Tuesday , November 21 2017
Home / Jeffrey Frankel's Blog / Deal-maker Trump Can’t Deal

Deal-maker Trump Can’t Deal

Summary:
(August 27, 2017) — Donald Trump has threatened new trade barriers against China while simultaneously depending on Beijing’s help to rein in North Korea’s alarming nuclear weapons program.   These two aspects of US policy toward China are at odds. It feels inappropriate to write a column that treats the two issues on a par.  To state the obvious, the stakes are vastly higher in a potential US-North Korean military conflict, especially when it comes to the real danger that nuclear weapons will be used, but even if they are not.  But we need to consider the Chinese trade issues together with the Korean nuclear issues because the Trump White House does.  (Chief strategist Steve Bannon, for example, had the priorities reversed.  Just before he was fired he said that the Korea issue was a

Topics:
Jeffrey Frankel considers the following as important: , , , , , ,

This could be interesting, too:

Mark Thoma writes Did the Rise of China Help or Harm the US? Let’s not forget Basic Macro

Mark Thoma writes Trade Policy and the Macroeconomy

Jeffrey Frankel writes The Next Fed Vice-Chair

Jeffrey Frankel writes The Choice of Candidates for Fed Chair

(August 27, 2017) — Donald Trump has threatened new trade barriers against China while simultaneously depending on Beijing’s help to rein in North Korea’s alarming nuclear weapons program.   These two aspects of US policy toward China are at odds.

It feels inappropriate to write a column that treats the two issues on a par.  To state the obvious, the stakes are vastly higher in a potential US-North Korean military conflict, especially when it comes to the real danger that nuclear weapons will be used, but even if they are not.  But we need to consider the Chinese trade issues together with the Korean nuclear issues because the Trump White House does.  (Chief strategist Steve Bannon, for example, had the priorities reversed.  Just before he was fired he said that the Korea issue was a “side show” compared with the all-important “economic war with China.”)

It is hard to know if Trump sees the two issues as related.   Quite likely he imagines that he can use trade threats against China as “bargaining chips” to secure its help in dealing with its troublesome ally.  Regardless, he is on the wrong track.  The consequences of this mistake could be disastrous.

The usual defense of Trump’s unprecedented approach to governing is that he is “transactional,” a deal-maker who presumably has bargaining skills because he was a businessman.  Many speak of this transactional approach as if it is a relevant alternative to the traditional assumption that a president should have some regard for rules and principles, and some respect for international alliances and institutions that are favorable to the long-run interest of the US.   They speak of it as a matter of short-term tactics versus long-term strategy.   But there is a serious question whether Trump can pull off even short-term tactical successes.

Despite his career in the private sector, the President acts as if he were unfamiliar with some of the most elementary requirements for successful negotiation.  One principle of bargaining is to consider the game also from the other player’s viewpoint and to think of outcomes that both sides will have reason to view as favorable compared to the relevant alternatives.  Another principle is to build credibility with respect to threats and rewards, so that the other player will perceive a genuine choice of outcomes.

It is probably true that heightened Chinese pressure on Pyongyang up to and including a cut-off of oil supplies, would be the best hope of getting Kim Jung-un to agree to suspend his nuclear program in return for certain security assurances from the US.  But how can the US persuade China to take stronger steps?

Despite Trump’s hope that he can use trade with China as a “bargaining chip” to secure its help, erratic threats from the White House are not the way.  Chinese leaders in China have already learned that they need not take Trump threats seriously. In December, before taking office, Trump challenged the One China policy.  He evidently did not think ahead or take into account that China is more willing to go to war over Taiwan than is the US.  On February 9 he had to reverse himself.  He got nothing for his “bargaining chip” other than loss of face and a bad precedent for future threats.

Another example of a threat that Trump backed down on was his oft-repeated campaign promise that he would name China a currency-manipulator as soon as he took office.  This policy was foolish all along.  If Chinese authorities had agreed to US politicians’ demands that they stop intervening in the foreign exchange market during the period 2015-16, the result would have been a more competitive yuan, not a stronger one.   But regardless of whether there was any merit to the original charge, which Trump repeated as recently as April 2, 2017, he again lost face with the Chinese by suddenly reversing himself a week later.  By now Chinese President Xi Jinping, like most observers, has learned to discount warnings from Trump because they bear such a very low correlation with reality.

The White House is still pursuing aggressive trade policy actions against China.  The measures cover a range with respect to their merits.  An attempt to block steel imports by means of a national security exemption is farcical — flimsy on legal grounds and bad policy on economic grounds: excluding steel imports, if successful, would raise costs for the rest of US manufacturing.  Some other measures have more merit, such as attempts to enforce intellectual property rights.  (On August 18, the White House launched a formal inquiry into whether China is stealing intellectual property.)

But none of these trade initiatives would have much of a positive effect, if any, on the US trade balance, on US real income or employment. And, regardless of the merits, the penny-ante games they are playing on trade policy will not work in favor of enlisting Chinese help in dealing with their neighbor, but more likely will work against it.

In a follow-up column I will address the right way to deal with the North Korea problem.

[An earlier version of this column appeared at Project Syndicate: “Can Trump Deal with North Korea and China?” ]

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

Leave a Reply

Your email address will not be published. Required fields are marked *