During my recent travels in Taiwan and China, I was asked repeatedly: What does America really want out of the trade war with China? In the interests of mutual understanding, here is my brief guide to America’s conflicting and complicated motives. Spoiler alert: The tariffs may get more attention, but the critical issues are Huawei and Taiwan.
Start with President Donald Trump, who himself has mixed motives. He has favored tariffs and protectionism since the 1980s, when he focused on Japan. For better or worse, protectionism seems to be one of Trump’s most sincere views. Yet Trump also fancies himself a deal-maker, and he would like to strike a deal with China to cement his legacy and boost his re-election chances in 2020.
Those two motives are in tension with each other. More and higher tariffs limit the chances of making trade deals.
Then consider the US ruling elite, namely the policy community, business leaders, media and the establishment wings of the two major political parties. All of these groups are likely to favor free trade and trade agreements, although they are willing to make exceptions for national security reasons (this exception, as we shall see, turns out to be important for the prospects of a China deal). There is also a subset of the Democratic Party that identifies closely with labor unions and does not favor free trade.
The new player in the trade game is the national security establishment. It is very worried about the rise of China and the spread of Huawei equipment around the world, and it does not have much of a stake in free trade or the stock market. Furthermore, the national security establishment is used to getting its way; when bargaining with other US political agents, compromise is not its natural inclination.
Finally, there is the US electorate. American voters are not treating the trade war as a major electoral issue, at least so far, thereby giving additional leeway to the other parties involved.
One conclusion from all this is that the trade wars really aren’t about tariffs. Regardless of whether you approve of any particular bargain, tariff disagreements are relatively easy to solve.
So that means the trade war is really all about Huawei and Taiwan. If the US persists in trying to eliminate Huawei as a major company, by cutting off its American-supplied inputs and intimidating foreign customers and suppliers for Huawei equipment, it will be difficult for the Chinese to accept. In this case, the reluctance to make a deal will be on the Chinese side, and the structure and relative power of the various American interest groups are not essential to understanding the outcome.
The question, then, is whether the US national security establishment, and in turn Congress (which has been heavily influenced on this question), will accept a compromise on Huawei. Maybe that means no Huawei communications technologies for the US and its closest intelligence-sharing allies, but otherwise no war against the company. That is the first critical question to watch in the unfolding of this trade war. The answer is not yet known, though it seems Trump is willing to deal.
The second major question, equally important but less commented upon, is Taiwan. China has long professed a desire to reunite Taiwan with the mainland, using force if necessary. If you belong to the US national security establishment, and you think a confrontation with China is necessary sooner or later, if only because of Taiwan, you would prefer sooner, before China gains in relative strength. And that militates in favor of the trade war continuing and possibly even escalating, as the US continues to push against China and there is simply no bargain to be had.
If the Huawei and Taiwan questions can be resolved, then the trade war should be eminently manageable. Now, does that make you optimistic or pessimistic?
Bloomberg View
