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Trump calls Xi’s bluff, but who really holds the cards?

It’s bluff-calling time in the U.S.-China economic conflict. President Trump appears to believe that China is economically vulnerable and dependent on trade with the United States.

Chinese President Xi Jinping appears to believe that President Trump makes empty threats and can be bought off with relatively minor concessions. President Trump just decided to call.

{mosads}On Sunday, Trump threatened to raise tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. There have been ongoing negotiations to avoid these tariffs, including a recent round when U.S. negotiators visited Beijing.

Chinese negotiators were due in Washington midweek. President Trump tweeted that the trade talks were moving too slowly.

There are two ways to think about his new tariff threat. He could believe that this is a savvy negotiating tactic that will apply just enough pressure to push difficult talks to a conclusion.

Or, he could believe that tariffs really are good for the U.S. economy, and he has waited too long to bestow this blessing on his constituents. Either of these would constitute a major gamble on his part.

The problem with the deadline and leverage is that President Trump has repeatedly tried the same trick, with the same interlocutor, and it has failed each time.

President Trump initially threatened tariffs on $50 billion of Chinese goods with a July deadline last year. The deadline was insufficient to bring about a deal and each side applied tariffs.

Then, President Trump set a September deadline to apply the $200 billion round of tariffs. That deadline, too, was insufficient to prompt a deal, and each side applied tariffs.

Next, President Trump set a Jan. 1 deadline to hike those tariffs, which he pushed back in early December. He set a March 1 deadline, which he waived in late February. What the deadline technique lacks in efficacy and imagination it makes up for in doggedness and consistency.

So why has President Trump’s approach to China not worked? There are at least four reasons:

1. U.S. demands have been either unfocused or unworkable. While there are numerous legitimate concerns about Chinese economic behavior, exhaustive lists of demands make it very difficult to achieve quick results.

Further, China is unwilling to yield on pursuing an industrial policy, and it is unable to eliminate the bilateral trade deficit. The inclusion of these demands makes the list seem less serious and makes the goal of trade peace seem unattainable to the Chinese.

2. The Chinese don’t know whom to talk to. Over the course of his term, President Trump has sent several different high-ranking officials to deal with the Chinese.

Even with cabinet secretaries at the table, deals they struck were later disowned by the White House. This hardly encourages the Chinese to put forward bold proposals that could cause them problems domestically.

3. China has its own politics, and no one likes to negotiate at gunpoint. China is certainly not a democracy, but its leadership still has concerns. If China were to concede to rhetorical gunboat diplomacy, it would be very poorly perceived back home.

In fact, at the time of this writing, China was reportedly threatening to cancel this week’s negotiations because of the president’s threats.

4. President Trump’s threats are becoming ever less credible. The repeated failure to follow through on this particular tariff threat sends a strong signal that the president is unenthused and bluffing. Further, on Friday, the President declared, “I’ll be running on the economy.”

{mossecondads}That was not really a secret, but it makes it that much more dangerous politically for the president to endanger markets and economic growth as 2020 draws near. Negotiating partners are aware of this.

What if the president truly believes that tariffs will help? He is likely to be disabused of the notion. Businesses have largely been operating under the belief that tariffs will be temporary and a negotiated solution is at hand. A sudden reversal of those beliefs could have notable effects on both markets and business decisions.

Without any particular need, the president declared this weekend that the Chinese were bluffing, and he would call. He has lost his previous wagers. Because of his latest move, this week will help show who really holds the cards in this conflict. If Trump loses again, it could be costly for him and for the country.

Philip I. Levy is an adjunct professor of strategy at the Kellogg School of Management at Northwestern University and a senior fellow on the global economy at The Chicago Council on Global Affairs. Follow Levy on Twitter: @philipilevy.

Tags China–United States trade war Donald Trump Economy of the United States President Xi Jinping Tariff Trump tariffs

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