Trade was the word on everyone’s lips during my recent trip to Washington, D.C. The mood was grim.
The U.S. and China trade war is going to get worse before it gets better. Our working assumption is now that all Chinese imports into the U.S. will be subject to tariffs sooner or later.
The initial 10% rate on the latest tariffs being applied to up $200 billion of Chinese import appears to be a precursor for more swingeing measures.
It seems to be an attempt to give U.S. companies time to adjust and soften the impact on consumer prices before Christmas. It’s very likely to be followed by a 25% rate in 2019.
China is not backing down. Its relatively modest retaliation of lower tariff rates on $68 billion should be seen as a way of lessening the domestic impact of the tariffs as opposed to any attempt to diffuse the situation.
The natural course of things to come is a gradual ratcheting up in tariffs until they are in place on all Chinese imports into the U.S. The most likely process would be for President Trump to ask the U.S. trade representative to China to compile product groups and conduct public hearings for new measures. This has typically taken between one to two months in previous rounds to get from announcement to enactment so full tariffs could be in place by the end of the first quarter of 2019.
The downbeat prognosis is justified by the lack of an obvious catalyst for either side to come together in the near future.
The G20 summit in November is one opportunity for U.S. President Donald Trump and Chinese President Xi Jinping to call a temporary truce. But it is not clear – least of all to the Chinese – exactly what the U.S. administration wants from this dispute.
President Trump is certainly unlikely to back down any time soon. Republican party polling and focus groups suggest relatively solid support among members for the president and his trade policy at this stage of the confrontation.
The one factor that could cause Trump to change course is if the trade war really starts to show up in the U.S. economic data. While it is clear that the trade war will hurt the economy eventually, it is not clear when this will happen.
Next month’s mid-term elections will not help the situation. The consensus is that the Democrats will take the House of Representatives, and the Republicans will retain the Senate.
Trade is an area where the president can act with relative autonomy.
Trade is an area where the president can act with relative autonomy. So the loss of the House of Representatives or Senate in next month’s mid-term elections is unlikely to put Trump off.
It could even embolden him. With less scope to fulfill his legislative agenda, Trump may double down on trade in order to appeal to his base ahead of the 2020 Presidential election.
Bizarrely, given how far off it seems to be, the 2020 election might be another reason why trade will stay at the top of Trump’s agenda. Trump is likely to run for no other reason than he has submitted his paperwork and set up a re-election website.
The one thing that was clear from the trip is that Trump really cares about his base and they care about trade. So beating the drum on trade is going to be the simplest way of giving his core voters the impression that he is working for them.
But, beyond that, the biggest conclusion from the trip was that Washington is still struggling to understand how this President works and what his behavior means.
There are very few people close to him and even the most sophisticated of pundits on Capitol Hill keeps on being wrong-footed. This should keep us humble and be in the front of our minds when we try to rationalize the President’s behavior.
A version of this article originally appeared in Investment Week in the UK on October 16, 2018.