The war of the deal

President Donald Trump has long asserted that he is the master of negotiation. In his 30- year old memoir, “Trump: The Art of the Deal”, he claimed that he knows the Chinese very well. Since his bid to run for the Oval Office, he blamed China for trade abuses and for stealing American intellectual property in what he termed China’s unyielding “economic aggression”. He promised voters that he could easily win a trade war with China, and bring American manufacturing back home. Was he right? In a latest reporting, China has proposed to purchase US goods worth $1 trillion over a six-year period in an effort to eliminate the trade deficit that US has with China. Has China buckled under the glaring pressure of Trump’s winning negotiation skills?

The trade war that quickly became a war of wits began last year when Trump administration levied 10 and 25 percent duties on aluminum and steel imports. China shot back announcing $3 billion worth of tariffs on US goods. Trump came back in turn with 10 percent tariff on $200 billion worth of Chinese exports with a promise to hike it to 25 percent on another $300 billion goods if China retaliates. China was not ready to be bullied and promised duties on $60 billion of US exports. By Nov-18, Trump upped the stakes saying he would put a 10 percent tariff on Apple iPhone and laptops imported from China and will continue hiking the earlier tariff if no deal is brokered. It was later in the month during the G-20 summit that the two countries called a 90 day truce in which time they would attempt to come to an agreement.

Experts have argued that the only losers in this tariff battle has been American consumers since tariffs levied on Chinese imports are not paid by the Chinese government, but by Americans buying these products. Thomas Donohue, president of the US Chamber of Commerce clarified: “Tariffs are taxes paid by American families and American businesses – not by foreigners”.

It has been argued that tariffs levied on Apple products manufactured in China are set to make Apple products more expensive, which in turn will allow the competitors of the tech giant to gain competitive edge in the US. Meanwhile, China’s tariffs on American’s agriculture products like soybean have hurt small farmers who lost nearly $12 million worth of demand from the Chinese.

The other important point is that no two countries that are part of global supply chain can enter a trade war expecting it to be zero sum. Many American companies that have set up shop in China are part of the global value chains where different components are sourced from different parts of the world and come back to be assembled in the final location. That makes production most optimum, but deeply integrated. Even if companies were to come back to America, they cannot bring with them the entire supply chain. Tariffs simply aren’t a powerful enough tool, a VICE report argued.

Companies located in the US importing Chinese parts have been trying not to pass on the additional cost to the consumers, but will have to if tariffs are further raised. They could go back to the drawing board and source the materials from suppliers in other countries but that would require adequate quality, capacity, skilled labour and competitive pricing in those countries. American companies do not think other suppliers can meet many of these demands. They are importing as much inventory as they can before tariffs are hiked.

Back in China, it is small Chinese vendors that are being hurt by reduced demand where American manufacturers have been able to shift suppliers. Moreover, while Trump’s tariffs are persuading US companies to move out of China in order to safeguard margins and not burden end-consumers, they are not motivated to move to the United States. A joint report of POLITCO and South China Morning Post argued that Vietnam and other South East Asian countries were primed to be the next best location for many of these companies trying to escape the tariff war. But ultimately, even these countries do not have the capacity or the labor force required to take on the mammoth Chinese setups.

There can be no optimism on either side. China could soon witness a huge outflow of investments as American consumers and businesses bear the brunt of higher costs. Meanwhile, Trump’s obsession with one-upping China and gaining a trade surplus would ultimately prove to be myopic. Even if China does increase its imports from the US over the next six years, it will not bring US companies back into the folds of the star spangled banner and neither will it hold China accountable for intellectual property thefts.