Trump's China options dwindle as the deadline looms

It is beginning to look as though 90 days will not suffice for restructuring the Chinese economy. Who knew?

Talks between the United States and China, begun in early December, are rapidly approaching their early-March deadline. As the talks head back to Washington, reports suggest that the measures China has proposed to ward off further U.S. tariff increases fall far short of the ambitious goals the Trump administration first set.


That leaves the White House with three options:

We can consider each in turn.

A limited deal

If there is to be a deal at the beginning of next month, it will be limited. The Trump administration’s deeper, structural concerns about Chinese economic behavior, while often legitimate, were never going to be resolved across a few meager months, which included time off for U.S. and Chinese new year celebrations.

The tight timeline undermined the serious structural goals. Further, the Trump administration's misguided inclusion of objectives, such as pushing toward a bilateral trade balance, opened the door for the Chinese to make modest purchase offers in lieu of addressing serious reforms.

Nonetheless, there would be upsides to accepting a modest outcome in the near term. It would be welcomed by market participants, who already seem to have priced it in. It would prevent damaging escalation of the trade conflict. And, for President Trump, it might help repair his dented credibility as a dealmaker, after his budget duel with Democrats.

But there are downsides as well. As much as the China hawks in the administration may try to sell a March agreement as a mere checkpoint on the path to more complete deal, they are likely to be undercut by President Trump, who is already enthusing about “big progress” on Twitter.

Excessive public self-congratulation makes it more difficult to backtrack later, should subsequent talks be unproductive.

The Chinese, who take these things seriously, will inevitably draw conclusions about U.S. credibility and the extent to which President Trump is prone to fold when confronted with a deadline of his own making. Thus, a limited early deal reduces the odds that important structural issues, such as intellectual property protection and Chinese subsidies, get addressed anytime soon.

Ongoing talks

To the reported chagrin of his negotiating team, President Trump has also floated the idea of pushing back the deadline. If he offers another brief time window, this would have the dual disadvantage of undermining U.S. credibility (missed deadline) while failing to achieve objectives (structural reform).

Suppose, though, that the president were to announce a longer and more plausible timeframe. That would have the virtues of making the structural reform objective potentially feasible, while also refusing to reward recalcitrant behavior on the part of the Chinese (in their attempt to hold out for a limited deal).

This approach comes with substantial downsides as well. First, it still undermines the credibility of U.S. deadlines — an important tool in bringing negotiations to successful conclusions.

Second, it prolongs uncertainty about economic relations between the world’s two biggest economies. This can be particularly difficult for farmers, for example, who have to think about whether the soybeans they plant in the spring will ultimately have a market in China.

Finally, ongoing longer-term structural talks would look a great deal like the approach of President Trump’s predecessors — an approach the current administration has derided mercilessly.

Blow it up

Finally, the president could simply declare that China failed to meet his long list of demands. He could then proceed with raising tariffs from 10 percent to 25 percent on $200 billion worth of imports, and perhaps putting tariffs on the rest of U.S.  trade with China.

This would have the notable upside of demonstrating that the president’s threats are credible. That would have to be set against substantial economic pain inflicted on Americans, a likely sharp downturn in global markets and another highly visible instance in which the president was unable to strike a deal. 

If none of these options looks especially appealing, one is reminded of the proverbial tourist in Western Ireland who asks how to get to Dublin only to be told, “Well, I wouldn’t start from here.”

President Trump launched his trade war with China without  a coherent strategy or sufficient focus. He and his team regularly mix serious concerns with basic economic misunderstandings.

He eschewed potentially effective tools such as the Trans-Pacific Partnership while alienating allies who might have joined the United States in applying pressure. He set unrealistic deadlines and then undercut his negotiators by questioning them as they approached.

Given all this, accepting a meager deal and declaring victory may be the best this administration can accomplish.

Philip Levy is an adjunct professor of strategy at Northwestern University's Kellogg School of Management and a senior fellow on the global economy at The Chicago Council on Global Affairs.