How President Trump's Hardball Negotiation Tactics Can Win the US-China Trade War

By Jack Nasher

US President Donald Trump’s negotiation style has been consistent throughout his real estate career and his presidency: anything goes. 

He never rules out a total failure of the deal, routinely receiving generous concessions. 

His emotional outbursts are frequent and the “Trump walkout” is proverbial.
Accordingly, on May 5, 2019, Trump furiously complained that the Chinese were trying to renegotiate verbal agreements and he walked out from a deal.
Such a risky negotiation tactic can work well in business, but does it make sense in deals such as complex and weighty as trade negotiations? 

This isn’t just a mere transaction, the current trade war the US and China are facing is no less than a textbook example of a complex negotiation involving billions of dollars and millions of jobs.
Let’s take a closer look at these negotiations: how the negotiations went so far, what the parties positions and interests are and what a possible deal could look like.
What happened? 

A brief timeline of events

The vast trade deficit of $419.2bn was an important, but not the only factor that lead to the current trade war. 

The trade war begins in 2016 when Trump is campaigning for the Republican Party’s presidential nomination: “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world.” 

Not a very subtle way to announce changes in the US-China trade relations.
Actions start in February 2018, when Trump slaps tariffs on Chinese solar panels. 

Mid-level representatives meet here and there without a deal. 

On September 17, 2018, Trump announces tariffs on Chinese goods worth US$200 with an initial rate of 10 percent to be increased to 25 percent by January 1, 2019. 

Retaliation follows one day later, when China announces new tariffs on US goods worth US$60 billion and cancels trade talks with the US.
The two giants meet at the G20 summit in Buenos Aires in late November. 

At a working dinner, US President Donald Trump and Chinese dictator Xi Jinping decide a temporary truce to work on a solution, refraining to impose new tariffs for 90 days, until March 1, 2019.
Haggling season is opened – but both sides play it cool. 

It isn’t until January when the two parties negotiate, first in Beijing and a few weeks later in Washington D.C.. 

The US negotiation team is led by Treasury secretary Steve Mnuchin and US trade representative Robert Lighthizer, the Chinese team is headed by Chinese Vice premier Liu He. 

President Trump makes an appearance and announces a meeting with Xi. 

A week later, Trump changes his mind: he doesn’t want to meet Xi. 

Then, In February, negotiations take place in Beijing and then in Washington D.C., where President Trump meets with Liu He, demonstrating confidence in reaching a deal. 

The deadline is extended, and President Trump expresses hope that Xi would visit him at Mar-a-Lago to finalize the deal. 

A deal is at reach.

Suddenly, on May 5, 2019 things go sour: President Trump complains that the Chinese are trying to renegotiate points that were already agreed upon and he announces that the US would go through with the increased tariffs on US$200 billion worth of Chinese products from 10 to 25 percent, effective Friday, May 10. 

Moreover, Trump announces new tariffs on almost all other Chinese products. 

On May 13, 2019, China retaliates, announcing that it would increase tariffs on US$60 billion worth of US goods, effective June 1, 2019.
So far, the US has set tariffs on Chinese products worth US$250 billion and has threatened tariffs on US$325 billion more. 

China has slapped tariffs on US goods totaling US$110 billion.
The two leaders will meet at the G20 summit in June to resume negotiations.
The negotiation process so far reveals a noteworthy dynamic, or – to be more precise – a lack of dynamic: Both parties were very slow to make a move, very careful to not show too much interest. President Trump constantly tried to shift the perceived power in his favor: by cancelling a meeting with Xi and by then inviting him to come to see him. 

But who really holds the stronger hand?

President Trump’s hand

U.S. President Donald Trump pondering. 

In 2018, the US trade deficit with China amounted to $419.2bn. 

But there is more the US does not like: On the one hand, the Chinese government does too much, on the other it does too little. 

China heavily subsidizes particular industries, such as aviation and information technology, and it forces foreign investors to transfer their technology if they want to do business in China. 

On the other hand, China still does too little to protect foreign partners, particularly IP, going so far as to support cyberattacks on American companies.
When the Chinese backed away from tackling these problems with clear and transparent measures, President Trump used tariffs as a tool to exert power, claiming “We’re taking in tens of billions of dollars [in tariffs], I think it’s working out very well.” 

Indeed, the new tariffs increase America’s annual revenue by about $42 billion.

But this is the tariff-trick, resembling an optical illusion: jobs that are created are visible but everyone else pays the bill due to less competition and increased prices. 

