For most of the year, President Trump’s trade moves have seemed arbitrary and disruptive: tariffs on random sets of imports, verbal attacks on trading partners, threats of recession-inducing protectionism.
But with a crucial deal to revamp the North American Free Trade Agreement, a broader Trump strategy is finally coming into focus, after several months of fits and starts. And it’s not about Canada, Mexico, Europe or other friendly allies. It’s all about China.
Trump’s negotiators have now finalized an agreement with Canada to update the terms of NAFTA, which went into effect in 1994, and rename it the U.S.-Mexico-Canada Agreement, or USMCA. The new deal will require automakers to put more U.S.- and Canadian-made parts in their cars, in order to qualify for the lowest tariffs. That could create more auto jobs, but also raise the cost of cars. And U.S. dairy farmers may be able to sell a bit more to Canada. It’s not clear whether the deal will boost or slow economic growth, but Trump, in his hyperbolic Trumpian way, can declare victory and take credit for saving the U.S. economy.
He can also focus better on what appears to have emerged as his top trade priority: Forcing China to open more of its home market to foreign companies, stop stealing corporate secrets and end subsidies to huge state-owned firms that allow them to underprice global competitors.
“At the beginning of the third quarter, President Trump made a critical decision on trade policy by realizing he could not fight three trade wars at one time,” research firm Strategas wrote to clients in an Oct. 1 memo. “If China is the real target, then the U.S. would need to accelerate NAFTA discussions immediately and form a peace treaty with the [European Union] so that it could focus on China.”
The new USMCA must still be ratified by the legislatures of the three countries, which won’t happen until early or mid-2019. But for now, the agreement should alleviate tension between the United States and its two most important trading partners. Trump still needs to make progress with the European Union and end a tit-for-tat tariff fight there. But he outlined a way forward on that in July, during a meeting with European negotiator Jean-Claude Juncker – including hints that Europe and the United States might confront China jointly.
China is the big fish
Many trade experts say Trump cannot pick trade fights with everybody and expect to win. And if Trump wants to force reforms on China, the best way to do it is to team up with trading partners that have the same concerns. The much-maligned Trans Pacific Partnership, which Trump rejected after he came into office, would have done that, to some extent. Trump has now embraced some principles of the TPP, though certainly not by name.
If Trump can, in fact, settle trade disputes with European and North American allies, the next huge question is whether he can win against China. Trump has so far levied tariffs on about half of all Chinese imports to the United States, while threatening to tax all Chinese imports if China doesn’t bend. But it’s not entirely clear what Trump wants of China, or what he would consider a victory.
Kevin Hassett, chair of the White House Council of Economic Advisers, told Yahoo Finance on Sept. 20, “We certainly have a list of well-defined demands with China, but we’re … not going to broadcast them to the world.” In general, he said, “we want access to their markets, same as we give to ours. There’s a whole bunch of stuff like that that they need to fix. We want them to roll back the forced technology transfer and industrial espionage that everybody knows about.”
Whatever Trump’s demands, a deal with China may be harder to reach than one with Canada. “Trump is willing to back down on his protectionist threats in return for modest concessions that allow him to claim victory,” research firm Capital Economics wrote in an Oct. 1 note to clients. That may embolden China and make it more reluctant to compromise, since the nation’s leaders may feel Trump will agree to relatively small changes, in the end. “The upshot is that it is still hard to see how a further escalation of the trade conflict with China will be avoided,” Capital Economics concluded. Trump, the happy trade warrior, soldiers on.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman