Trump’s Economic Iron Curtain Against China

A poignant new Netflix documentary called American Factory—ironically produced by former U.S. President Barack Obama and first lady Michelle Obama—shows what happened when a Chinese owner took over a shuttered U.S. plant in Ohio. The result was a disturbing culture clash in which U.S. workers were thrust into laboring 12-hour days at less than half their previous wages and found themselves pressured to adhere to the company line like good communists.

To many of the China hawks advising U.S. President Donald Trump, and to the president himself, that experience sums up the delusion that previous U.S. administrations—including Obama’s—have labored under vis-à-vis China. Since China’s opening to the world in 1978 and the increasing marketization of its economy, Americans have sought to integrate Beijing into a rules-based, Western-style economic system—and they’ve found they can’t, the hard-liners say. China and the United States cannot share the same economic and geopolitical space: The living standards and social and ideological expectations are just too different. And, meanwhile, the Chinese are stealing America’s jobs, its intellectual property, and its prosperity, or so the argument goes.

The solution that Peter Navarro, Trump’s trade advisor and the administration’s chief China hawk, has pushed the president to adopt is to force a dramatic decoupling from China—to reverse, in effect, 40 years of advancement in globalized trade and finance, rip up global supply chains, and destroy a geopolitical working relationship between Washington and Beijing that has progressed in fits and starts.

That attitude appeared to lie behind a startling series of tweets that Trump sent out on Friday after China announced a new round of tariffs on $75 billion of U.S. goods, declaring: “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far better off without them. … Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

Trump is hardly empowered to “order” U.S. companies anywhere, and while the Dow Jones Industrial Average plunged more than 600 points Friday on Trump’s words, many observers wrote off the tweets as just the latest tantrum by an angry president who realizes that his reelection chances are in greater jeopardy thanks to his lengthy trade war with China. But, meanwhile, Trump is making it a lot tougher for U.S. corporations to do business with China by imposing tariffs. And since he began his trade war with China, some experts have suspected that his goal all along was something far more dramatic than just a new deal. By demanding extreme terms from Beijing—in effect asking it to discard its system of state-subsidized capitalism as well as observe Western laws and rules regarding intellectual property and contracts—he was dooming the negotiations to fail and advocating a divorce from China, one that would utterly transform the global economy.

Such an outcome, in the Trump team’s imagining, would somehow restore the prosperity that many Americans remember from the days of a well-paid industrial middle class that wasn’t beaten down by a “China price” and seemingly limitless supply of dirt-cheap labor, especially from East Asia.

Most economists and trade experts, however, say that is sheer fantasy. In seeking to decouple the United States from China, Trump will succeed at only one thing: Decoupling the United States from the global economy. And that will mean a long-term future of being outcompeted and impoverished—by Europe, Japan, and ultimately China as well.

“They can do a lot of damage but they can’t get their wish,” said Adam Posen, the president of the Peterson Institute for International Economics, who has believed that decoupling was Trump’s true goal since before he became president. Posen and others point not just to the loss of the huge China market, but also to the loss of global prestige for U.S. brands and the likelihood that European companies will swiftly move in to take America’s place.

Michael Pillsbury, a sometime advisor to Trump on China, told Foreign Policy he firmly believes that the president is not in favor of a complete divorce from China, and that Trump still wants a trade deal. “Despite his angry tweets this morning, he’s not saying decouple. He’s saying he wants U.S companies to look into new alternatives,” Pillsbury said. He added that Trump and his team were incensed when, back in April, the Chinese side appeared to back away from a commitment to enforce “legally binding” protections against trade abuses in court, which was contained in a 150-page tentative agreement. He said he also believes negotiations have been held up by a new set of hawkish advisors around Chinese leader Xi Jingping.

“I just spoke to the president a few days ago,” said Pillsbury, who despite his own reputation as a national security hawk on China opposes the idea of decoupling. “I’m still optimistic there can be a deal.”

In recent speeches, former Treasury Secretary Henry Paulson—who relied on Chinese goodwill to maintain huge investments in U.S. bonds and securities during the financial crisis a decade ago, thus helping to prevent a recession from becoming a depression—has warned that the Trump administration is trying to place “an economic iron curtain” between the United States and China. The hawks in Washington, by identifying China as a national security threat as well as an economic one, are discussing Cold War-style regimes for the denial of technology—one reason the Trump administration has sought to pressure other nations to drop purchases of Huawei products in the race for 5G networks.

But as the flagging Huawei campaign shows, the environment now could not be more different from the Cold War—for the simple reason that most countries, including Western allies, still want to be on Beijing’s side of the curtain, doing business in China. And, ultimately, Trump will probably have to realize that.

“Trump has painted himself into a corner where he in the end will have only two options—accept a weak agreement or continue the war,” said William Reinsch, a China trade expert at the Center for Strategic and International Studies.

“‘Surrender’ is not in his vocabulary, and somebody is going to tell him sooner or later that ordering companies to leave is not within his power. On the two options, if he continues the war, the Democrats will say failed policy, collateral damage, poor negotiator, you’ve caused all this harm and have produced nothing, etc., etc. Instead, he goes for an agreement, says it’s the greatest ever, and declares victory,” said Reinsch, a former senior Department of Commerce official and former president of the National Foreign Trade Council. “That’s why I think the drama is going to continue until September or October 2020, at which point he will attempt to pull out a miraculous victory—or something he will call that.”

The Trump hawks are right to suggest that previous administrations have been somewhat naive about China, which is taking a much harsher nationalistic attitude under Xi. Since the Tiananmen Square massacre three decades ago, the hoped-for full integration into the world order hasn’t happened; instead, Beijing has largely gamed the system since it was welcomed into the World Trade Organization in late 2001. And neither Democrats nor Republicans properly understood the economic, social, and political upheaval that would result from post-Cold War globalization, which made conditions more equal between developed and developing countries, but at the cost of creating more inequality within the advanced countries, thanks to the flood of industrial jobs that fled to cheaper shores, especially in China and Southeast Asia. Under U.S. trade policy embraced by both the Democratic and Republican parties, these trends were dismissed as a minor trade-off in exchange for cheaper consumer prices. So Trump is probably correct to say that American workers have been paying, to some degree, for China’s rising prosperity.

And as those trends became more onerous, culminating in the populist, protectionist backlash that produced Trump on the right and progressive alternatives on the left such as Sen. Bernie Sanders, China hawks have become increasingly vociferous about containing China, slowing it down, disengaging from it—anything to prevent what seems to them the inevitable rise of a rival superpower.

But most observers say that, whatever the cultural differences between the U.S. and China, to decouple them at this point would be akin to separating conjoined twins who share the same internal organs—and would end up hurting the United States far more than China. Decoupling, said Reinsch, “is harder than the people writing about it think, and it will be incomplete at best. Both economies are going that way anyway—Xi is giving speeches about China needing to go it alone and there are a number of non-Trump reasons for U.S. companies to leave.

“But our sense here is that what is most likely is that companies with a substantial investment in China will stay there and serve their China and Asia markets from there, but will serve their U.S. markets via non-China supply chains.”

Beyond that, even marginal capitalism and openness integrate and enmesh China into the global system. Obama—who sought to pressure China on these issues in a more multilateral way by negotiating the Trans-Pacific Partnership (which Trump has abandoned)—said during a visit to China in 2009 that “power in the 21st century is no longer a zero-sum game,” as it was during the Cold War. The U.S. and Chinese economies are so integrated that their bond creates a modern-day form of mutual assured destruction, or MAD, if they separate.

For the world economy as well as for the United States, most experts would say that this version of MAD has more benefits than not.