When President Trump increased tariffs on washing machines in January, it created around 1800 jobs. However, it also led to the rise of prices for washing machines and dryers of over $1.5 billion, so each job costs the taxpayer around $815,000. 

In the case of US farmers who are suffering from the trade war with China, the taxpayer’s costs are even more apparent: President Trump created a $12 billion aid program to compensate farmers for their trade-related losses. 

Indeed, the current tariffs have cost each American around $11 per month.

Xi’s hand
China’s hand isn’t all that great: The country is facing its slowest economic growth in almost 30 years, due to a shrinking manufacturing sector and an aging society. 

China is heavily dependent on foreign consumption, with the US as its main export market, having exported goods worth almost $540 bn to the USA in 2018, making up over 19 % of China’s overall exports. 

Right now, China simply cannot afford to lose access to US consumers, especially as Xi is getting ready to serve as the president of China for a third term.
Accordingly, Xi ‘s chief negotiator, Vice Premier Liu He, asked for three points: 

• He wants the duties to be completely revoked. 
• He wants the amount of additional goods the China has to buy from the US to balance the trade deficit to be realistic. 
• And lastly, he wants the deal to be “balanced”, meaning that China must not lose face.

So China would be fine if everything remained more or less as before.
The most effective way for China to gain leverage in these and all following trade negotiations would be to focus on domestic trade. 

However, even though China has enough resources and people to build an advanced economy on its own, the people simply don’t have enough money to spend. 

Also, China is currently becoming an even more authoritarian state with a president for life and about to roll out an Orwellian social credit point system. 

Totalitarian structures prefer workers, not empowered citizens.
China could react in several ways: it could continue to impose higher tariffs on US goods. 

But then, Chinese companies would still have to buy unique US products such as semiconductors or Boeing jets or be left with a single competitor like Airbus who would exploit Chinese dependencies. This in turn would make Chinese companies less competitive.
China has used boycotts as a tactic in disputes with South Korea and Japan. 

But nationalism could open Pandora’s box and make deals with the US very difficult for the future.
Or China could block US supply chains that are heavily dependent on Chinese components. 

This, however, would severely damage China’s reputation as a reliable supplier to the world – something China can currently not afford.
And lastly, China could devalue its currency to make exports cheaper. 

But doing so would make all imports, such as oil, more expensive and could prompt wealthy Chinese to move their money abroad.

What now?

President Trump is getting support from unlikely sources, such as from Senate Democratic leader Charles E. Schumer (D-N.Y.) who tweeted: “Hang tough on China, @realDonaldTrump. Don’t back down. Strength is the only way to win with China.”
And yet, President Trump will be in serious trouble if the tariffs on US products continue. 

Even though the $11 per citizen wont motivate anyone to march on the streets, the effect of the higher tariffs President Trump announced would hit US economic growth by half a percentage point in 2020 and cost around 300 000 jobs, prompting Republican Paul Ryan to oppose Trump’s tariffs. 

This could jeopardize President Trump's 2020 reelection.

Hence, tariffs are not a permanent option but only a bargaining chip. 

Warren Buffet is right when he says that a trade war would be bad, but “There are times in negotiations when you talk tough.” 

And referring to President Trump’s negotiation approach, he says: “With some people in negotiations, the best technique is to act half crazy.”

Half, but not full crazy. 

Despite President Trump trying to display negotiation power ("I love the position we're in"), China knows that President Trump cannot afford to continue with the high tariffs and has thus signaled little interest in resuming negotiations with the US. 

Zhou Xiaoming, a former commerce ministry official and diplomat said: "China’s stance has become more hard-line and it’s in no rush for a deal.”

Showing little interest and no time pressure is a textbook example of displaying negotiation power. But, as Max Baucus, former US ambassador to China, rightly said: "Those who think the US has leverage do not fully understand China. China thinks long-term.” 

China is a one-party dictatorship after all and the ruling party can do as they please for quite some time.
Thus, President Trump needs to shift away from higher tariffs and look for other ways to increase his negotiation leverage.

The Huawei incident is no coincidence. 

President Trump built it up to serve him as a bargaining chip. 

So it wasn’t surprising when President Trump just said: "If we made a deal, I can imagine Huawei being included in some form of, some part of a trade deal." 

This was President Trump’s most effective move to strengthen his hand. 

But it comes at a high cost, weakening America’s relationship with China.

