85: Trump-China Negotiating Dramatics and Even More Tariffs

Episode Summary

Executive Summary: The episode analyzes the May 2019 collapse of U.S.-China trade talks and the sudden tariff escalation from 10% to 25% on $200 billion of Chinese imports, with the threat of extending 25% tariffs to the remaining imports. The hosts argue the breakdown may reflect mistrust, miscalculation, and competing domestic pressures rather than a simple bluff, and they assess near-term market uncertainty, consumer-price risks, and historical significance.

Main Topics: Collapse of the U.S.-China trade talks (Priority: 5/5): The episode reconstructs the sequence from optimistic reporting to President Trump’s tariff hike tweet and the breakdown of talks in Washington, emphasizing that negotiations failed despite expectations of a deal. Why the talks broke down (Priority: 5/5): The hosts present competing explanations: Chinese backtracking, U.S. hawkish pressure, and mutual misreading of signals, while noting the process is opaque and much remains unverified. Tariff escalation and immediate market uncertainty (Priority: 5/5): They explain how the tariff increase created confusion for importers, especially because shipment timing determines whether goods face 10%, 25%, or possibly 0% tariffs if a deal emerges. Who pays tariffs and consumer effects (Priority: 4/5): The episode reviews evidence that U.S. importers initially bear most tariff costs, but warns that higher, broader tariffs are more likely to be passed through to consumer prices, especially for goods like clothing and electronics. Agricultural retaliation and policy response (Priority: 4/5): Trump’s proposal to buy agricultural products and ship them as humanitarian aid is critiqued as inefficient, distortionary, and likely inconsistent with WTO rules, even though farmers remain politically important. Historical context of U.S. tariffs on China (Priority: 5/5): Chad Bown compares the tariff rate trajectory over time, showing how Trump’s measures pushed average U.S. tariffs on Chinese goods from low single digits toward levels resembling pre-WTO/1930s-era protection.

Key Arguments: The tariff hike was not merely a bluff; the fact that tariffs actually increased strongly suggests the threat was real. The collapse likely involved mutual miscalculation: China may have thought the U.S. was desperate for a deal, while the U.S. may have perceived Chinese backtracking. The negotiations were opaque, so claims that China reneged or that the U.S. was forced into a hawkish stance cannot be fully verified from the public record. Short-term academic evidence suggests U.S. importers, not Chinese exporters, have borne most tariff costs so far at the border. Broader and higher tariffs are more likely to affect consumer prices directly, because they would hit finished consumer goods as well as intermediate inputs. Trump’s idea of using tariff revenue to buy farm goods for foreign aid is economically inefficient, potentially wasteful, and not a good way to assist farmers or poor countries. The latest escalation pushes U.S.-China trade relations close to historical extremes, with discrimination against China far exceeding tariffs on other countries.

Data Points: Tariff rate on $200 billion of Chinese imports: 10% to 25% - Raised at midnight Thursday/Friday during the episode’s focal escalation. Existing tariffs on Chinese imports before the episode’s escalation: 25% on $50 billion and 10% on $200 billion - The baseline tariff structure described at the start of the episode. Potential next tariff tranche: 25% on roughly $300 billion of additional Chinese imports - Threatened if no deal was reached within about a month. Average U.S. tariff on imports from China before 2018: About 3% - Historical baseline mentioned by Chad Bown. Average U.S. tariff on imports from China after 2018 measures: About 12% - After earlier Trump-era tariffs including washing machines, solar panels, steel, aluminum, and the $250 billion tranche. Average U.S. tariff on imports from China after May 10 escalation: About 18% - Updated average after the latest tariff hike. Average U.S. tariff if all threatened tariffs are imposed: About 29% - Projected rate if the remaining Chinese imports face 25% tariffs. Average tariff if China were not in the WTO: About 38% - Used as a historical comparison to pre-WTO/Smoot-Hawley-style tariffs. Estimated covered trade subject to tariffs: Around $250 billion - The episode’s opening description of current tariffs in force. Chinese negotiator travel timing: Liu He arrived Thursday, not Wednesday - Used as evidence that the talks were not progressing smoothly. Dinner-only visit: One evening in Washington - Highlighted to suggest limited room for substantive talks.

Pivotal Quotes: "I am the tariff man." — Donald Trump: Quoted after the May 5 tweet announcing tariff escalation and framing Trump’s approach. "The tariffs paid to the USA have had little impact on product cost, mostly borne by China." — Donald Trump: From the tweet read aloud on the episode; the hosts note it contains inaccuracies and oversimplifications. "It would take both leaders to break the deadlock." — Ling Wei: Summarizing the scale of the remaining gaps between the U.S. and China after the talks stalled.

Implications: Businesses face major uncertainty over landed costs, sourcing, and contracts. Consumers may see higher prices if tariffs expand to finished goods. Politically, the dispute hardens positions and may push U.S.-China trade toward a prolonged, more confrontational phase.