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Trump’s victorious retreats

Aug 09,2018 - Last updated at Aug 09,2018

LONDON — Will US President Donald Trump back down in his trade war with China, or will he win it? The answer is probably both. Trump’s characteristic sequence of blood-curdling threats, “fire and fury”, “squeeze Iran’s exports to zero”, “tariffs on everything Chinese,” “consequences the likes of which few have ever suffered”, followed by a handshake, a hug and a sudden outbreak of mutual understanding, is now a clearly established pattern.

The most dramatic example was Trump’s abandonment of any genuine effort to remove nuclear weapons from North Korea. More recently, there was Trump’s suspension of tariff threats against the European Union after his love-in with European Commission President Jean-Claude Juncker, the offer of a US-Iran summit “with no preconditions”, and then signals that escalation of tariff threats against China is actually a device to reopen negotiations.

Why does Trump keep making empty threats? His detractors respond that he is simply a braggart, a fool and an ignoramus. But there could be a less unflattering, though equally depressing, explanation.

Trump’s approach to foreign policy is the opposite of President Theodore Roosevelt’s famous early-twentieth-century dictum: “Speak softly and carry a big stick.” Trump’s modus operandi could be described instead as, “Shout loudly and carry a white flag.” And while this sounds irresponsible and cowardly, it may be the most politically effective and rational strategy for conducting US foreign policy in the twenty-first century.

If we acknowledge that the United States is now a global hegemon in decline, it is reasonable for US voters to reject any serious economic or military sacrifices in pursuit of unattainable foreign policy objectives such as containment of China. And if Americans are no longer prepared to bear the costs of global domination, then disguised retreat is a better policy than the neo-conservative belligerence that produced the disasters in Iraq and Afghanistan, or the liberal interventionism that encouraged the Arab Spring and caused the disasters in Syria and Libya.

Trump’s skill at turning US retreats into personal political victories was on display in his dealings with North Korea and his acquiescence to Russian dominance in Syria. A similar policy should probably be expected vis-à-vis China and possibly Iran and Ukraine, because it reflects geopolitical and economic realities, and, more important for Trump, it enhances his personal position.

To see how Trump’s seemingly irrational geopolitical oscillations benefit him, let us return to the US-China trade war. Assume, as do most dispassionate observers, that President Xi Jinping will not make any real concessions on the issue of fundamental importance to both sides: China’s determination to catch up with US military and industrial technology. Suppose also that Trump understands this and knows that he will have to back down, if only because the US is a democracy whose voters will not accept economic hardship, while China is a nationalist dictatorship that can force its people to bear almost any amount of sacrifice.

Trump may be an ideological protectionist who believes that US trade deficits are a form of theft and that foreigners should be “punished” with tariffs and embargoes. But he is a politician first and foremost, who probably understands that tariffs will inflict pain on US consumers. And the closer the US economy gets to full employment, the more the costs of protectionism are borne by US consumers, rather than Chinese exporters.

With little surplus labour or excess industrial capacity, US businesses cannot readily replace Chinese goods. This means that Chinese exporters can respond to Trump’s tariffs simply by raising their prices instead of cutting their profit margins or relocating production to the US.

So, rather than punishing foreigners, tariffs in a full-employment economy act mainly as a tax on domestic businesses and consumers. If applied to the US this year, their main effect would be to counteract the stimulus from Trump’s tax cuts and simultaneously to stoke inflation, ultimately forcing the Federal Reserve to accelerate the increase in interest rates.

Why, then, has Trump allowed his most Sinophobic advisers, US Trade Representative Robert Lighthizer, White House National Trade Council Director Peter Navarro, and Secretary of State Mike Pompeo, to start a game of chicken against China, which the US is bound to lose? Perhaps it is because Trump knows how to appear triumphant in retreat. By escalating confrontation to a level just short of real economic damage, and then offering peace terms that he knows China will accept, Trump can return to the pre-trade war status quo but emerge looking like a political winner.

Trump surely understands that applying 25 per cent tariffs to Chinese-made consumer goods would be wildly unpopular with US voters. But he also knows that merely threatening tariffs can give the impression of “being tough on China” and of fighting for American jobs. Once he has reaped sufficient political benefit from this aggressive messaging, he can “force” China back to the negotiating table by quietly suggesting a diplomatic US retreat from its unrealistic demands.

Such U-turns, far from hurting Trump politically, have been a consistent feature of his rise to power. Throughout his career, Trump has understood that appearances matter more than reality, and nowhere more so than in modern US politics. Policy zig-zags allow Trump to win support by making unrealistic promises and then to win again by “pragmatically” recognising reality.

In the US-China conflict, Trump has appealed to nationalist extremists with wildly belligerent rhetoric. Assuming that he remains true to form, once he has maximised the benefits of jingoism, he will then appeal to moderates by backing down and averting the damage that his reckless threats could cause.

If Trump eventually retreats in his confrontation with China, few voters will know or care that he failed to achieve his supposed economic objectives. Instead, Trump will win praise for “forcing” China into a negotiation that it never resisted and averting the risk of a trade war that he himself created. This is how Trump’s art of the deal works: declare war, restore peace and then claim credit for both.


Anatole Kaletsky is chief economist and co-chairman of Gavekal Dragonomics and the author of “Capitalism 4.0, The Birth of a New Economy”. Copyright: Project Syndicate, 2018.

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