Negotiations are almost always messy, but this is starting to look like mud wrestling in a hurricane. The key question that everyone from the trading floors of Wall Street to the Iowa soybean farms is asking is: How does this end?
"I have no idea what’s going to happen,” Trump said Thursday. Realistically, there are three potential paths this U.S.-China trade war could take. Trump is either going to get a good deal, a lousy deal or no deal. Two of those options aren’t great for the American people, especially if Trump leaves all the tariffs in place. Here’s a rundown.
1) Trump gets a “good deal.” It’s subjective what would constitute a good deal, but most economists, trade negotiators and business leaders say it means China would agree to enhanced protections for intellectual property and open up the Chinese market more to U.S. businesses. Ideally, trade experts say there would also be an enforcement mechanism to ensure China follows through on its promises.
Recall that a year ago the Chinese tried to buy off Trump by offering to purchase billions more of U.S. natural gas, soybeans and other agricultural products. It’s a move that would probably shrink the trade deficit a bit (which Trump tweets about frequently), but it wouldn’t fundamentally alter the U.S.-China trade relationship. Trump said no to that deal, so the pressure is on for him to get a lot more from the Chinese than what was on the table last year.
“China had hoped to keep it to a shopping list. They thought because the president is preoccupied with the bilateral trade deficit that if they could demonstrate to him they would buy a trillion more of this or a trillion more of that, he might buy it,” said Michael Froman, former U.S. trade representative under President Barack Obama. “The administration thus far has said they are not going to stop there.”
Some on Wall Street still think this scenario can happen, which helps explain why the market isn’t down more this week. It would also be a major talking point for Trump’s reelection campaign. But investors, business leaders and the Chinese also want to see the tariffs removed after a deal is reached. If the tariffs remain, it could still be a drag on the economy in the critical 2020 election year.
2) No deal is reached. A full-blown trade war ensues. This is most economists’ worst-case scenario. The two sides do not reach an agreement and Trump and Chinese President Xi Jinping continue to ramp up tariffs and barriers on trade, which could even spill over to other parts of the world. It’s basically a trade version of the Cold War, and the economic consequences would likely be severe.
“A trade war, with across-the-board tariffs on US-China trade, would push the global economy towards recession,” wrote Bank of America Merrill Lynch economists in a note to clients Friday.
The Tax Foundation, which typically leans to the right, said Friday that the tariffs already in place amount to $72 billion worth of new taxes on Americans. If Trump puts even more tariffs, as he has threatened, growth would fall by 0.75 percent, “effectively offsetting almost one-half of the long-run impact of the Tax Cuts and Jobs Act,” and employment would fall by more than 580,000 jobs, the Tax Foundation forecasts.
The economy is doing pretty well and many in Washington wonder why Trump would risk this scenario, which could cost him the election and bring on a recession.
3) Trump gets a lousy deal and many tariffs stay. The easiest deal to strike is the one China already put on the table: The Chinese agree to buy more U.S. goods. But after almost a year of Trump’s tariffs and a lot of pain for farmers, a deal like that would likely be a letdown.
It’s the deal that could have happened a year ago, and it’s doesn’t give U.S. companies greater access to the Chinese market, which is the real prize for years to come as that country’s middle class grows. (Chinese consumers are already buying as much per year in total as Americans and those numbers are only expected to grow).
The core of what American companies want in an agreement is “substantive, legally-binding changes to Chinese policies,” said the U.S.-China Business Council. “Our members want an agreement that includes measurable, commercially meaningful outcomes."
While the markets would likely be relieved just to have an agreement done, Democrats would pounce on Trump for being a weak negotiator, and U.S. businesses would still be at a disadvantage in China. Leaving all the cuurent tariffs in place would only add to the pain.