses considered him an ally who supported foreign investment. But he also thought the tentative deal was too one-sided.
The three other standing committee members—Premier Li Keqiang, anti-graft czar Zhao Leji, and veteran political leader Wang Yang, who had negotiated for years with Americans on trade—weren’t as vehement. They shared their colleagues’ concerns, though they broadly supported a deal with the United States.
Faced with, at best, tepid support, Xi—himself an ardent nationalist—decided that Beijing needed to toughen its stance in negotiations. Here, Xi too made a series of miscalculations, which combined with those on the American side would eliminate the chance of a deal anytime soon, embitter both sides, and deepen the economic cost of the trade war so much that it threatened to drive the global economy into recession.
Time was on China’s side, Xi believed. Trump’s tough talk masked a fear about the American economy. Trump was constantly hectoring Federal Reserve chairman Jerome Powell to cut interest rates. That would only be necessary, the Chinese leader thought, if the U.S. economy was slowing precipitously.1 China’s economy, on the other hand, had stabilized, and Beijing could start counting on allies in its trade battle, he believed. Some forty heads of state and government ignored a U.S. boycott and attended an April conference in Beijing on Xi’s signature Belt and Road Initiative. The vast infrastructure lending and construction program was designed to put Beijing at the heart of trade from Southeast Asia to Europe.
Some advisers had been encouraging Trump to make allies of his European trade partners in the confrontation with China. Instead, he confronted them too, calling countries like Germany worse trade offenders than China. Xi tried to capitalize on Trump’s belligerence. A March tour by Xi of Italy and France also gave him a sense that more countries would line up with China. European officials indicated they were worried that a deal to buy more U.S. goods would mean China would buy less from Europe. They needed China’s vast market to bolster their economies and were wary of American intentions.
Be firmer with the Americans, Xi instructed Liu, the Chinese negotiator.
At a welcome dinner in the Forbidden City for the American negotiators on April 30, Liu hinted that he was having problems convincing his superiors to take the deal they had negotiated. On the same day, during a private meeting with Lighthizer and Mnuchin, Liu said the leadership strongly objected to specifying the laws China needed to change. This was more than the give-and-take of prior rounds, he made clear. He didn’t have a mandate to cut a final deal. Beijing was still willing to change some legislation to honor its commitment to better protect U.S. intellectual property, among other U.S. demands, Liu said, but it would have to do so without seeming to yield to American pressure.
Detailed requirements, which started with the phrase “China shall,” would have to be dropped from the text, even though that wording was crucial to the Americans who wanted ironclad guarantees that China would make the changes. China would rather meet U.S. demands by modifying certain regulations as part of a newly passed foreign investment law that promised to help U.S. companies compete more fairly in China, Liu said.
While the difference between changing laws instead of regulations may seem small, especially in China with a legislature widely considered toothless, to Lighthizer it was freighted with significance. The Obama administration had managed to get China to make administrative changes, but that hadn’t noticeably reduced the problems U.S. companies faced in China. And the Trump administration was obsessed with not settling for anything Obama settled for. Lighthizer insisted that the National People’s Congress approve changes. That would signal a deeper commitment by Beijing and make it tougher for Chinese judges to use phony reasoning to rule against U.S. companies. He also knew that changes requiring legislative approval are standard in international trade agreements. But his insistence was too much for a Chinese leadership protective, perhaps overly so, of Xi’s strongman image when national sentiment against foreign pressure was rising.
The Americans weren’t looking to compromise. They were looking for more concessions. During negotiations in the leafy campus of the Diaoyutai State Guesthouse, the U.S. side presented a detailed proposal on how China should open up its fast-growing cloud computing sector to companies like Microsoft and Amazon. To do business in China, foreign firms had to form joint operations and license their technology to local partners. Alibaba Group Holding Ltd. and other Chinese firms didn’t face those restrictions in the United States.
Liu offered to issue more licenses and allow U.S. firms to control joint ventures for certain cloud services, instead of being limited to a 50 percent stake. But the United States wanted more. The Americans raised questions about a notice published in 2016 by China’s Ministry of Industry and Information Technology that seemed to put restrictions on foreign cloud operators. If enacted, Americans could be blocked from the market even if they obtained licenses. The Chinese balked at rescinding the notice.
