Yesterday, president Trump laid out the stakes in the ever-escalating trading war between the US and China, in typical laconic fashion: "We may want countries to choose between us and China" (a topic discussed further here), with the White House adding that "The ball is in China’s court. China needs to make a deal with us."
This strategy, of forcing the world into "us (or US) vs them" camps first emerged last week when Trump reduced reciprocal tariffs for all countries except China, something we highlighted at the time.
A few days later, this now appears to be the official strategy in the global trade war.
As the WSJ reports, the Trump admin plans to use ongoing tariff negotiations to pressure U.S. trading partners to limit their dealings with China, according to people with knowledge of the conversations.
The idea, as we laid out in not so many words, is to extract commitments from U.S. trading partners to isolate China’s economy in exchange for reductions in trade and tariff barriers imposed by the White House. US officials plan to use negotiations with more than 70 nations to ask them to disallow China to ship goods through their countries (the so-called "transshipment" loophole), prevent Chinese firms from locating in their territories to avoid U.S. tariffs, and not absorb China’s cheap industrial goods into their economies.
Those measures are meant to put a final stake in China’s already sinking economy (which somewhat ironically got a boost in the first quarter as its export partners front-loaded purchased goods ahead of the tariff price surge which is already in place and which will put a deep freeze on China's manufacturing empire) and force Beijing to the negotiating table with less leverage ahead of potential talks between Trump and President Xi Jinping. The exact demands could vary widely by nation, given their degree of involvement with the Chinese economy.
US officials have already presented the idea in early talks with some countries according to WSJ sources, who added that Trump himself hinted at the strategy on Tuesday, telling the Spanish-language program “Fox Noticias” he would consider making countries choose between the US and China in response to a question about Panama deciding not to renew its role in the Belt and Road Initiative, China’s global infrastructure program for developing nations.
According to the WSJ, the brain behind the strategy is Treasury Secretary Scott Bessent, who has taken a leading role in the trade negotiations since Trump announced a 90-day pause on reciprocal tariffs for most nations—but not China—on April 9.
Bessent pitched the idea to Trump during an April 6 meeting at Mar-a-Lago, the president’s club in Florida, said people familiar with the discussion, saying that extracting concessions from U.S. trading partners could prevent Beijing and its companies from avoiding U.S. tariffs, export controls and other economic measures.
The tactic is part of a strategy conceived by Bessent to isolate the Chinese economy that has gained traction among Trump officials recently. Debates over the scope and severity of U.S. tariffs are ongoing, but officials largely appear to agree with Bessent’s China plan.
It involves cutting China off from the U.S. economy with tariffs and potentially even cutting Chinese stocks out of U.S. exchanges. Bessent didn’t rule out the administration trying to delist Chinese stocks in a recent interview with Fox Business. Still, the ultimate goal of the administration’s China policy isn’t yet clear.
Bessent has also said there is still room for talks on a potential trade deal between the U.S. and China. Such talks would have to involve Trump and Xi. White House press secretary Karoline Leavitt read a new statement from Trump during Tuesday’s press briefing suggesting a deal with China isn’t imminent.
“The ball is in China’s court,” Leavitt said when reading Trump’s statement. “China needs to make a deal with us. We don’t have to make a deal with them. China wants what we have…the American consumer.”
Indeed it does, as do all the countries that China uses for tolling and/or transshipment, so if the White House truly cracked down on all possible ports of entry to US consumers, who account for 70% of the roughly $30 trillion in US GDP, then China will have no choice but to either concede, or pursue two other approaches which we laid out before: devalue the currency or unleash a massive fiscal stimulus.
It also isn’t clear that the anti-China line has entered into negotiations with all nations. Some countries haven’t heard demands from U.S. negotiators related to China, although negotiations remain in early stages. Many expect the Trump administration to raise China-related demands sooner or later.
Bessent has shown his desire for anti-China pledges from U.S. trading partners before. In late February, he said that Mexico had offered to match U.S. tariffs on China as part of negotiations over Trump’s tariffs on Mexico imposed because of the fentanyl trade. Bessent called Mexico’s offer a “nice gesture,” but the idea didn’t find much traction with the administration.
Since then, Bessent has taken a more central role in trade negotiations, assuming a lead in talks over reciprocal tariffs after Trump announced his 90-day pause on April 9. The Treasury secretary is slated to meet with Japan’s economic revitalization minister today and has laid out a list of nations he thinks could soon reach deals with the U.S., including Japan, the U.K., Australia, South Korea and India.
Of course, China isn't waiting for the trap to close in on it, and is conducting its own trade diplomacy. This week, Xi traveled to Vietnam, a key U.S. trading partner hard-hit by Trump’s tariffs, and signed dozens of economic pledges with the Hanoi government, although at the same time Vietnam has hinted it could balance out its trade balance with the US by purchasing substantial military equipment from the US.
China views Trump’s reciprocal trade gambit as an opportunity, Peter Harrell, the former senior director for international economics on former President Joe Biden’s National Security Council, said on a panel discussion Tuesday at Georgetown Law.
But China’s ability to counteract U.S. trade policies is limited, Harrell said. While the U.S. remains a “massive net importer,” China is reducing its imports from the rest of the world and focusing on self-sufficiency. The problem, as Michael Pettis has laid out, is that China is years if not decades behind having a vibrant consumer class of its own. Which only leaves mercantilism for now.
And that's why Beijing is scrambling to inflict as much financial damage on the US as possible - up to and including dumping US Treasuries in hopes of sending the dollar tumbling and prompting narratives about "the end of the US dollar reserve status" while maintaining the impression that all is well domestically as discussed here.
China “isn’t going to replace the U.S. as a source of demand for the products that a bunch of these developing countries…make,” Harrell said. “So the economics of this are going to prove challenging for China, but I think we see them playing the politics of this reasonably savvily.”
https://www.zerohedge.com/markets/bessents-grand-strategy-use-tariff-negotiations-isolate-china-rest-world
