Watching Donald Trump fight a trade war is a bit like watching George Foreman’s 1974 title bout against Muhammad Ali. The pulverising power of the champion in the opening rounds is awe-inspiring, but against a wily and disciplined opponent who has the mental ability to absorb punishment, you know he’s setting himself up for that eighth-round knockout.
The Trump method, which he supposedly honed in the real-estate world, is to bully your way to a deal. You manoeuvre yourself into a position of overwhelming power, then you open negotiations. That’s why Trump wanted to smash the multilateral global order, cheering the breakup of Europe and undermining the World Trade Organization: divide and conquer.
When it comes to China, Trump is right that China stands to lose more than America from a trade war. Precisely because the US runs such a large deficit with China, China needs the US economy more than the US needs China’s. In the aggregate, China will suffer the most from a prolonged trade war. Thus it stands to reason that in a scrap, Beijing will be the first to cry uncle.
Except that aggregates don’t make decisions, at least not in China. The leadership does. And just in case Trump hasn’t noticed, the Communist leadership doesn’t spend hours each day watching Fox and Friends to see how they’re playing on Main Street. The Chinese leadership can’t willy-nilly ignore its citizens’ wishes indefinitely, but put simply, there are no mid-term elections looming in China.
Like Ali did in 1974, China can probably absorb a good deal of punishment in the early rounds, relying on its stamina to go the distance. Given that the US President has repeatedly cited the performance of the stock market as an indicator of his economic savvy, it’s hard to imagine plunges in the indices, of the sort we saw this past week, sliding off his back indefinitely. Meanwhile, if the idea of fighting for American jobs plays well among his base, it will be complicated by the fact that many other industries in which his supporters work will be negatively affected by a prolonged standoff. Given how little of a margin of error Trump has, with his approval ratings so low, he doesn’t have a lot left to burn. He needs a deal.
And yet, from an economic standpoint, he’s carried a knife to a gunfight. China engages in all sorts of unfair trade practices, and Trump has a reasonable point that they should be forced to open up more. But why choose steel for your ammunition? A big part of the reason the American steel industry is declining is that its competitiveness has been sliding for decades. Its plant is aging. This has depressed margins, which has limited the amounts available for re-investment and re-tooling. New entrants to the steel industry in the developing world, by installing state-of-the-art machinery, are able to operate with much healthier profit margins than those in the US.
In principle, therefore, Chinese producers can absorb more of the costs imposed by a trade war than American producers can. In the short term, American steelmakers may get a modest boost from the added protection, but it probably won’t change their margins enough to reverse long-term trends. Meanwhile, if the tariffs trigger a trade war, the damage will be absorbed by other industries which are competitive, and which could stand up well in a tussle.
The Trump administration’s divide-and-conquer strategy appears not to be working. Having enthusiastically welcomed the Brexit vote, in the hopes that it would unleash a populist tide across Europe, Trump has had to watch as Europe’s leaders effectively regrouped. The populist tide continues, but fears of a European break-up now look premature. On the contrary, Britain is slowly but surely moving itself back into the European column – would you want to bet the farm on a new trade deal with this bloke? Current betting is that Brexit, if it happens at all, will be almost in name only. Equally, when Trump walked away from the Trans-Pacific Partnership, he apparently calculated that without the US, the deal would collapse and everyone would petition the US separately for new deals. Instead, the TPP re-constituted itself under China leadership.
Each time Trump fires an arrow that misses its target, his quiver empties. It’s conceivable that Beijing will make some kind of cosmetic concessions that will enable Trump to save face before his supporters, claiming a victory while hiding its Pyrrhic character. But it’s telling that Trump’s best hope is that Beijing throws him some kind of lifeline. His worst fear, by contrast, would have to be that Beijing decides to take this one the distance.
In that case, Trump may find himself reliving George Foreman’s seventh round. ‘I hit him hard to the jaw’ Foreman said years later, recalling the match. ‘He held me and whispered in my ear: “That all you got, George?” I realized that this ain’t what I thought it was.’
To readers in South Africa: I’ll be speaking about my new book, Twilight of the Money Gods, on 4 April at 4 pm at the South African Institute of International Affairs in Johannesburg, and on 11 April at 12:15 at Stellenbosch University.