The Americans also wanted China to bump up its target for purchasing U.S. goods and services by roughly 50 percent to about $2 trillion over six years from $1.2 trillion. Chinese officials had proposed $1.2 trillion in “additional purchases” at Buenos Aires, according to Mnuchin.2 Even that target seemed wildly ambitious and caused some Trump advisers to roll their eyes at its improbability.
Meeting the $1.2 trillion goal would require about a 30 percent annual increase in U.S. merchandise exports to China from the $130 billion in 2017, before the trade war started. Since 2001, when China joined the World Trade Organization and became a major global trader, U.S. annual goods exports to China increased at a 30 percent pace only twice. Goods exports fell in four years. Now the United States wanted China to buy at an even a faster clip.
To Lighthizer, the increased target was part of the haggling involved in cutting a final deal. To the Chinese negotiators, though, this was an indication that Americans weren’t bargaining in good faith.
Liu made it clear that China’s leaders couldn’t accept the draft as it was written. Okay, Lighthizer responded. Show me what you mean. Pick any of the seven chapters in the agreement and mark it up. Make as few changes as you can, consistent with your new instructions, and send it to me, he told the Chinese negotiator. Maybe the changes won’t be as radical as you’re suggesting and negotiations could continue as before. Lighthizer had come to trust and respect Liu as a committed reformer.
Liu picked the chapter on intellectual property, which was nearly completed. It called for changes in Chinese law, including criminal penalties—jail time—for those who repeatedly stole technology secrets or copied them. Lighthizer’s goal was to make IP protection in China as tough as it was in the United States or Britain. While the United States was willing to give China the time it needed to rewrite the laws, the Americans insisted that tariffs stay in place to make sure Beijing would carry out its pledges.
China was moving in a different direction. On May 1, the social media account Taoran Notes, which often reflects the views of senior Chinese officials, posted this warning: “If one party only considers its demands and thinks it can use extreme pressure to force the other party to submit and ignore fairness, then there’s not any other possibility than breaking up.”
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On Friday, May 3, the Americans received a formal response. Chinese negotiators emailed to Washington a Microsoft Word version of the tentative agreement, with about one-third of the intellectual property section crossed out in red, including requirements that China change its laws. Beijing also continued to hedge on whether it would bar currency devaluations aimed at helping Chinese exporters compete better, and disclose when China’s central bank bought or sold foreign exchange so its activities could be more closely monitored.
The reluctance to accept changes in currency practices was particularly galling. China had already committed to refrain from competitive devaluation in multilateral agreements. Now it was balking at making essentially the same pledge to Americans. Treasury Secretary Mnuchin, the most dovish member of the administration on China, had negotiated that section. Beijing was embarrassing him and turning him into an opponent, too.
To Beijing, the changes were just another step in ongoing negotiations—yet another of the serious miscalculations made by both sides. The Chinese had backed away from other parts of the deal before, with no repercussions. Officials on both sides would stew, but continue to negotiate. During an exchange in February 2019, Lighthizer “read them the riot act” before the Chinese started negotiating in earnest, White House economic adviser Larry Kudlow told reporters at the time. 3
But Washington viewed the breadth of the changes this time as more than a tactical move; it was bad faith on the Chinese part. In Washington’s eyes, China had broken its word.
Outraged, Trump wanted to retaliate immediately. China at the time faced 25 percent tariffs on $50 billion of goods and 10 percent tariffs on another $200 billion. Trump wanted to increase the tariffs on the latter amount to 25 percent, which would be enough to shut out those imports, and threaten to hit the rest of Chinese imports with levies. Lighthizer helped talk him out of acting rashly. Markets were bound to react badly to the news, he argued. Wait until the weekend to act, which would give traders more time to digest the news, and give him more time to try to figure out what happened.
Trump also took out his frustration on Mnuchin, who just a few days earlier had said the talks were in their final stages. But the Treasury secretary wasn’t the only one caught flat-footed. Trump had told the press earlier that talks would be wrapped up shortly, as had Lighthizer.
The trade representative, who had joined the administration mainly to confront China, wanted to give Liu more time to sort out his political problems back home. No one in the White House understood the events in Beijing that led to the retrenchment. Many thought Xi had faced deepening opposition as more officials learned what was in the tentative deal. “Who is China’s Peter Navarro?” asked some aides—referring to the White House trade adviser who implacably opposed any deal with China. Who were China’s rejectionists? The Trump team didn’t realize that Xi himself had lined up with the opponents.