A better way would be to reach out to the world, as many of America’s closest allies – such as the EU and Japan – have similar concerns with China’s exports. 

Those partners are closely watching the progress of the talks and will likely claim the new rules to be extended to their tradings with China under the World Trade Organization, particularly the changes concerning market access and IP protection. 

China became a member of the WTO in 2001 and is still listed as a nonmarket economy, which allows trading partners to impose antidumping and countervailing tariffs.
These duties are about twice as high as the tariffs President Trump has imposed in the current dispute, with only the antidumping tariffs averaging 151.5 percent. 

A new deal could affect all tariffs. 

China disputed its nonmarket status against the USA and the EU, and has already lost the case against the EU.
So, the US has allies at its doorstep, but President Trump fails to include them in the negotiation. Instead, he alienated them by introducing tariffs on steel and aluminum from the EU, Canada, Mexico and Turkey, which led to a number of trade disputes with America’s closest partners.

Certainly, the US is still a low tariff country but the new tariffs would rise the annual tariff rate from 1.4 to about 3.2 %. 

This could prompt China and the rest of the world to sign more free trade agreements, particularly as the world could shift its focus to the East, isolating the USA even more. 

President Trump has made the US more protectionist, using tariffs as more than a mere bargaining chip. 

But America needs partners more than ever to create negotiation leverage, especially when facing China – be it in the trade war or in the dispute in the South China Sea. 

Meeting Shinzo Abe in Tokyo today, announcing a trade deal with Japan was exactly the right thing to do at the right time.

Yes, the best deals are win-win deals. 

But you can’t reach a win-win solution if you are in a zero sum-game. 

So when everything you gain is lost by the other party and vice versa. 

Such is the case in the US-China trade dispute. 

President Trump’s “anything goes” approach has opened doors to thorough changes. 

But one ace isn’t enough: time is playing against him and President Trump needs more leverage, the strongest one being a team.

Commercial Cleansing

For U.S. to Stay in WTO, China Must Leave
The U.S. and its allies could use the World Trade Organization to force China to alter its trade-distorting behavior—or leave
By Greg Ip

The intensifying trade war between the U.S. and China didn’t come out of the blue. 

American frustration has long been building over China’s failure to live up to its commitments when it joined the World Trade Organization in 2001.
But President Trump’s unilateral tariffs risk a Pyrrhic victory that damages global trading rules that have broadly served U.S. interests. 

There is a more effective solution: threaten China with expulsion from the WTO.
Calling this the nuclear option doesn’t really do it justice since the nuclear weapons don’t even exist. The WTO lacks a formal mechanism to throw out a member. 

But its founding charter, the General Agreement on Tariffs and Trade, includes a section, Article XXIII, that can achieve the same thing. 

It allows a case to be brought against a member for behavior that doesn’t specifically violate the treaty but “nullifies or impairs” the benefits every other country expects to derive from the WTO.
“China’s economy is structured differently from any other major economy in ways that were not anticipated by WTO negotiators,” Jennifer Hillman, a Georgetown University law professor told Congress’s U.S.-China Economic and Security Review Commission in June.
WTO rules don’t deal well with the extensive overlap between China’s government, ruling Communist party and companies. 

Article XXIII was designed “exactly for this type of situation.”
China is more open and market oriented today than before it joined the WTO. 

It has generally adhered to the letter of WTO decisions, including when it loses cases there. 

And it argues much criticism aimed at it is unfounded. 

For example, no formal laws force foreign companies to transfer technology to Chinese firms, it says.
But as Ms. Hillman, a former member of the WTO’s top dispute-settlement panel, shows, that misses the many ways China violates the commitments it undertook when it joined the WTO. 

In the 1994 Marrakesh declaration, which led to the WTO’s creation, members agreed to a trading system based on “open, market-oriented policies.” 

Yet market forces in China are retreating as the state expands.
Foreign companies are routinely compelled to transfer technology to Chinese companies to do business there, in violation of Beijing’s commitments. 

Ms. Hillman notes that even unwritten measures can be challenged at the WTO.

China’s discriminatory licensing treatment and its failure to better police the theft of foreign intellectual property both violate its obligations under the WTO’s side agreement on intellectual property.
China, like all WTO members, is supposed to publish all of its subsidies so that others can respond to them. 

It doesn’t, because many take the form of low-cost loans, raw materials or other inputs to or from state-owned enterprises.
China isn’t sued more often for such transgressions, Ms. Hillman says, because such cases can be hard to win. 

