Analysis

Trump has long been vexed by US trade deficits, believing they reflect unfair foreign trade practices. In 2017, the United States had a 335-billion-dollar trade deficit with China (goods and services combined), with a 40-billion-dollar services trade surplus and 376-billion-dollar goods deficit.

The administration also accuses China of industrial espionage and intellectual property (IP) abuse; US officials say US firms working with China are forced to hand over IP for any deal to be made.

Yesterday, the commerce department began taking public comment on whether to curtail US exports of advanced technology, to safeguard against competition from China.

Tariffs come

Administration officials have headed delegations to China, and Washington has received them, seeking trade reforms.

Not satisfied with Beijing's response, Trump has introduced tariffs on 250 billion dollars' worth of Chinese imports this year (an approach taken with aluminium and steel imports this June that helped bring the EU to the negotiating table). On January 1 next year, tariffs on 200 billion dollars of those 250 billion will rise to 25% from 10%. More than 6,000 types of goods are subject to the tariffs. In reaction, Beijing has imposed tariffs on 110 billion dollars' worth of US goods.

Economic dislocation

Tariffs have had tangible effects on many sectors. The long-term question for the US economy is whether this will be a temporary hit to earnings or trigger a re-evaluation of supply chains (both for inputs and for recruitment, such as in Silicon Valley, which has many expatriate Chinese employees) as US firms adapt.

Thus far, there has been no widespread move to shift trade patterns, likely because firms know the tariffs could be quickly wound down. Moreover, China is the United States' largest trading partner and has a dominant position in many elements of supply chains that cannot easily, quickly or cheaply be circumvented or relocated.

Both countries face limits on how long they can endure tariffs before supply chains need to be reworked: if tariffs remain to 2021 or 2025, especially if they deepen, they will likely constrain GDP growth and push up inflation, while businesses want to avoid unnecessarily higher costs.

Farmers hit

Perhaps of greatest importance to the US political system was China's retaliatory tariffs on US soybeans, for which it was the the largest export market. This led to a soybean price crash from close to 10.5 dollars per bushel to 8.2, a ten-year low.

The economic damage will escalate. Farmers are currently in what would be their highest exporting season (October and November). During the week of October 5, 2017, the United States exported 700,713 bushels of soybeans to China; in the same week this year, the figure is zero.

Midterm election results suggest US agricultural states still support Trump, but that could change by 2020, especially as the Midwest, where many affected farmers live, is one of the most politically elastic regions, and lingering retaliatory tariffs are one possible factor (see UNITED STATES: Lower farm incomes imply more subsidies - November 16, 2018).

What might spark policy change?

Trump's tariffs have been opposed by nearly every US power base and interest group. This level of bipartisan opposition has rarely been seen without affecting policy -- the trade frictions demonstrate how a determined president can defy congressional and interest group preferences. (The administration has called for US farmers to be steadfast until a deal is done with China.)

In a frank October 4 speech, US Vice President Mike Pence called for improved US-China relations, noting that to do so China must stop IP abuses and negotiate a free trade deal. China has sent a list to the administration of actions it could take that might help resolve trade disputes; of this, Trump said on November 16 that further tariffs on China might not be necessary.

Whether this list and renewed high-level talks will work depends on whether they satisfy Trump's long-held trade beliefs, whether he calculates that he and the Republicans would be better off in 2020 by reaching a deal with China and, just as important, Beijing's views.

It also depends on external and internal reactions:

Beijing makes concessions

China is unlikely to make all the concessions Trump wants; for one, they know he will be out of office by January 2021 or January 2025.

However, the depth of the US-China trade relationship will likely see Beijing pursue, or at least acquiesce to, a deal that goes just far enough, similar to the revised bilateral trade agreement with South Korea and the US-Mexico-Canada Agreement (USMCA), which if ratified will replace NAFTA but in practice bring comparatively limited change.

Trump could then claim to voters his tariffs worked. As with the USMCA, even minimal changes in policy can be embraced if they give an opportunity for political fanfare.

Congress pushes back

Democrats and Republicans in the next Congress from January, or the current Congress's 'lame duck' session before it, could mobilise in opposition to the tariffs and seek their end as part of a compromise with the White House.

Funding a US-Mexico border wall is the most likely element of such a deal, and it would likely come during the budget process. The federal government is funded to December 7 (with some departments, including labour, defence and education, funded until September 30), but a spending deal needs to be reached for after that (see PROSPECTS 2019: US politics - November 13, 2018).

In December, Congress may pass a continuing resolution, extending funding levels for a short period, if some or all of the seven of twelve remaining appropriations bills cannot be passed. Budget agreements could, therefore, come after December 7; and if so, most likely in February after the new Congress has been seated.