Early Sunday morning, May 5, Trump tweeted his threats. On Friday, May 10, tariffs on the $200 billion of goods would increase to 25 percent, and the rest of Chinese imports would soon face the same levy. “Trade deal with China continues, but too slowly, as they attempt to renegotiate,” the president tweeted. “No!”
The outburst caught Beijing by surprise. Liu He was due in Washington on May 8 to continue negotiations, only two days before Trump’s tariff deadline. Some of his team were scheduled to arrive earlier. They had booked tickets on Air China for May 6. How could they go if Trump was threatening a massive escalation? The negotiators received an urgent message: stay put until further notice. “Looks like we’re not going,” one of them said, early in the morning on May 6. 4
Now it was Chinese officials who didn’t understand what was happening on the other side of the Pacific. They combed through a transcript of a rare press conference that Mnuchin and Lighthizer held on May 6 to explain the president’s actions. Lighthizer sounded sympathetic about the political constraints facing Liu and other negotiators. “We tried to accommodate changes that China would ask in the text that we thought were needed for their own purposes,” Lighthizer told reporters. “But these are substantial and substantive changes. And really I would use the word, sort of reneging on prior commitments.”
Mnuchin added that he, Navarro, and Kudlow, who also attended the briefing, backed the president’s decision to raise tariffs “if we are not able to conclude a deal by the end of the week.” In other words, Beijing shouldn’t look to Mnuchin to try to get the president to ease off, as it had done before. For once, the U.S. economic team was united.
Still, the United States invited further negotiations. “We’re not breaking off talks at this point,” Lighthizer said. In a nod to Liu, he said, “We have a trusted relationship.”
Inside the Beijing leadership compound, officials tried to figure out how to reduce the hit to Chinese markets that was sure to follow Trump’s tweets. On the morning of May 6, China’s central bank sped up a plan to release more funds for banks to lend. State-backed investment funds were also instructed to buy shares to prevent a market free fall. China’s Foreign Ministry spokesman released a statement saying the Chinese delegation would travel to the United States, which often reassured markets, though the ministry didn’t say when or provide any other details.
The Chinese effort didn’t work. The benchmark Shanghai Composite Index fell 5.6 percent while its counterpart in Shenzhen tumbled 7.4 percent—their biggest single-day declines since 2016.
On May 7, a group of midlevel officials, including Finance Vice Minister Liao Min, a trusted aide to Liu, and Commerce Vice Minister Wang Shouwen, huddled to analyze the Lighthizer-Mnuchin press conference. Their conclusion: the Chinese side should try to keep the dialogue open to avoid a rupture that would be difficult to repair. Xi Jinping signed off on the recommendation the following day, May 8. Liu would travel with a pared-down staff, not the team of one hundred he had earlier planned to bring to finish negotiations. Neither the Chinese nor the Americans expected a breakthrough, let alone a completed deal.
“The goal was simply to keep the talks going, and to show China is a responsible party,” said a senior Chinese official at the time. Beijing also sent a letter from Xi to Trump, which stressed the importance of the bilateral relationship and China’s need to be treated as an equal.
Liu arrived in Washington on May 9 and plunged into talks with Lighthizer and Mnuchin. The pair took Liu for a working dinner at the tony Metropolitan Club, a Lighthizer haunt close to the trade representative’s office. They met again on the morning of May 10. Separately, Trump complimented Xi’s “beautiful letter” and said he would probably speak to the Chinese leader by phone. (He didn’t.)
But the two sides made little substantive progress. Liu tried to convince Lighthizer that regulatory decrees issued by the State Council, the Chinese government’s top decision-making body, were as good as the legal changes sought by Washington. Lighthizer didn’t buy it.
On May 10, while Liu and his team were still in Washington, the Trump administration made good on its threats and ratcheted up the trade war by raising tariffs. Lighthizer also started the legal procedures to assess 25 percent tariffs on the remaining $300 billion or so of Chinese imports. Around that time, President Trump told a campaign rally in Panama City Beach, Florida, that the Chinese “had broke the deal.” Now they would pay.
Before Liu flew back to China, he called together Chinese reporters covering his visit. He denied that China had reneged on its commitments. The United States didn’t fully appreciate China’s bottom line, he countered. Tariffs must be lifted; demands to boost U.S. imports higher than China’s original offer must be dropped; and the agreement had to be “balanced” to ensure the dignity of both nations.