Foreign companies are reluctant to provide evidence because they see foreign competitors as intertwined with the Chinese government, which can retaliate, for example by blocking their expansion. 

Many countries won’t bring cases against China on their own for the same reason, says Chad Bown, of the Peterson Institute for International Economics. 

No such fear exists about suing the U.S.
Ms. Hillman says this is why other countries should bring a “big, bold” case based under Article XXIII; by addressing China’s systemic violations, such a case would depend less on proving smaller, specific violations.
If the U.S., European Union, Japan, Canada, Australia, Mexico and South Korea brought the case jointly and won, China would either have to change its policies, or face WTO-sanctioned penalties on almost all of its exports. 

Ms. Hillman goes further: The findings could be used to amend the WTO charter to explicitly prohibit the offending policies. 

If China couldn’t abide by amendments, it would effectively withdraw from the WTO.
Ordinarily the WTO acts by consensus, so China could just veto the amendments. 

But Ms. Hillman notes that if consensus can’t be reached, the WTO allows amendments with a supermajority of members.
All of this is risky and unprecedented; only a handful of WTO cases have been brought under Article XXIII. (Ms. Hillman says they were much narrower and not relevant to the China situation.) 

No country has left the WTO, much less been expelled.
Putting together a case would take a long time and require the U.S. to work with allies it has alienated with tariffs. 

The Trump administration has little love for the WTO and has reportedly weighed withdrawal, while blocking appointments to its dispute settlement body.
Yet some administration officials are willing to entertain this strategy. 

Does China “want to be a part of the WTO and just behave like everybody else, or don’t they?” Kevin Hassett, chairman of the White House Council of Economic Advisers, said on Fox Business Network last week. 

“And if they don’t, then we, the community of nations, are we going to let them stay in the WTO?” 

Before he became Mr. Trump’s trade ambassador, Robert Lighthizer proposed bringing a case against China under Article XXIII.
Japanese and EU trade officials are meeting with their American counterparts in Washington Friday to discuss China. 

They already have their own reasons for wanting China to change, but now they have another: forcing China to act like it belongs in the WTO may be necessary to keep the U.S. from leaving.

China Threat

China threatens to cut sales of iPhones and US cars if 'naive' Trump pursues trade war
By Tom Phillips in Beijing

China: Donald Trump ‘will be condemned for his recklessness, ignorance and incompetence’ if he wrecks China trade ties

US president-elect Donald Trump would be a “naive” fool to launch an all-out trade war against China, a Communist party-controlled newspaper has claimed.
During the acrimonious race for the White House Trump repeatedly lashed out at China, vowing to punish Beijing with “defensive” 45% tariffs on Chinese imports and to officially declare it a currency manipulator.
“When they see that they will stop the cheating,” the billionaire Republican, who has accused Beijing of “the greatest theft in the history of the world”, told a rally in August.
On Monday the state-run Global Times warned that such measures would be a grave mistake.
“If Trump wrecks Sino-US trade, a number of US industries will be impaired. Finally the new president will be condemned for his recklessness, ignorance and incompetence,” the newspaper said in an editorial.
The Global Times claimed any new tariffs would trigger immediate “countermeasures” and “tit-for-tat approach” from Beijing.
“A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US.”
“Making things difficult for China politically will do him no good,” the newspaper warned.
China’s foreign ministry has used more diplomatic language to caution Trump not to square up to Beijing.
Foreign ministry spokesperson Lu Kang told reporters last week: “I believe that any US politician, if he takes the interests of his own people first, will adopt a policy that is conducive to the economic and trade cooperation between China and the US.”
The excoriating editorial was printed hours after Trump spoke to Xi Jinping. 

The president-elect’s staff said Trump thanked Xi for his well wishes and congratulations on his election victory.
The statement read: “During the call, the leaders established a clear sense of mutual respect for one another, and President-elect Trump stated that he believes the two leaders will have one of the strongest relationships for both countries moving forward.”
However, experts say officials in Beijing are still battling to untangle what a Trump presidency means for relations between the world’s two largest economies but wager he is unlikely to follow through on his most radical campaign pledges such as imposing 45% tariffs on “cheating China”.
Paul Haenle, a veteran US diplomat who is director of the Carnegie-Tsinghua centre at Beijing’s Tsinghua University, said: “The biggest lesson that they draw from watching our presidential campaigns over the years is that he will become more realistic and more pragmatic once he is in the position where he has to govern. That is what they are hoping for when it comes to Trump.”