Trump’s protectionist swagger is no match for China’s financial muscle

Over recent months, though, Trump has dialed up Sino-US trade tensions to a whole new level. The US has proposed up to $150 billion of tariffs on Chinese goods – some of which could bite from next month. China retaliated, warning of tariffs on American exports if these US measures are imposed.

Trump then countered, demanding a “written plan” from Beijing to take $100 billion more in US exports. In recent days, these demands have escalated, with the White House now targeting a $200 billion cut to the $375 billion trade deficit by 2020.

The US wants China to open its market for financial services and reduce limits on foreign shareholding, while significantly tightening rules on intellectual property theft. President Xi Jinping’s top economic adviser is now in Washington for the second round of trade negotiations this month. There are signs of movement from China, but very few. As the world looks on nervously, amid fears of an international trade war, the US Ambassador to China says the two sides remain “very far apart”.

Trump’s trade policy is often dismissed as ignorant economic nationalism. In her UnHerd documentary, my colleague Juliet Samuel questions that view. The President’s bombastic rhetoric could be a bargaining ploy, she suggests, with the White House using lurid threats to try to push China towards less protectionist outcomes. I’d say that’s right – and would go further.

The US trade regime is far from perfect. America itself can be protectionist – and, of course, uses trade sanctions for broader geopolitical purposes. But after years of Chinese currency manipulation, patent law violation and state-sponsored corporate espionage, the usual forms of trade diplomacy have completely failed. Trump is right to come out swinging.

Now the world’s biggest manufacturer, China has proved adept at capturing overseas markets and buying up foreign companies – but with a marked lack of reciprocity. China has developed so fast, becoming so powerful so quickly, that the broader global economy – particularly previously hegemonic Western economies – have struggled to cope.

The truth is that, while Trump is hogging the headlines, Beijing holds most of the cards. The pertinent question now isn’t if Trump will do trade deals with China. It’s whether China will do trade deals with Trump.

As Beijing has turned the screw, Trump has made concessions. Last weekend, ahead of these latest Washington talks, Trump tweeted a pledge to help ZTE, a Chinese telecom giant, “get back into business, fast”. The US Commerce Department recently blocked American firms from selling parts and services to ZTE, which makes smartphones and other telecommunications equipment, after the firm apparently breached US sanctions relating to North Korea and Iran – causing ZTE, which employs 75,000, to halt operations.

Trump’s surprise volte face, for no apparent gain, has been spun as a “grand gesture”, part of the President’s “bait and switch” negotiation tactics. But it results from direct Chinese pressure. Over recent weeks, Beijing has ramped up inspections of US pork exports to China – with the implied threat that such “enhanced checks” could extend across US agricultural produce. Lucrative US scrap metal exports have also been effectively halted after the Chinese customs authorities suddenly stopped their cargo checks.

Reports have also emerged of Ford vehicles being held up at Chinese ports, with the US carmaker being asked for extra checks on emission components. In this tense trade stand-off, Trump may be doing the shouting, but it is the Chinese who are flexing their muscles – harming domestic US industries that Trump needs and winning concessions.

This reflects an underlying reality often unacknowledged. China has huge influence over America, not least due to its pivotal role in keeping the US financially afloat. Beijing officially owns around $1,200 billion dollars’ worth of US Treasury bills, making it by far the world’s largest creditor to Washington. On top of those holdings, swathes of US government debt is held via murky funds domiciled in Belgium – many of which lead back to Beijing.

The US national debt is now over $20,000 billion dollars, having more than doubled over the last decade. That’s 104% of GDP. As US debt grows, and with China soaking up vast amounts of new Treasuries each year, any signal Beijing might slow its purchases would send US markets into an immediate tailspin. That gives Beijing enormous power – leverage Trump will understand.

China is calling the shots on several fronts. Trump has lapped up plaudits for his role in brokering peace talks on the Korean Peninsula, for instance. Only a fool would fail to welcome the US President’s upcoming bilateral meeting with North Korea’s Kim Jung-Un. The meeting, though, is part of a broader Beijing-driven plan to ease the US out of the Pacific basin.

Dependent on China for food and fuel, Kim does what he is told – which is why this summit is happening. Trump will be allowed to claim some credit for denuclearising the Korean peninsula, as a pretext for downsizing the US naval presence in the region. China wants both outcomes, of course – and Trump, too, can live with this, as part of his “America First” strategy.

The same principle applies on trade. Trump is clumsy, his rhetoric often shocking. But he is, above all, a transactional President. Xi knows that China, now economically strong and financially flush, finally needs to open its doors to the world. And if Trump wants to claim credit for making that happen, in return for ongoing US access for Chinese goods, it’s a “win-win”.

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Liam Halligan writes his multiple-award winning weekly “Economics Agenda” for The Sunday Telegraph. A panellist on CNN Talk, he has previously worked for The Economist, Financial Times and Channel 4 News.

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