“We are very clear that we cannot make concessions on matters of principle,” Liu said. “We hope our U.S. colleagues understand this.” 5
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Trump’s anger at the Chinese actions had another important consequence that Beijing didn’t foresee.
With Trump looking for ways to pressure China, John Bolton, the hawkish national security advisor, laid out a course of action that would truly rattle Beijing. He planned to try to cripple China’s leading company, Huawei Technologies Company. Bolton was more of a hard-liner on China than Trump and understood better how to use government processes to get the outcomes he sought. Now that Trump was outraged by Beijing, Bolton had the president’s ear. (Later, Trump’s disagreement with Bolton on Afghanistan, North Korea, and other issues led the president to fire him.)
For months, the United States and China had been at loggerheads over Huawei. The Americans suspected that the telecommunications company was a tool of the Chinese military, which could tap Huawei’s equipment and spy on the company’s customers around the world, a charge Huawei vehemently denied. The United States also accused Huawei of breaking its sanctions laws by shipping products with U.S.-made components to Iran. The U.S. government had stopped buying Huawei equipment and was pressuring other governments to do the same, with limited success.
To Beijing, Huawei was a crown jewel. It was a Chinese firm that could outcompete Western rivals and become a global technology leader. The company was essential to China’s ambition to dominate future technologies, especially the next-generation mobile communications network, known as 5G. Bolton believed that Huawei must be stopped. The United States wouldn’t have trusted telecommunications to a Moscow telephone company during the Cold War, he argued. It was crazy to trust China now.
Bolton reminded Trump that the Commerce Department had been spending months weighing whether to put Huawei on what it called its “entity list”—a group of companies whose U.S. purchases were severely limited. Only firms that obtained a Commerce license could sell to the listed companies, and at that point Commerce had never announced a grant of any waivers. In bureaucratic language, there was a “presumption of denial” when it came to licenses, unless the company could provide a compelling reason to continue shipments.
Huawei relied on U.S. semiconductors and other electronic components for its advanced technology. Putting the company on the entity list could strangle the company, or at least halt its advance while it sought to build the technology itself or find other suppliers. Trump liked the idea and encouraged Bolton to move ahead. With Trump, “it makes sense to seize on the low moments and come in with a stack of papers that advance your goal,” says a senior U.S. security official.
Bolton lined up allies among intelligence agencies, the State Department, and Pentagon who were deeply suspicious of Huawei. Then he sought out Lighthizer, who raised objections about the timing. An entity listing was bound to make it even harder to strike a trade deal. Mnuchin was even more emphatically opposed. The blacklisting would hurt Huawei’s U.S. suppliers and could lead to unintended consequences. But neither man was going to make a public stand against an idea that Trump had endorsed.
Commerce got the message and sped up the legal work needed for an entity listing. Commerce Secretary Wilbur Ross briefed the president about the department’s progress on May 13. Two days later, Trump’s most senior officials gathered in the Oval Office around 3:30 p.m. to ratify the decision. The president was so enamored of the sanction that he wanted the action announced that day, leaving little time to notify allies and the Chinese embassy, and prepare talking points for the press and supporters. The short notice made the decision making look amateurish.
To make sure the public understood the significance of what was happening, Commerce briefed a Reuters reporter before it published the press release, figuring the news service would explain clearly the complicated proceedings. Huawei had engaged in activities “contrary to U.S. national security,” Commerce concluded, including violating U.S. sanctions against Iran. Huawei responded by saying it would work with the U.S. government “to come up with effective measures to ensure product security.”
Bolton was exultant. “The shackles are off,” he told his senior staff. Move ahead aggressively. In later months, Bolton would threaten to move intermediate-range missiles into Asia and redouble his efforts to sell advanced tanks and F-16 fighter jets to Taiwan. Senator Tom Cotton, an Arkansas Republican who was a fierce China opponent, tweeted: “@Huawei 5G, RIP.”
In Beijing, officials were surprised and angered. Trump had miscalculated that targeting Huawei was just another pressure point. To Chinese officials, the move reinforced the idea that the United States didn’t simply want a trade deal; it wanted to stifle China and keep it from ever challenging America. China’s censors ramped up nationalist propaganda, including airing old movies glorifying the Chinese fighting Americans during the Korean War. State media labeled those advocating a deal with the United States as “capitulators.” 6
Xi Jinping also looked for ways to strike back. Five days after the Huawei sanctions were issued, on May 20, the Chinese leader went on an inspection tour of the southeastern province of Jiangxi and made a point of visiting its leading manufacturer of rare earths—natural elements used for wind turbines, electric cars, and jet fighters. The visit was meant to remind the United States of its dependence on China for these minerals.
