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Trade escalation won't bring deal

Stocks plunged on Monday as investors weighed the consequences of an escalating conflict over trade.

Trump has said that the U.S. will impose a 10 percent tariff on an additional $300 billion worth of Chinese goods on Sept. 1, unless China starts acceding to his demands. If he follows through, the president will have levied tariffs on virtually all imports from China, including toys, smartphones and other consumer goods that had previously been spared. China has promised to retaliate if the new measures go forward. The government reportedly told state-owned enterprises to suspend imports of U.S. agricultural products and on Monday allowed the yuan to weaken below 7 to the dollar for the first time in more than a decade.

Trump’s logic is simple, albeit wrong. He thinks that China, which had agreed to continue talks in Washington next month, is playing for time; he’s particularly irked that it hasn’t put in the big agricultural orders President Xi Jinping supposedly promised when the two met in June. The new tariffs help Trump look tough as he hits the 2020 campaign trail while imposing further pain on China’s limping economy. Any hit to U.S. output will presumably encourage the Federal Reserve to cut rates further – something Trump has been urging for months.

Yet the new levies are no more likely to produce the deal Trump seeks than his previous rounds. The cost of tariffs is paid by U.S. consumers and businesses, not China (and that’s not counting the billions in compensation the government has had to shell out to farmers hurt by Chinese retaliation). U.S. manufacturers have been forced to realign their supply chains and are struggling to secure crucial inputs. Meanwhile, any jobs leaving China are moving to low-wage countries such as Vietnam, not back to the U.S.

Trade tensions have dented China’s growth, but they aren’t the main reason for its recent slowdown. China’s leaders, moreover, have ways to prop up output and employment. They appear to have calculated the costs of additional tariffs and found them preferable to compromising on policies they see as fundamental to their economic model. They’re also figuring that they can bear the domestic political costs better than Trump, who is acutely sensitive to both rural voters and gyrations in the stock market.

Finally, the way Trump imposed the latest tariffs confirms Chinese officials’ greatest fear about striking a deal: They think he’s incapable of sticking to it. Trump acted just after trade talks in Shanghai had ended relatively amicably, and apparently against the advice of his top advisers.

The U.S. has legitimate complaints about China’s economic behavior. Beijing should be helped to spin concessions on those issues as being in China’s interest – as many, in fact, would be. If the U.S. had concentrated on making Chinese pledges as airtight as possible, the two sides might’ve made some real progress. Issuing unrealistic demands and painting any prospective compromise as a Chinese surrender will only stiffen resistance.

That’s not all. Over the past year, the U.S. should have been building leverage by enlisting allies and working through the World Trade Organization. Instead, the Trump administration has postured.

Striking a deal won’t get any easier as the U.S. enters full campaign mode. And additional interest-rate cuts won’t avoid the economic damage being done. Trump has backed himself into a corner, and the U.S. will pay the price.

This editorial first appeard in Bloomberg.