China Tariffs Won't Make America Great Again

In recent weeks, Western news outlets have detailed the desire among advisers like Robert Lighthizer, Trump's former international trade representative, to pivot to a beggar-thy-neighbor crouch on trade.

The former president has long been fascinated with a 1985 currency deal that still stands today as history's most impactful realignment of exchange rates.

That agreement to push the yen sharply higher versus the dollar was inked at the Plaza Hotel, a New York institution that Trump once owned.

During Trump 1.0, then-Treasury Secretary Steven Mnuchin and advisors like Peter Navarro talked of Trump's desire for a new Plaza Accord, only this time to drive the Chinese yuan sharply higher.

Surely, Chinese leader Xi Jinping would refuse in a Trump 2.0 era. If nothing else, Xi and Premier Li Qiang understand how the 1985 pact exacerbated Japan's asset bubble that exploded five years later and the lost decades that followed.

Today, as China's property crisis fuels deflationary pressures , Xi's team would be loath to repeat past mistakes made by Japan, the US or the broader Group of Seven nations.

Sadly, Biden's administration is de-emphasizing its earlier commitment to prioritize increasing US innovation and productivity.

Moves in 2022 to sign the $280 billion CHIPS and Science Act and others breathed new life into America's semiconductor sector and scientific research. It was a down payment on promises to create new high-tech jobs and put the US back in the game versus China.

It also was a sign of economic realpolitik. In recent years, Xi has thrown trillions of dollars at leading the future of aerospace, artificial intelligence, biotechnology, chips, electric vehicles, green infrastructure, renewable energy and other hot sectors.

Trump barely tried. The massive $1.7 trillion tax cut that Trump's Republican Party enacted in 2017 was more the stuff of 1985 than a strategy to reanimate American competitiveness. It did little to incentivize corporate chieftains to compete with China the organic way - by getting the US economy in better shape.

Nor did Trump's giant tariffs on Chinese goods, steel and aluminum reduce costs for US households or shield companies from global risks.

Unless Team Biden acts quickly to complement its new China tariffs with steps to increase productivity and unleash new waves of entrepreneurship they're destined to fail. Or cause more problems than they solve, including a possible new spike of inflation.

Had Biden's White House moved quicker to roll out a CHIPS and Science Act 2.0, US inflation might be receding rather than becoming ingrained.

The Federal Reserve, it follows, might've long since eased rates by now. Instead, Fed Chairman Jerome Powell's team is grappling with consumer prices expanding at a 3.4% rate year-on-year.

Though a galaxy removed from the 9.1% peak in 2022, prices are still quite a distance away from the Fed's 2% target.

The 162 days between now and the US election on November 5 have global markets entering something of a holding pattern. Amid tight polls and Biden and Trump trying to one-up each other on being tough on China, investors aren't sure what to expect from Xi's government in terms of retaliation .

Last week, Beijing warned that it might impose taxes as high as 25% on imported cars with large engines as trade tensions escalate with Washington and Brussels. A big question now is whether European Union officials will impose their own fresh curbs on China-made imports.

“China's retaliatory trade investigations and warnings are not deterring the EU,” write analysts at Eurasia Group.“Brussels is eager to send a strong signal to Beijing with its EV probe that the EU will counteract Chinese subsidies and overcapacity.”

Andrew Kenningham at Capital Economics argues that“Europe will raise barriers to trade and investment with China in the coming months and years. But policymakers will try to balance conflicting objectives so the result may well be a gradual rather than sudden increase in protectionism with measures targeted at selected goods.”

The EU, he adds, could follow Washington's lead and ratchet up import taxes on Chinese autos. But Brussels may tread carefully out of fear China might restrict mainland investment in Europe.

“Europe is set to increase tariffs and use other ... instruments to de-risk its economy from China,” Kenningham says.“But we think it will do so gradually and with carefully targeted measures.”

Tobin Marcus, head of US politics at Wolfe Research, advises investors to expect“some Chinese response, but that Beijing will aim for proportionality, which means the US fallout should be limited.”

Indeed, Xi and Li might stay more focused on repairing China's underlying financial cracks rather than engage in a destabilizing tit-for-tat trade war on the world stage.

The biggest is a property crisis that's both weighing on growth and scaring off foreign direct investment. Last year, FDI was the lowest since 1993 at just $33 billion as a growing number of firms decoupled their operations from the mainland.

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Though Beijing has a long road ahead to revive real estate, recent policy shifts have economists more optimistic that stronger growth is coming. These include lowering down payment parameters.

“Although some of these measures are unprecedented – the minimum downpayment requirement was never below 20% previously – they are still insufficient compared to our property team's estimates of at least 1 trillion yuan (US$138 billion) funding needed to start digesting excess inventory and to allow new home prices to find a bottom within a year,” says Hui Shan, chief China economist at Goldman Sachs.

Even so, there's a growing sense that Xi's government is finally moving more decisively in the right direction.

“Beijing has already pivoted from building public housing to ensuring the delivery of numerous pre-sold homes to rebuild buyers' confidence, marking a significant step towards cleaning up the big mess,” says Ting Lu, chief China economist at Nomura Holdings.

“However, this is proving to be a daunting task, and we think markets need to exercise more patience when awaiting more draconian measures,” Lu added.

Overall, though, Lu says,“we believe Beijing is headed in the right direction with regard to ending the epic housing crisis.”

A porter walks on a bridge in Chongqing, China with new residential buildings in the background. Photo: CNBC Screengrab

As China works to stabilize its underlying financial system, it will require considerable multitasking on the part of Xi's government to deflect the ways in which the 1980s are making an ill-timed comeback in the West.

Then, as now, such blunt-force trade clashes are as much about politics as they are about economics. But at least they worked to some extent back then.

Four decades on, Team Biden seems to be forgetting the lessons of Reagan, Abe, Trump and others. The biggest is that the best way to take on China today is by building new economic muscle at home.

As November 5 approaches, Biden and Trump are making a pivot down memory lane that the liberal trading order-fueled global economy can ill afford.

Follow William Pesek on X at @WilliamPesek