Donald Trump and The Art of No Deal With China

August 2, 2019 Updated: August 2, 2019

News Analysis

The United States and China ended trade negotiations this week in Shanghai with no deal, with new talks scheduled for September in Washington.

Prior to the meetings, White House economic advisor Larry Kudlow said in an interview with CNBC on July 26 that he “wouldn’t expect any grand deal” to come out of the two-day talks on July 30 and 31, the first since negotiations fell through in May.

While Chinese negotiators called the talks “constructive,” no results were announced regarding the latest rounds of discussion.

President Trump, in a set of tweets prior to the meetings, warned that China should not wait until after the 2020 election in the hopes of making a deal with a more conciliatory Democratic president. He said that if he wins, China may face a deal that is far more unfavorable than the one currently being discussed, or there might not be any deal.

“The problem with them waiting … is that if & when I win, the deal that they get will be much tougher than what we are negotiating now … or no deal at all,” said Trump’s July 30 tweet.

For some, the outcome of the U.S.-China talks was predictable. Kyle Bass of Hayman Capital Management told CNBC on July 25 that he believes a trade deal with China can’t be reached.

“When you look at what the Chinese did in the last negotiation, it was about a 150-page agreement, and the night before both sides were to sign the agreement, the Chinese took 50 pages, the core of the agreement, and threw it away,” he said.

“Every deal that the Chinese have signed with us since their ascension to the WTO in 2001, China never lives up to their promises. At some point in time, one of our administrative officials has got to hold their feet to the fire. This is kind of the battle of cultures, because the Communist Party doesn’t want to submit themselves to anything that is measurable or enforceable. I don’t think an agreement can be had.”

The question is: What if that was Trump’s goal all along? Is it possible that from the very beginning President Trump never intended to have a trade deal with China, knowing that they would cheat on anything struck between the two nations?

The President is well aware of China’s dishonest and double-dealing methods. He also knows that any deal that he proposes to China, even under immense economic pressure, will likely be broken in order to subvert any type of rules and regulations that would economically disadvantage the ruling Chinese Communist Party (CCP).

The President may be trying to string along the CCP with negotiations that he knows are going nowhere, while simultaneously placing maximum economic pressure via tariffs to drive manufacturing out of the country.

Companies Fleeing China

A year into the trade war with China, over 50 global companies including Dell, HP, Apple and Nintendo have announced they are pulling or considering pulling manufacturing from China and relocating to other nations, mainly in Southeast Asia.

According to a Nikkei Asian Review report, Apple has called on major suppliers to prepare for possibly moving 15 to 30 percent of iPhone production out of the country. The company also reported in mid-July that Apple will be starting a trial production of its wireless AirPod earbuds in Vietnam. In industry practices, these trial runs are often an indicator for major production in the not too distant future.

Apple also has been eying moving the production of its iPhones to India to avoid tariffs, which would be a major blow to China’s economy. Foxconn, which produces iPhones for Apple, could move production of the iPhone XS, iPhone XS Max and iPhone XR, to India in the near future, according to a report by Fortune.

“We believe, realistically, in a best-case scenario, Apple would be able to move 5 to 7 percent of its iPhone production to India in the next 12-18 months,” WedBush Securities analyst Dan Ives told Fortune magazine in June. “Moving 15 percent of its iPhone production from China to other regions (India and Vietnam would be top candidates) would take at least two to three years in our opinion.”

HP and Dell have openly discussed moving up to 30 percent of their notebook production to Southeast Asia or other regions, reported the Nikkei Asian Review. Nintendo also has announced that it’s pulling a portion of its Nintendo Switch system production to Vietnam.

According to a UBS Evidence Lab survey released on July 31 that asked 500 US companies detailed questions on the effects of tariffs, 37 percent have either moved production facilities out of China or are in the process of doing so. Another 35 percent are also considering moving production out of China.

This is all coinciding with the slowing of the Chinese economy as it enters recession, with unemployment estimates nearing 15 percent. China’s GDP growth slowed to 6.2 percent in Q2 of 2019, the slowest in 27 years. Feeling the pain from the trade war, the country has been offering perks to foreign companies in an effort to make them stay or encourage others to come in.

According to the Nikkei report, China has been opening up to overseas business since 2018 as a means of countering the effects of the tariffs, with the Chinese Commerce Ministry reporting foreign direct investment increasing 3.5 percent to roughly $70.7 billion from January to June.

The Ministry of Commerce is notorious for inflating its numbers, but even if this is true, will it be enough to overcome the pressure from the tariffs?

Taking a look at the countries benefitting from the tariffs on China, both India and Vietnam, historic rivals of China are seeing a massive wave of companies moving their operations within their borders. These countries have developed closer economic and military relations with the United States as the CCP has become more belligerent in its actions.

While the President may not be able to transfer all manufacturing back to the United States, he can definitely pressure companies to move out of China to more US-friendly nations. This may have been Trump’s move all along: a game of kabuki theater to give China hope that he will lift the tariffs, while he delivers a wake-up call to the oppressive regime. Both China and the United States know that while the tariffs are uncomfortable for the US, their economic consequences dwarf in comparison to those of China.

Tariffs Not Really Hurting America

What has been the outcome of this tariff war?

Contrary to the chagrin of economic commentators, the trade war has had a marginal effect on consumer goods in the United States.

According to Wall Street Journal and CNBC writer and lawyer John Carney, in a piece for Breitbart News from July, the United States producer-price index only increased by 1.8 percent over the last year, which was less than expected.

Breaking this down even further, furniture, which was hit hard by the tariffs were up only 2 percent for the last 12 months.

Soaps and detergents were only up 0.4 percent compared to a year ago.

Electronic equipment was only up 1.2 percent.

Household appliances, which got hit hardest by the China tariffs were up 4.4 percent from last year, but this increase was offset by the fall in computer prices, which were down 4.7 percent for the year.

After more than a year into the trade war with China, the tariffs on US goods are not harming the consumer nearly as much as many experts claimed they would. This is a storm that the US can weather with very little damage, while it is severely impacting China. The Chinese economy is heavily reliant on the United States to buy its products, but the reverse isn’t true, and Trump’s team knows this.

Talks Continue

As the negotiations string along, the President and his team will likely continue the charade that there will be a deal, when in fact there won’t, all while major companies flee China. The CCP will be unable to counter the effects with perks for companies to stay, as these companies may not want to be caught in the crossfire of a tariff war.

In a Twitter post on Monday July 29, President Trump said, “The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving. This is why China wants to make a deal.”

However, Trump may not be giving them one.