Xi also laid a wreath at a monument marking the starting point of the Long March, the long retreat to safety made by Communist revolutionaries that official media now portray as paving the way for ultimate victory over the Nationalists. The message to Washington couldn’t have been clearer: China was prepared for another Long March, this time toward ultimate victory over America.
“This was a watershed moment in how China views the trade war,” says a senior Beijing official. “It’s crystal clear that the U.S.’s motive isn’t just trade. It’s both political and strategic. They want to keep China from becoming stronger.”
Through a series of threats, counter threats, and miscalculations, the world’s two biggest economies were edging toward a new Cold War. This one wouldn’t be defined by missiles and nuclear weapons, but by a struggle over economic and technological supremacy. Rather than working together, two great economic powers were on a path of suspicion and separation, a fissure that would damage global commerce and upset the lives of workers, consumers, and businesses from Sichuan to Seattle. The global marketplace was in danger of shattering.
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Donald Trump started the biggest trade war since the 1930s with only a superficial understanding of how China worked, and without a specific goal in mind or a plan to achieve success. Some of his advisers, especially Navarro and former chief strategist Stephen K. Bannon, claimed they had a plan: the administration would show it was serious on trade by quickly blocking imports of steel and aluminum, as Trump had pledged during the presidential campaign. Then the United States would promptly renegotiate the North American Free Trade Agreement so that American companies that left China could resettle in Mexico, on terms the Trump administration approved, if they didn’t move back to the United States. Having accomplished all this, the United States would press China on economic, political, and military grounds.
Trouble was, Trump never signed on to the plan, and it was far-fetched.
Rather than dispose of the steel and aluminum tariffs, the United States embarked on a lengthy, bitter fight with some of its closest allies in Canada and Europe, which still wasn’t settled by early 2020. Trump went out of his way to alienate allies the United States should have recruited to confront China. He pulled out of the Trans-Pacific Partnership, a twelve-nation pact of Pacific Rim countries that included heavyweights like Japan, Australia, and Vietnam, rather than try to renegotiate it to his liking. When French President Emmanuel Macron arrived in Washington for a state visit in April 2018, Trump rebuffed his offer to join forces on China. “I’ve got this one,” he told the French leader.
Renegotiating NAFTA also took far longer than expected. In January 2020, the deal finally cleared Congress. While Lighthizer praised the results as presaging a new model of trade deals supported by labor Democrats and business Republicans, many trade associations backed the deal to try to end Trump’s threats to pull out of NAFTA, not because of their enthusiasm for the agreement. Their support for future Trump trade deals was far from assured.
Companies still couldn’t count on Mexico as a safe haven if they relocated from China. After NAFTA negotiations were completed, but before the pact passed Congress, Trump had threatened to impose tariffs on Mexico as a way to pressure the country to take a tougher immigration stance. To U.S. companies, that meant a Mexican location would always be subject to Trump’s whims. One big U.S. consumer goods company was so confounded about where to locate facilities outside the United States that it started searching for low-wage nations that had a trade deficit with the United States. The company figured the president only targeted nations that ran big bilateral trade surpluses.
Trump’s China offensive, as we will lay out, was marked by clashing ideologies and personalities, and hesitation about what actions to take. The president never made the case to the public that the United States might be in for a long and costly struggle with China—one that might require sacrifices, but was necessary to rebalance relations. He never put together a plan to keep the United States ahead of China technologically. Instead he proposed cutting research-and-development budgets year after year. He also claimed, against all economic evidence and common sense, that his tariffs didn’t cost American consumers anything.
Trump was both a China hawk and a China dove. He truly wanted to get China to change objectionable policies, as the hawks did. But he feared upsetting global markets, as did the doves. Different aides played to different parts of his China schizophrenia, as U.S. policy to China lurched back and forth.
