Reading Trump’s Breadcrumb Trail in 2019

Excerpt from Professor Di Dongsheng’s 2019 Interview:

If you want to understand the actions of U.S. President Trump, you need to study the U.S. fiscal balance. It perfectly explains why he launched a global trade war, including tariffs, in early 2018. The imposition of tariffs actually coincided with the implementation of his large-scale tax reduction plan, which is one aspect.

Many people speculated that Trump’s sole motivation was to contain China. This explanation is incorrect. Trump’s trade war, including tariffs, was not specifically targeting China. What was the first shot he fired? It was on steel and aluminum, totaling 400 billion dollars. And steel and aluminum account for only a small portion of China’s exports to the US. Which countries was Trump targeting then? It was primarily not China, as China did not export much steel and aluminum to the U.S.

They were Canada, Mexico, Japan, South Korea, and Europe. In other words, he struck his first blow against his own allies. Only after that did he start imposing tariffs on 500 billion dollars’ worth of Chinese products.

Following the start of the tariff war, his allies, especially Japan’s Abe and Europe’s Juncker, flew to the U.S. They played golf with him, chatted with him, and reminded him that they belonged to the same camp. It is China who’s the bad guy who deserves their united confrontation.

And how did Trump react? Trump’s response was that China is not a good guy, neither are you two. So just wait and see how I will deal with you. What does his reaction indicate? It shows that Trump’s attack on China was not motivated by the so-called Thucydides Trap, but by something else.

This explains Trump’s renegation of his agreed-upon deal with China. On May 20, 2018, China reached a preliminary agreement with Trump where China would purchase an additional $250 billion worth of U.S. goods in exchange for Trump canceling further tariff increases. Chinese media even began reporting on the progress.

However, on May 20, 2018, U.S. time, Trump tore up the agreement. Why? China didn’t understand.

My argument is that Trump needed the money tariffs provide. While China’ concession can substantially reduce U.S.’s trade deficit with China, it doesn’t address his hunger for revenue the way tariffs do.

Here’s my prediction: With the continual deterioration of U.S. federal deficit, likely reaching its ceiling by September of this year, Trump might seek another tariff war. It could be a war on China, or one that include Europe and Japan who are major exporters of cars to the US.Trump could potentially levy $30 billion through the war-a figure too significant to overlook. Based on this logic, Vietnam won’t be spared either. As you can already see, Trump has started bashing Vietname on Twitter and in TV programs. In the end, no country exporting large quantities of goods and services to the U.S. will escape his menace.

I suggest that, in this tug of war with the US, China should forgo the hope that the US can be talked out of tariffs altogether, as it is too difficult. Imagine trying to talk someone out of eating when he’s starving, on the brink of going crazy from hunger.

What China should aim to achieve is treatment based on Non-discrimination. This means that China should acknowledge that the United States has changed. The U.S. is not willing to return to liberalism, just like the populist-supported president. Low tariffs are not a realistic goal in this new context.  

In other words, if the U.S. imposes a 10% tariff increase on all the goods worth over 500 billion dollars that we export to them, in one scenario, China could agree not to retaliate. Under what conditions? If, besides imposing a 10% tariff on us, they also levy a 10% tariff on all other major exporting countries. It means Vietnam, Europe, Japan, South Korea, Mexico, Canada – everyone would be treated the same as China, all facing a 10% tariff. This implies that China’s relative advantage compared to those economies has not changed, thereby avoiding issues of trade and industrial transfer.

So think back to when President Trump initially launched the tariff war, he sent a message to China and other parties we found strange at the time. What was this message? He said you have stolen my money, so I will impose tariffs on you, and you are not allowed to retaliate. Everyone should impose tariffs, and no one should retaliate.

Many of us in academia thought he had lost his mind. How could he strike yet forbid retaliation? Looking back now, he was actually inviting all trading partners to join him in this carefully curated show. What was the theme of this show? A war against trade deficits, staged for his citizens, taxpayers, and voters. What does Trump want them to see? A fearless Trump confront exporters and exporting countries worldwide in defending their interests,

In conclusion, I believe China’s priority should shift from the previous goal of low tariffs to the goal of non-discriminationary treatment.

Editor: Leo Cai