What the U.S.-China Trade War Is Really About

  • 17 Jul, 2019

The tariffs get all the attention, but the dispute is mainly over national security and geopolitical power.

Tyler Cowen July 16, 2019, 7P00 AM GMT+8

This is what the trade war is about.
Photographer: Bloomberg/Bloomberg

During my recent travels in Taiwan and China, I was asked repeatedly: What does America really want out of the trade war with China? In the interests of mutual understanding, here is my brief guide to Americaʼs conflicting and complicated motives. Spoiler alert: The tariffs may get more attention, but the critical issues are Huawei and Taiwan.

Start with President Donald Trump, who himself has mixed motives. He has favored tariffs and protectionism since the 1980s, when he focused on Japan. For better or worse, protectionism seems to be one of Trumpʼs most sincere views. Yet Trump also fancies himself a deal-maker, and he would like to strike a deal with China to cement his legacy and boost his re-election chances in 2020.

Those two motives are in tension with each other. More and higher tariffs limit the chances of making trade deals.

Then consider the U.S. ruling elite, namely the policy community, business leaders, media and the establishment wings of the two major political parties. All of these groups are likely to favor free trade and trade agreements, although they are willing to make exceptions for national security reasons (this exception, as we shall see, turns out to be important for the prospects of a China deal). There is also a subset of the Democratic Party that identifies closely with labor unions and does not favor free trade.

The new player in the trade game is the national security establishment. It is very worried about the rise of China and the spread of Huawei equipment around the world, and it does not have much of a stake in free trade or the stock market. Furthermore, the national security establishment is used to getting its way; when bargaining with other U.S. political agents, compromise is not its natural inclination.

Finally, there is the U.S. electorate. American voters are not treating the trade war as a major electoral issue, at least so far, thereby giving additional leeway to the other parties involved.

Now for some speculation about what a deal might look like. To see how all these groups can affect its contours, ask yourself: On which dimensions is a deal possible?

When it comes to tariffs and Chinese purchases of U.S. goods, a deal between the two countries should be possible. The national security establishment will not object, the protectionist Democrats donʼt run the show, and I predict that dealmaker Trump will triumph over protectionist Trump. (To scratch his anti-trade itch, he can and will impose other tariffs elsewhere.) The Chinese also could offer stronger intellectual property enforcement and greater domestic market access for U.S. financial institutions, as they have already been doing.

One conclusion from all this is that the trade wars really arenʼt about tariffs. Regardless of whether you approve of any particular bargain, tariff disagreements are relatively easy to solve.

So that means the trade war is really all about Huawei and Taiwan. If the U.S. persists in trying to eliminate Huawei as a major company, by cutting off its American-supplied inputs and intimidating foreign customers and

suppliers for Huawei equipment, it will be difficult for the Chinese to accept. In this case, the reluctance to make a deal will be on the Chinese side, and the structure and relative power of the various American interest groups are not essential to understanding the outcome.

The question, then, is whether the U.S. national security establishment, and in turn Congress (which has been heavily influenced on this question), will accept a compromise on Huawei. Maybe that means no Huawei communications technologies for the U.S. and its closest

intelligence-sharing allies, but otherwise no war against the company. That is the first critical question to watch in the unfolding of this trade war. The answer is not yet known, though it seems Trump is willing to deal.

The second major question, equally important but less commented upon, is Taiwan. China has long professed a desire to reunite Taiwan with the mainland, using force if necessary. If you belong to the U.S. national security establishment, and you think a confrontation with China is necessary sooner or later, if only because of Taiwan, you would prefer sooner, before China gains in relative strength. And that militates in favor of the trade war continuing and possibly even escalating, as the U.S. continues to push against China and there is simply no bargain to be had.

It is far from clear what a U.S.-China deal over the status of Taiwan could look like. How much Americans actually care about Taiwan is debatable, but the U.S. is unlikely to abandon a commitment that would weaken its value as an ally around the world. And unlike with Huawei, it is difficult to see what a de-escalation of this issue might look like. 

So: If the Huawei and Taiwan questions can be resolved, then the trade war should be eminently manageable. Now, does that make you optimistic or pessimistic?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Tyler Cowen at tcowen2@bloomberg.net

To contact the editor responsible for this story:

Michael Newman at mnewman43@bloomberg.net