Anyone who has taken their children to Disneyworld in the U.S. has felt the pressure to go on "Mr. Toad's Wild Ride." Based on the character from the children's classic, "The Wind in the Willows," Mr. Toad is the reckless scion of the largest building in the forest, Toad Hall. Fabulously wealthy, he buys a car to impress his friends, although he has no idea how to drive. He loads his companions into the vehicle, liberally honking the horn as he careens on a path of destruction, heedless of the damage he does and exhilarated by the fear he engenders.
U.S. trade policy is now on "Mr. Toad's Wild Ride," with the difference being that the Disney version ends where it began, with no harm done. The Trump administration's lack of predictability and indifference to global risk is the new normal. Nowhere does President Donald Trump's trade policy carry a greater risk than in the interplay of the world's two largest economies, the U.S. and China.
Out of disbelief or disorientation, markets have examined the Trump challenge to U.S.-China trade and concluded it is manageable. That conclusion ignores the consequences of a decisive turn in U.S. policy toward Trump's version of "America First" isolationism and trade protection, coupled with his apparent animosity toward China and his failure to view the relationship within a wider context. Further, it rejects the belief that the direction of Trump's China and trade policy is real and durable, even though it was central to the argument that won him the presidency.
Even before he seeks new legislation from Congress, Trump has an impressive range of options in dealing with Chinese trade issues. These include:
- Imposing tariffs on all Chinese imports.
- Declaring China a currency manipulator and then beginning negotiations. If not satisfied with the ensuing changes in China's currency and/or trade policies, he could impose across-the-board or selective tariffs.
- Launching unfair trade cases based on Chinese barriers to U.S. exports and intellectual property violations.
- Tightening the official approval process for Chinese investment in the U.S. and the acquisition of U.S. companies.
- Proposing or implementing changes to make it easier for U.S. companies to obtain relief from Chinese imports, such as through higher tariffs.
These actions items are not mutually exclusive. The Wall Street Journal recently suggested that the Trump administration would soon announce that the countervailing duty law could be interpreted to include currency manipulation as an illegal subsidy. That approach has been considered in the past in combination with the currency manipulator designation; if China did not change its currency practices, the U.S. could implement this measure.
The recent phone call between Trump and Chinese President Xi Jinping reaffirming the U.S. president's support for the "One China" policy has led to speculation that Trump may stand down from his strident China campaign rhetoric in favor of a more accommodating approach to addressing the trade imbalance. With the exception of former President Barack Obama -- who chose not to make China an election theme -- every recent American president has reverted to the mean of competition based on mutual interest after threatening to get tough with Beijing.
That is not a likely outcome under Trump.
The call with Xi helped put a floor under the China security risk associated with abandoning four decades of policy. But the residue of the uncertainty over U.S. views on One China is a deeper distrust by Beijing of any economic or security policy pronouncements coming out of Washington. Unlike U.S. policymakers, Chinese leaders see security and economic issues on a continuum, not as individual and unrelated events.
It would be a mistake to dismiss Trump's protectionism risk in general and anti-China campaign rhetoric as just "Trump tactics." The consistent failure of analysis about Trump policy is that -- as was said of Wagner's music -- it will be somehow better than it sounds. With Trump, it is better to skip policy analysis and lean toward pattern recognition.
There is no evidence for the belief that Trump will drop his anti-globalization agenda, with China as the prime target. To the contrary, his opposition to globalization and anti-China sentiment are among the only consistent themes since his emergence on the political scene in 1988 as a possible presidential candidate.
Trump needs the same states he won in the 2016 election to win again in 2020, so anyone trying to talk him out of a protectionist stance faces a daunting challenge. It is both intellectually dishonest and unfair to the Trump team to imagine that they will fail to do exactly what they have said during the campaign and since. As the president reassured us: "The era of empty talk is over."
For markets, behaving as if a deliberate abdication of U.S. leadership, repudiation of the free trade agenda, and questioning of dollar seigniorage do not matter could be a very bad bet, especially when a penchant for the unpredictable becomes predicable.
In trade policy, some ambient uncertainty may bestow a game theory advantage on the party deploying it. But there is a reason that the cardinal rule of Obama's China policy was "no surprises" in terms of economics or security. A lack of consistency and predictability erodes trust in a relationship where that commodity is always in short supply. That very uncertainty is a conscious preference of Trump policy. This strategy served him well in his insurgent campaign. His inner circle measures success more by how much coverage Trump receives than by its content.
There is a contrary theory, of course. This is the notion that Trump will hire talented stewards of U.S. international economic relations and they will be a moderating influence. People are policy. Only a handful of Trump nominees have so far been confirmed by the Senate out of the over 700 political appointments requiring Senate confirmation. The backlog is the result of the administration having named few nominees beside those at cabinet level.
The slow pace of nominations reflects several key factors: First, that Trump's win was a surprise; second, the challenges of an onerous vetting and clearance process (especially for nominees outside of the mainstream); and third, the fact that staffing the government with Trump's choices does not seem to be an urgent priority for the White House.
Top-down decision making
For the near term, this will fortify the instinct for Trump's inner circle to make all the decisions at the top. The longer the appointment gap continues, the more deeply embedded these habits become -- and the harder to change once Trump's nominees take charge in some 4,000 politically-appointed positions in the agencies.
It is hard to imagine that a new cast of characters will unravel the president's consistently held views that alliances weaken American freedom of action, and that big trade deals are for suckers. For those who seek comfort in the president's business acumen, it is worth recognizing that real estate transactions are unique, because the property sector is unique. Each deal is zero sum and unrepeatable, with each side getting all it can. In security policy and trade, you never win and never lose, because the deal never closes.
As hard as it is for Americans to imagine, other countries have politics too. Elections occur this year in Germany, France, the Netherlands and Iran. China has its version in the Communist Party Congress toward the end of the year. The Trump trade agenda will communicate either confidence or confusion, which will result in reappraisals in Washington or Beijing.
Whether America is great is a judgment best left to Americans, but Chinese leaders will draw their own conclusions about America's economic direction and its role in trade policy based on whether they are confident about what that greatness means for them.
Kevin Nealer advises U.S. companies on emerging market investment as a principal of The Scowcroft Group.