While you weren't looking the trade war with China went completely off the rails
- America's trade war with China has lost its way.
- Instead of pushing for structural change in China's managed economy, the Trump administration is currently negotiating to get US-China trade where it was before the war started.
- This story is starting to sound like a loop, and it's unclear how the Trump administration will get out of it.
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While you weren't looking - perhaps while you were watching impeachment hearings - the trade war with China went completely off the rails and lost its meaning.
To understand why you have to understand why the US started a trade war with China started in the first place. It started with a very specific investigation - an investigation into China's theft of US intellectual property (IP) using Section 301 of the Trade Act of 1974.
The investigation determined what many in the business community had been talking about for years, the fact that China abused its US partners, stole the IP of American companies, forced those companies to reveal their technology to Chinese counterparts and muscled US firms out of the Chinese economy in favor of state owned enterprises (SOEs).
This, the Trump administration said, was a problem beyond the capacity of the World Trade Organization. It was a problem worth going to economic war over. And so we did.
But since it began this trade war has accomplished absolutely nothing aside from breaking up US supply chains and souring relations between the US and China. And now instead of discussing meaningful ways the Chinese economy will open to US businesses, trade negotiators are reportedly haggling over how many soybeans China will buy.
In fact, the status of the negotiations we're in now sounds a lot like the status of the negotiations back in December 2018, when the US and China temporarily laid down their arms and announced a cessation of hostilities. Back then the New York Times called the treaty - which included a resumption of soybean purchases on China's part - "less a breakthrough than a breakdown averted," and the "Phase 1" deal the administration is currently working on would do much the same thing.
Of course, that's if we ever sign the deal.
Status quo antebellum
I understand if your head is spinning. This summer it looked like the world was ending - economic data was sputtering, the stock market was whipsawing and it felt like the US Treasury yield curve would remain inverted forever. President Donald Trump, for his part, was sounding more and more unhinged.
On August 23rd, Trump tweeted out of the blue that American companies were "hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME."
Business leaders across the country didn't know what that meant, or whether or not to take the President of the United States seriously. What a time to be alive.
The headlines about the trade war since then have been cloudy. First there was a cease-fire that paused an escalation of US tariffs on China, and then there was a deal nobody saw in writing but Steve Mnuchin swore existed. Then there were just some small details (agricultural purchases and what not) left to figure out to complete this so-called "Phase 1 deal." Wall Street loved that. It loves any headline that smacks of this thing being over, whether it's true or not.
Then something strange happened - the thing that is making this all seem so silly - the small details became onerous, so onerous that they became the main event.
The Trump administration reportedly started tossing around removing the tariffs in exchange for some agricultural purchases, and suddenly we were all supposed to get excited about a deal that only promised to get soybean purchases back to where they were before this mess even started - as if they were the point of starting a trade war in the first place.
And the more desperate the Trump administration becomes to eek out some kind of win in the midst of a darkening political situation, the more it will try to make small victories seem like big ones. Or what is shaping up to be a total non-victory seem like the thing we came here to do in the first place. China, for its part, is digging its heels in too.
Bloomberg Businessweek - in a well-reported piece describing what it was like inside the White House as this trade war descended into the farcical - obtained a quote so good it made this reporter jealous.
Douglas Irwin, an economic historian at Dartmouth compared what the Trump administration is doing with trade war now to what the US did after it lost the War of 1812 to the British. When the war started, Americans claimed they would take territory from Canada, by the time the war ended in defeat Americans were reduced to touting the fact that they hadn't lost any territory.
Trump is taking from the same playbook, says Irwin, he "launched the trade war against China and said, 'We are going to remake the economy and get the state out of industrial policy and mercantilism'...We are ending it by saying, 'They are buying just as much stuff as they did before.' "
Part of this shifting of the goal posts is the result of Donald Trump's obsession with narrowing the trade deficit between the US and China, an issue that economists of all stripes have repeatedly said doesn't matter for an advanced economy like ours.
It's Trump's obsession with that deficit that drives him to negotiate so hard for China's purchase of US goods. And as I've written before, as long as he's tilting at this particular windmill with the force of a thousand Don Quixotes negotiations will vacillate between being serious and being ridiculous.
Now it seems they may stay firmly in the ridiculous.