When someone bursts onto the global stage with a deeply unconventional diplomatic approach, the natural question is whether it is genius or foolishness. When President Trump brought his distinctive approach to U.S. trade relations with China, there were enough long-standing problems plaguing the relationship that a new tack may have seemed worth a try. Even Chinese leaders expressed some optimism that a more transactional relationship with the United States could be promising.
But a stunning story by Shawn Donnan in the Financial Times fills in a critical gap in our understanding of trade developments over the last few months. In it, the foolishness of the Trump approach is laid bare.
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To put the revelation in context, first recall that Donald Trump, in his presidential campaign, ripped China for its economic dealings with the United States. He denounced the bilateral trade deficit. He threatened China with 45 percent tariffs and a “currency manipulator” label. His sole economist adviser was picked because of his anti-China writings.
Upon taking office, President Trump seemed to pivot to a more constructive approach. The 45 percent tariffs never materialized. President Trump set aside his “currency manipulator” pledge (just as President Obama had before him). There was a promising summit meeting with Chinese President Xi Jinping at Mar-a-Lago. The leaders pledged a quick trade agreement – and they delivered!
In the spring, a modest trade deal was struck. Commerce Secretary Wilbur Ross, who was overseeing the talks, oversold the accomplishment, but it looked like progress. It was certainly better than one might have expected after the campaign. And, of course, there was an expectation that there was more to come.
Which brings us to the puzzling part. In July, trade talks between the United States and China simply failed. Press conferences were cancelled. There was scarcely a token attempt at positive spin. Such an abject breakdown is rare, particularly at the ministerial (cabinet) level. It was hard to know what had happened. Perhaps Team Trump had pushed too hard and run up against Chinese ‘red lines.’
Now, the Financial Times story reveals it was worse than that. The U.S. negotiating team had indeed succeeded, but President Trump rejected the deal! In the wake of a G20 meeting in which there were pledges to address global steel overcapacity, China – where the problem is most severe – offered to cut its capacity by 150m tons by 2022. Commerce Secretary Ross, who brings ample expertise from his time as a steel tycoon, endorsed the deal. He took it to the President.
The President said no.
Ross tried again a week later.
The President again said no. He evidently wanted to apply tariffs instead. It is not entirely clear from the Financial Times article which tariff authority the President intended to use, but there was some contemporaneous evidence that the President was confusing protection against Chinese steel with a pending national security case against steel and aluminum imports.
As things played out, the Trump administration seems to have subsequently opted to walk away from that national security case. Officials discovered that such protection on important intermediate goods could alienate allies, hurt domestic industries, and upset members of congress (all eminently predictable problems for anyone familiar with the history of protection). So the President ended up with neither tariffs nor a capacity deal.
Whereas protectionism is highly problematic, a Chinese commitment to cut its steel capacity could have had enormous potential. It could have been leveraged into a global agreement that would have offered a real solution for the industry. To tally up the costs of this diplomatic fiasco, then, the first is the missed opportunity to tackle the real problem of steel overcapacity.
The second cost is to U.S. relations with China. If the story is correct, the Chinese made a good-faith offer to address a top U.S. concern and were flatly rejected. This makes it much easier to understand why Chinese negotiators would storm off without even an attempt to paint talks in a favorable light. They were justifiably offended.
The third major cost is the damage to U.S. economic diplomacy. There is a natural tendency for interlocutors to wonder if they’re dealing with the right person. Does a U.S. representative have the authority and trust to represent the views of the President? If anyone had that stature in the Trump administration, Wilbur Ross seemed to. The Financial Times reports Ross “was initially appointed Mr. Trump’s de facto trade tsar, but appears to have lost his role as the leader of Mr. Trump’s trade team after suffering several defeats in internal battles linked to China.”
The diplomatic damage will not be limited to China. Other countries are watching closely. They will wonder whether the problem was with Ross or with a President who has not thought through nor understood the issues and therefore has stances that are unpredictable, even for his chosen representatives.
And who wants to negotiate with a country that won’t take “yes” for an answer?