BEIJING – President Donald Trump's initial retreat from his trade-war threats has handed hard-liners in China a victory. A longer, pricklier trade war and stiff Chinese resistance to economic reforms could result.
Trump on Friday outlined a partial trade deal that deferred new tariffs on $160 billion a year in Chinese-made goods, a move that would have had him taxing virtually everything China sells to the United States. He also agreed for the first time to broadly reduce tariffs he had already imposed on Chinese goods, halving tariffs on more than $100 billion a year worth of products like clothing and lawn mowers — a striking about-face for a protectionist president who last year described himself as a "tariff man."
The White House called the deal a win. It said China had agreed to buy large quantities of American agricultural goods, giving farmers hit by the trade war some needed relief. It also means the U.S. economy will not suffer from new tariffs threatened for Sunday on Chinese-made goods that Americans love to buy, like toys and smartphones.
But the deal may be seen by Xi Jinping, China's top leader, and his hard-line supporters as vindication of the intransigent stance they have taken since the spring, when a previous pact struck by Chinese moderates fell apart. Since then, China has asked that even a partial deal include tariff rollbacks. U.S. officials resisted, debated, then relented.
In essence, a year and a half into the trade war, China seems to have hit on a winning strategy: Stay tough and let the Trump administration negotiate with itself.
"The nationalists, the people urging President Xi Jinping to dig in his heels and not concede much, have carried the day," said George Magnus, a research associate at Oxford University's China Center. "I don't see this as a win for market liberals."
Friday's announcement makes it likelier that China will resist any further concessions next year, and perhaps beyond. It seems to affirm the belief, held by many Chinese officials, that Trump will back off from his trade-war threats if markets tumble, or if his supporters in agricultural states suffer too much.
Even before Friday, Trump had delayed or canceled tariffs four times this year. Such policy shifts could ultimately encourage Beijing to draw out negotiations even further, to reach the best possible deal.
The effects could ripple beyond trade. Friday's deal essentially forestalls discussion of curtailing the Chinese government's support for its homegrown industries, which China hawks within the Trump administration see as posing a direct threat to American businesses.
More broadly, the agreement could further marginalize already weakened Chinese moderates who want Beijing to ease state control over its economy.
Western economists warn that bloated state-owned industries are holding down the Chinese economy and soaking up money and attention that should go to private firms. Beijing's tighter control could also make it harder for American companies to do business there.
Yet a tougher Chinese stance carries big risks for Xi. China's growth has already slowed, in part because of the trade war, and it could sag further as the clash drags on. Significant American tariffs remain in place, keeping pressure on major companies to move their manufacturing in China elsewhere.
"Xi Jinping really needs the trade deal, both for economic reasons — to boost the flagging economy — and to strengthen his own position," said Willy Lam, a specialist in Beijing politics at the Chinese University of Hong Kong.
But for now, Xi appears to have a deal in hand that may reassure people in China that the worst of the trade war is over — although some legal details still need to be ironed out, and could prove troublesome. But the broad contours of the agreement are likely to satisfy Communist Party hard-liners who insist that Beijing make no compromises that would limit industrial policies aimed at turning China into a high-tech competitor with the United States.
Under Xi, who took the party's reins of power seven years ago, the hard-liners have prospered. He has started a huge, government-driven spending spree to make sure China becomes a leading player in the industries of tomorrow, from semiconductors to electric cars.
One state-owned enterprise has erected 110 vast hangars, computerized design studios and other buildings on the outskirts of Shanghai to build commercial aircraft in competition with Boeing. Dozens of Chinese cities are erecting subsidized factories to churn out semiconductors in competition with American giants, as well as with companies in Taiwan and South Korea.
Trump administration trade hawks and American business groups say state-subsidized Chinese companies could wipe out international competitors. They point to the solar panel industry, which boomed in China thanks in part to almost unlimited financing from state-owned banks. Factory closings in the United States and Europe have left China in almost total command of that industry.
But Xi and his backers argue that China needs those subsidized industries. Trump's moves this year to deprive Chinese companies of American-made chips, software and other essential goods of the modern age, after allegations that the companies were linked to human rights violations or intelligence-gathering activities, underscored for many in Beijing that China depends too much on the United States.
The Trump administration had a two-prong strategy for dealing with China's industrial policy. Its first choice was for China to agree to tight limits on subsidies. The second was to leave steep tariffs in place across a wide range of goods as a kind of informal anti-subsidy measure, offsetting China's support for its homegrown companies and giving American and other companies room to invest and compete in the United States.
The administration has now stepped back from the first position. And by cutting tariffs at all, the administration has shown a new willingness to retreat — although the products covered by the halving of tariffs on Friday were fairly low tech.
The issue of China's state subsidies was more prominent in earlier talks. In April, Xi's market-oriented team of trade negotiators accepted preliminary compromises in Washington that would have left a lot of tariffs in place and rolled back some Chinese laws that the White House said favored Chinese companies unfairly.
But Xi sided with hard-liners who demanded that the deal be torn up and renegotiated, because the deal did not include a broad reversal of tariffs that had already been imposed and because it demanded detailed changes in laws that were seen as violations of national sovereignty.
In October, trade negotiators reached another tentative deal without tariff rollbacks, only for hard-liners in Beijing to again demand revisions again and a removal of tariffs.
People close to China's economic policymaking process say that as the trade talks progressed this past week, the mood among Chinese officials gradually shifted from deeply worried to cautious and finally, by late in the week, jubilant and even incredulous that the hard-liners' goals had been achieved.
Even the major concession to the United States — China's agreement to buy more agricultural goods — could enhance the power of the Chinese state. Those purchases would most likely be carried out by state-controlled companies, preserving their indispensable role in Chinese commodities trade.
China hard-liners are not the only ones who benefit from Friday's deal, of course.
American companies and farmers are likely to find it easier in the coming months to sell everything from semiconductors to soybeans to China, making corporate sales goals and executive bonus targets easier to meet.
Trump himself may face only limited criticism. The companies likely to be upset about backing away from the issue of Chinese subsidies are based largely in states that vote Democratic, like California's technology companies. Those businesses may also benefit in the short term from lower tariffs.
Still, the deal on Friday pushes the thorny issue of China's state support for its industries down the road, most likely complicating relations between the world's two largest economies for years to come.
"In the long term, the U.S. is going to have to address the practical impact, and not just the political impact, of the industrial imbalance caused by China's policies," said Malcolm McNeil, an international trade lawyer at the firm Arent Fox who advises Chinese and American companies.