Beijing was also to blame for the escalating trade battle. Previous generations of Chinese leaders had used U.S. pressure to push through needed economic reforms at home, especially reducing the role of state-owned companies, which are subsidized, protected, and fed cheap loans by the government. Not Xi Jinping. He relied on state firms to move the country ahead technologically, reduce the widening income gap, and expand the country’s power. They were the lynchpin of his “China Dream” of national revival. Complaints of unfair competition from U.S. firms and many privately owned Chinese ones were shunted aside.
From the 1990s until around 2012, when Xi Jinping took power, the role of state firms had steadily diminished. Xi was widely seen as a reformer who would continue that trend. Instead, state investment grew faster under Xi and state firms took on more debt even though they were significantly less profitable and contributed less than 30 percent to China’s GDP. “This picture of private, market-driven growth has given way to resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms,” wrote Nicholas Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics, who had earlier promoted the Xi-as-reformer thesis.7
Xi and other Chinese leaders were also blind to the changing reality in the United States. Working-class Americans long ago had turned against Beijing, as Chinese imports, aided by an undervalued currency, decimated manufacturing towns in the Southeast and Midwest. In places like Hickory, North Carolina, the unemployment rate rose from less than 3 percent in 2000 to more than 15 percent by 2010, creating a new American underclass that would tie its hopes and resentments to Donald Trump.
Corporate America, long compliant to the demands of Chinese authorities, was also pressing the White House to take action. U.S. firms were angry that Chinese officials helped domestic firms steal their technology. The Americans also feared Chinese plans to spend hundreds of billions of dollars to overtake the United States in artificial intelligence, advanced semiconductors, aviation, and other technologies of the future.
Rather than reexamine the policies that caused such a reaction, Beijing turned to its old playbook: court and threaten U.S. multinational companies, which need the Chinese market to grow. Chinese leaders expected them to lobby Washington to back off, as they had in the past. Beijing also lavished attention on sympathetic officials in Washington, especially Treasury Secretary Mnuchin, thinking that would help raise their standing in bureaucratic face-offs with China skeptics like Trade Representative Lighthizer. The strategy had worked in the past but no longer did.
Hawks on both sides of the Pacific say the result of the trade battle will be a “decoupling” of the two economies—a kind of complete estrangement. To us, that is fantasy, unless the two nations confront each other in a shooting war. The two nations are too intertwined. American multinationals spent a quarter century building global supply chains that stitched the economy of the two nations together. China is also one of America’s largest lenders, holding more than $1 trillion of U.S. government debt.
America depends for growth on a burgeoning Chinese market. China is already the world’s biggest market for luxury goods, automobiles, and online shopping, among other sectors. Its middle-class spending significantly tops the United States, according to Homi Kharas, a Brookings Institution economist. Cut off U.S. companies from that market, while European and Japanese companies remain entrenched, and the U.S. firms will become laggards, as will the American economy. Cut off consumers from the cheap goods they get from China, and Americans will balk at the higher prices at Walmart and Target.
Eurasia Group analyst Michael Hirson, who was a U.S. Treasury representative in Beijing, talks instead of a “derailment” of the two countries. The battle threatens to derail China’s rise because it can no longer depend on the U.S. market or technological expertise. With broad segments of the U.S. population suspicious of China, the United States has become an unreliable partner, whether Trump is in the White House or not. China needs to turn elsewhere for technological expertise or further develop it on its own. “We’re trying to give China a bloody nose,” says Christopher Johnson, a former China analyst at the Central Intelligence Agency. “But if the assessment is that China will realize the error of its ways and embrace market economics, that’s laughable. They will double down on industrial policy.”
The fight also could derail the United States, which needs China’s workers and markets to continue as the world’s economic superpower. Now China’s openness to the United States is in doubt. The United States is trying to woo other big markets, especially India, to replace what China offers. But the others lack China’s singular combination of a huge population, diligent workforce, big-spending consumers, competent—though authoritarian—government, and aspirations to become a leader among nations. “We are telling the Chinese people that their growing rich is something we view as unfair and shouldn’t be allowed,” says Adam Posen, president of the Peterson Institute. “That is a very potent political message that could be quite destructive.”
Between 1999 and 2018, the number of poor Chinese living on less than two dollars a day dropped by nearly 500 million, a miraculous achievement, supported in part by the U.S. decision to welcome China into the world trading system. Rather than see it as a great achievement for capitalism, many Americans now see it as a strategic blunder. And many Chinese, rather than appreciating U.S. support, now see America as an adversary.
