Losing the Trade War with China

The Times reports on the tentative trade pact announced with China last week. The administration's main goal was to somehow foil China's strategy for the economic future, which involves using subsidies and easy credit from state-owned banks to fund strategic industries, thereby undercutting foreign competition and positioning China for leadership. This already worked in solar panels and it looked like it might work in 5G phone equipment, which I found worrisome. But while fighting that policy seems to me a good idea, Trump and Co. have not found a strategy for achieving their aims:

The Trump administration had a two-prong strategy for dealing with China’s industrial policy. Its first choice was for China to agree to tight limits on subsidies. The second was to leave steep tariffs in place across a wide range of goods as a kind of informal anti-subsidy measure, offsetting China’s support for its homegrown companies and giving American and other companies room to invest and compete in the United States.

The administration has now stepped back from the first position. And by cutting tariffs at all, the administration has shown a new willingness to retreat — although the products covered by the halving of tariffs on Friday were fairly low tech.

The issue of China’s state subsidies was more prominent in earlier talks. In April, Mr. Xi’s market-oriented team of trade negotiators accepted preliminary compromises in Washington that would have left a lot of tariffs in place and rolled back some Chinese laws that the White House said favored Chinese companies unfairly.

But Mr. Xi sided with hard-liners who demanded that the deal be torn up and renegotiated, because the deal did not include a broad reversal of tariffs that had already been imposed and because it demanded detailed changes in laws that were seen as violations of national sovereignty.

In October, trade negotiators reached another tentative deal without tariff rollbacks, only for hard-liners in Beijing to again demand revisions again and a removal of tariffs.

People close to China’s economic policymaking process say that as the trade talks progressed this past week, the mood among Chinese officials gradually shifted from deeply worried to cautious and finally, by late in the week, jubilant and even incredulous that the hard-liners’ goals had been achieved.

There's our tough negotiator-in-chief, leaving his opponents "jubilant and even incredulous" that they got so much.