Markets rejoiced as the US and China reached a temporary truce of sorts in their trade war Monday, sharply reducing tariffs in a “90-day pause.”
For Trump, this was a climbdown. He had severely escalated the trade war against China, starting on “Liberation Day” when he began hiking tariffs through the roof — all the way to 145 percent — in a series of tit-for-tat exchanges.
Now, during the pause, he’ll lower that to 30 percent, and China will roll back their retaliatory measures and leave a 10% tariff level in place. (Essentially, both sides are rolling back tariffs to where they were before Liberation Day, plus a new 10 percent levy.)
Whether this will result in a permanent cessation of the US-China trade war or Trump will eventually get bored and start hiking tariffs again remains to be seen. Talks will proceed, but while Trump claimed Monday that China had agreed to “open up” to US businesses, details about that were nowhere to be found in Monday’s agreement.
What is clear is that the rollback only heightens the contradictions and incoherence about just what exactly Trump is trying to do here.
The problem is basically this. If Trump’s tariffs are too big, they damage the economy and cause market chaos. But if they’re too modest, they won’t be impactful enough to produce the grand rebalancing of the global trading order — much more manufacturing in the US, no more dependence on China — that his team wants.
It seems that Trump’s team is searching for a sort of Goldilocks tariff level — not too hot and not too cold, but just right. But that’s likely impossible to achieve.
The existing global trading order is very entrenched, and there’s no way to dislodge it without causing severe economic pain. Modest tariffs won’t produce the dramatic reordering that tariff proponents have hoped for. All they will do is make things more expensive.
The tariffs are terrible – and such small portions
Trump’s obsession with hiking tariffs on US allies and other friendly countries like Canada has gotten a whole lot of bipartisan criticism.
But the policymaking establishment has been much more sympathetic to the idea that the US-China trade relationship needs a rethinking.
Many Democrats and Republicans believe the US’s dependence on China for critical goods, materials, and supply chains would be disastrous if the two nations come into serious conflict. There’s also a widespread belief that China is undercutting (or outcompeting) the US economically — that the rise of cheaper Chinese manufacturing has helped destroy domestic manufacturing, hurting jobs and sharply reducing Americans’ ability to make things in the US.
Some security and trade hawks have gone so far as to call for a “decoupling” between the US and China — a separation of our two economies.
That’s easy to say in the abstract, but far, far more difficult and painful to actually do. China is the US’s third-largest trading partner. Many US companies manufacture there, and far more are deeply reliant on Chinese component parts. There’s no way to reorder the complex global supply chain without very severe disruption. Huge tariffs mean prices go up both on imported products, even on US-made goods that use imported parts.
For a while, Trump and his advisers were claiming that they understood the risks, but that it was worth doing anyway because short-term pain would lead to long-term gain.
There are many reasons to doubt whether said long-term gain would ever have materialized. But now, Trump has shifted, apparently believing the short-term pain is too painful.
The grand ambitions of reorganizing the global trading order appear to have, for now, been downsized. And Trump is now just seeking some sort of a deal he can claim as a win.
All told, this shift is probably a good thing or at least better than the alternative. The idea of reshaping the global trading order through tariffs alone was always preposterous and likely to produce terrible results. But at this reduced tariff level, you can forget about restoring manufacturing in the US and reducing dependence on China.
In other words, these tariffs are like that joke about the restaurant food in Annie Hall: The food is terrible — and such small portions!
