US-China: Trump will give Xi a chance

• We have consistently written about our expectation that neither ‘blanket’ nor ‘average’ 60% tariffs on China are likely to materialize under the second Trump administration.
  • Instead, we foresee a two-pronged approach of:
    • ‘Punishment’ for China’s failure to comply with its Phase One trade deal commitments – in the form of ‘early’ but fairly ‘small’ (7.5-15%) tariffs; and
    • ‘Prevention’ of future Chinese leverage over the US’s economic and national security – particularly in times of crisis (such as COVID) – in the from of ‘high’ (likely higher than 60%) but: A) ‘slow’ (phased-in, backloaded), and B) targeted (to select sectors) tariffs.

• A key question now pertains to how early one should expect the first of those two categories of tariffs (‘punishment’) to kick in:
  • The arguments for ‘Trump won’t waste any time’ are:
    • China has had four years to fulfill the Phase One trade deal, and didn’t.
      • Per former US Trade Representative Robert Lighthizer himself: “China is in clear violation of our agreement due to its abject failure to meet many of the systemic change commitments and the purchasing targets” (Source)
    • Expecting China to meet its commitments is ‘a fool’s errand’.
    • Giving China ‘one last chance’ opens the door to continuous can-kicking.
  • The arguments for ‘Trump will give Xi a chance first’ are:
    • President-elect Donald Trump has clearly said he intends to do so: “My first call – I’m going to call up President Xi. I’m going to say, ‘you have to honor the deal you made”.
    • This is also in line with other reports from Trump-affiliated circles:
      • “Reviving that Phase One agreement could be the starting point […] under the new Trump administration, according to the America First Policy Institute” (Source)
      • “If Trump gets re-elected,” said Matt Turpin, a visiting fellow at the Hoover Institution who served on Trump’s National Security Council, “on day one, he would ask how China lived up to the Phase One trade agreement” (Source)
    • Meanwhile, China is already working hard to convince the incoming president to take the time to talk, and Trump is known to appreciate a bit of pageantry.
  • We believe the latter arguments are more convincing, and therefore expect that Beijing will be given ‘one last chance’ to fulfill its Phase One trade deal commitments before suffering ‘snapback’ / punitive tariffs.

• This having been said, we expect that said-repriev will be short-lived, as:
  • China’s hill to climb on purchase commitments is extremely steep (see here).
  • The ‘other’ carrots Beijing might seek to turn to are unlikely to ‘jibe’ with the broader political mood in the Trump 2.0 era.
    • For instance, we are very skeptical of the notion that “The incoming president has signaled that he would be open to Chinese investment in the US, which could potentially form the basis for some sort of agreement” (Source).
  • The next administration will have ample legal tools to snap tariffs back on short notice once it so decides:
    • “One […] technical point: China didn't meet its phase one commitments & the "remedy" under phase one was always an increase in the section 301 tariffs.  So I am pretty sure I know how Lighthizer et al could raise tariffs on China” (Source)