One way to think about the lasting impact of this trade battle is to imagine the U.S.-China relationship if Trump were to lose the 2020 election. Whichever Democrat beats him would inherit a world where the United States has tariffs on hundreds of billions of dollars in imports from China and other nations. No president would simply roll back those tariffs. He or she would want a lot in return, meaning that the trade fight with Beijing would continue. A Democrat would also probably add other issues to the mix that Trump has, at best, paid lip service to: human rights in Hong Kong, Xinjiang, and Tibet; environmental issues; labor standards. Any of those issues is bound to make a deal much more difficult. They did during the Clinton presidency, as we will explore.
Trump has reinvigorated the use of tariffs, and they are now a part of the arsenal of any president. He can rightly point out that only tariffs got the Chinese to bargain seriously and Mexico to crack down on immigration. Only tariffs prompted the Europeans and Japanese to negotiate seriously over automobiles and agriculture, though tariffs haven’t settled any of these problems. Should Trump be reelected, he’s bound to use this weapon more and more. Should he lose, the weapon becomes a powerful one in the hands of Democrats looking to force nations to adopt environmental and labor standards acceptable to a Democratic White House.
The losers in all this are the consumers who have to pay the tariffs and the workers in the industries that are being harmed by the trade fight. More broadly, the battle damaged a global trading system that helped to lift more than 1 billion people out of poverty over the past forty years and delivered material prosperity to billions more. From the end of World War II until Trump’s election, the United States championed an increasingly liberal trade order where tariffs were minimal and countries had started to agree on rules to cover the rest of the global economy, including services, intellectual property, and state-owned firms. Trade expanded globally and helped power the postwar boom. Both the left and the right in the United States criticized the system as too concerned with corporate interests, not the interests of everyday Americans, and there is truth to their criticism. But the system could be overhauled. Now it’s on the verge of collapse, as the United States watches out for its own interests instead of also considering the global good. America First.
As we write this book in early 2020, the two sides agreed to a limited deal that paused the trade fight. The agreement contained detailed pledges by Beijing to protect U.S. intellectual property and end pressure on American firms to give up their technology—longtime U.S. goals—though it didn’t compel China to change laws to carry out the pledges. In exchange for small cuts in U.S. tariffs, China promised huge purchases of American products, though many trade experts doubt exports will meet the targets. But the deal left untouched many of America’s deepest concerns about Chinese mercantilism and technology policies. The so-called phase-one deal is supposed to lead to other phases that will tackle tougher issues.
It was as if the two sides were locked in a bad marriage and thought they wanted a divorce. Then when they saw the costs of the split, they decided to think it over again. But the rot in the marriage remains and the coronavirus pandemic, which was spreading globally as we finished work on this book, threatened to cause more rot.
The chances for a true rapprochement—for a deal that could change the way China does business—still seem remote, especially before the November election. With the global economy listing badly in the pandemic, that could change. The U.S.-China conflict remains an obstacle to global growth. Tariffs undermine corporate confidence in the future. That reduces business investment crucial for growth. With reduced investment comes reduced employment. Laid-off workers will find that the goods they buy are more expensive because of tariffs.
If pressed, the two sides could also pursue a follow-up deal before the election that is less ambitious than originally conceived by Trump’s economic team. Treasury Secretary Mnuchin has hinted that is the administration’s plan. That could give the president another talking point during the campaign.
Xi also may find it in his interest to strike another limited deal with Trump rather than risk the unknown. Should Trump win, his pressure on China is bound to continue, although Beijing will have had four years to figure out how to deal with him. Should he lose, a new president may make additional demands that are even tougher to meet. It’s a quandary. The Chinese leadership finds it increasingly difficult to cut a deal with Washington, whoever is president, without being seen as caving to what it views as American hegemony.
Wei Jianguo, a former commerce vice minister, predicts that the U.S.-China economic and trade war will last thirty years or even fifty years. “The essence of the trade war is that the United States wants to destroy China,” he says. “The U.S. is unwilling to accept China as a rising power.”
To understand how we have come to this point—a trade war like no other since the Great Depression—it’s important to look back in history to see how the relationship developed. It may seem fanciful now, but not long ago America was the shining city upon a hill to many Chinese, not just to impoverished peasants but to the Communist elites who would transform the nation. We trace the arc of the relationship from the 1990s when the United States was a model for China to emulate economically, if not politically, to the current day when the United States fears China is plotting a path to surpass it.