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Click here to read an earlier analysis of China's options in the trade war stalemate.

Gary Li provided editorial support on this article.

Bite after the Bark

While previously believed to be just a form of coercion that would bring China to the negotiating table, the latest round of U.S. tariffs on $200 billion of Chinese imports demonstrates that the Trump administration is no longer issuing empty threats.  

The United States has not shown any signs of reopening official trade negotiations, which have halted since Commerce Secretary Ross’ unfruitful trip to Beijing in early June. China has also not shown any indications of backing down from their thus far clearly stated position.

An earlier piece of APCO analysis pointed out that a negotiated settlement in the near future is highly unlikely. The terms set by the Trump administration go beyond Beijing’s red lines, and the ideological fixation on trade is also seeing the U.S. attack traditional trading partners such as Germany and Canada. This deadlock, coupled with a divided White House trade team, suggests that whatever position Washington assumes in waging trade battles with Beijing will come down to the personal calculations of President Trump himself.

From indicators observed so far, it seems that Trump is betting that China has more to lose from these trade battles due to its large trade surplus with the United States. He is also gambling that his constituents will not feel the bite of tariffs until after November 6, following mid-term elections for control of the House of Representatives. The costs of these two wagers vary. 

Wager 1: Who Blinks First

Trump hopes that China’s brittle, state-orientated economic system will not be able to absorb the shocks from a fully-fledged trade war.

Washington may be counting on China being unable to withstand any frontal assaults against its exports. Early indicators do suggest that China is more concerned than the United States regarding the economic impact of the disputes. However, there are structural features of the Chinese economy in 2018 that suggest China may be more resilient than the Trump administration assumes.

Financial Volatility

China’s stock markets have fallen sharply relative to the S&P 500, and the yuan is steadily depreciating against the dollar. But this volatility can be managed by China’s Communist Party, and is occurring against the backdrop of a wider financial de-risking campaign. Trade frictions with the United States are simply a shock to an already overheated system.

Shifting Economic Model

China is no longer the export-reliant world factory that Trump’s advisers may have led him to believe, and has been shifting its economy towards domestic consumption rather than manufacturing based exports. Indeed, net exports in 2017 accounted for just 2% of China’s GDP, down from 9% in 2007.

Wager 2: Delayed Pain

Appear to deliver on promises before mid-terms and use the delayed impact on United States consumers to gain more time for waging a trade war.

What Trump is really banking on is the bigger bet that his strident supporters living and working in American heartlands targeted by retaliatory Chinese tariffs won’t feel any economic pain before November 6.

Short Term Gain

Economists tend to agree that the microeconomic impact of retaliatory Chinese tariffs on American harvests and wallets is likely to be minimal in the short-term. But a macro view of the long-term suggests that the economic and political costs of combative U.S.-China trade relations will include erosion of consumer confidence and reduction of business investment.

Trade Above All

This bet explains that for the Trump administration, U.S. tariffs on Chinese products are not just a threat deployed to bring China to the negotiating table. Instead, escalatory U.S. trade policy with China as well as a host of other trading partners serve a long-held campaign promise to restructure trade relationships to benefit U.S. manufacturing and make America great again. On this, the administration is consistent. Tariffs therefore are part of a wider domestic political strategy to mobilize Trump’s base to the polls in November and ensure that the Republican Party maintains control over the House of Representatives, suggesting that long-term costs will be managed after that control is assured.

Fingers Crossed

These dynamics suggest that a more conciliatory U.S. approach to trade with China and other traditional trading partners is unlikely in the immediate term. Political and economic costs incurred in in ratcheting up combative trade policy are likely to be minimal between now and mid-term elections. De-escalation is likely to occur only once the very real negative impacts of full-blown trade war with China materialize and once the administration has assured control of the legislative branch. Only then will Trump see if his bets paid off.

Until that time, international trade policy deployed to serve domestic political ends reveals a range of potential next steps:

  • Washington may recalibrate its negotiating position with China and other trading partners once Republican control over the House of Representatives is assured. The sequencing of this recalibration is likely to be directly related to the emergence of any economic pain felt by the U.S. electorate.


  • Assuming this economic pain is felt in the medium-to-long term, the Trump administration may restart trade negotiations with Beijing in 2019 to ameliorate the frustration expressed by domestic constituents. Such a restart of trade negotiations could manifest in the form of resumed talks on a U.S.-China Bilateral Investment Treaty, a long-held aspiration in both Washington and Beijing.


  • Such a Treaty would enable both Presidents Trump and Xi to demonstrate leadership and statesmanship to domestic political constituents. It would enable President Trump in particular to portray adherence to his touted image of a deal-maker and master negotiator.


  • On the flipside, should China manage to withstand tariffs and show no sign of compromising its political-economic framework even after the mid-terms, the Trump administration will need to either soften its negotiation conditions or increase the scale of its attacks. The latter, more belligerent option, will depend on how effectively the administration sells its handling of the issue to the U.S. electorate, and the level of economic pain that the latter suffers due to the tariffs.


  • In selling escalatory trade policy to an electorate frustrated with tariffs, the Trump administration may seek out scapegoats on which to pin the blame. While it is too early to tell who these scapegoats might be, U.S. firms with operations in China could become one likely target. This possibility suggests that U.S. firms operating in China should be mindful of their exposure to the bilateral politics of Washington and Beijing.


Kaj Malden
Kaj Malden

Kaj Malden is an associate consultant in APCO Worldwide's Washington-based Public Affairs practice. Prior to this role, Kaj was based in APCO’s Shanghai office, where he specialized in government relations and strategic communications. Read More

Caroline Meinhardt APCO
Caroline Meinhardt

Caroline Meinhardt is a policy analyst in APCO Worldwide’s Beijing office. She specializes in government affairs and policy monitoring and analysis and is a co-editor of APCO's China Reform Watch. Read More