Matt Turpin’s Substack is deemed by the cognoscenti to be essential reading on China. In this piece, he says that Trump is contemplating doing a deal with China. He then sketches out what that deal might look like. First Mr Turpin gives us his read as to why Trump is a deal-oriented politician: “Unlike other Presidents who have portrayed themselves as steady hands that will bolster U.S. leadership through maintaining the status quo (a liberal, rules-based international order). Trump portrays himself as a President that takes action, that is seeking to change the status quo, and to get a better deal for the American people than what they had before.
It is important to keep in mind that this is his principal appeal to the American people: I can get better deals for you, that no one else can…
He is interested in increasing overall deal flow, creating the conditions where his counterparties (which is literally everyone else in the world) are either incentivized, or feel compelled, to offer up their own deals (and with that, concessions).”
Mr Turpin then gives us his 4 axioms which undergird Trump’s thinking on deals:
“Axiom #1: Everything is interconnected, and deal-making is a dynamic, multi-player game — International relations, like the Manhattan real estate business, is a combination of zero-sum games, positive-sum games, and non-zero-sum games all happening simultaneously with incomplete information and costly path dependencies that come from prior decisions, the laws of nature, and chance. There is no immutable set of rules and no referee to turn to. As soon as you think you have a problem solved, the conditions and rules start changing.
Axiom #2: Deal-making never ends — “Deals” don’t resolve issues permanently, they are just the starting point for the next round of deal-making, which involves threats, the building of leverage, and brinksmanship. There is no ideal status quo or endstate one is aiming for, just the continuous effort to improve one’s position relative to your rivals… See Axiom #1.
Axiom #3: Maximize options by considering all alternatives — Seek to maintain maximum optionality, consider abandoning long-held positions or adopt long-ignored positions, if it might provide better opportunities. But not everything considered will be acted upon… See Axiom #1 and #2.
Axiom #4: Grand Bargains aren’t what you think they are — When describing a potential deal between Donald Trump and Xi Jinping, some folks use the term “Grand Bargain.” What those individuals often mean is a resolution of the issues and tensions between the two countries. In their minds, a “Grand Bargain” will permit things to return to “normal,” in other words, things will return back to an imaginary Golden Age of friendly Sino-American relations. Faith in this concept of a “Grand Bargain” can be found among business leaders and investors whose business and investment models are vulnerable to continued tensions between the two countries. Believing that a “Grand Bargain” will result in the kinds of outcomes these folks desire (even if Trump uses the term “Grand Bargain” or the “Greatest Deal in History”) is a mistake… see Axiom #1, #2, and #3.”
In short, as long as he has power, Trump will be making deals non-stop with everyone who he can drag to the negotiation table. Mr Turpin then speculates on what Sino-American deal might look like. He says that to begin with Trump will – and to our mind this is ingenious – deliberately push weaker Third World nations towards China: “Part of the negotiating strategy for the United States will be pulling economically prosperous third countries into the U.S. orbit with demands to disadvantage the PRC, while pushing economic laggards, like South Africa and Pakistan, closer to the PRC, imposing even more liabilities on the Chinese Communist Party.
This should raise questions for leaders in places like Brasilia, Mexico City, Jakarta, and Riyadh. Folks can repeat the mantra, “don’t make us pick sides” all they want, but picking sides is taking place…
In my opinion, potential partners of the United States who are willing to also impose costs on the PRC are much more likely to get limited concessions from Trump over time. It won’t work for these countries to say: “hey, we will work with you on China, so long as you don’t put pressure on us.” I suspect that this line of negotiation will be rejected out of hand (just ask President Emmanuel Macron of France how well that works). But if countries were to take their own actions and publicly align themselves with Trump on the harm that PRC trade and economic practices are doing, that public support will be rewarded over time.”
Then, says Mr Turpin, Trump will position China as an evil kingdom doing evil things. In fact, this strategy has already been activated and is designed to build leverage against China: “The 10% tariffs on PRC imports last week were directed specifically at Beijing’s unwillingness to halt the flow of fentanyl precursors and its blind-eye to money laundering for drug cartels, but the action in the first 15 days of the Administration is also part of a wider game plan.
The roadmap described in the America First Trade Policy signaled not only this action against the PRC on January 20 (see Section 4(g), “The Secretary of Commerce and the Secretary of Homeland Security shall assess the unlawful migration and fentanyl flows from Canada, Mexico, the PRC, and any other relevant jurisdictions and recommend appropriate trade and national security measures to resolve that emergency.”), but a series of actions that are coming down the pike.
Those actions were initiated with the Day 1 Presidential Memorandum to create optionality and to signal the leverage that President Trump and his ‘trade team’ plan to build over time. While the trade policy is global in scope, the PRC is really the only country that gets its own section of enhanced scrutiny. While President Trump views the whole world as taking advantage of the United States in trade, the PRC is in a league of its own when it comes to harming U.S. interests.”
The next step is to open a window for countries who are in reasonably good shape economically and with whom Trump wants to do a deal: “…other countries have an opportunity to make concessions to Washington early, all while distancing themselves from Beijing and adopting policies that place even more pressure on the leaders of the Chinese Communist Party. In some ways this is how the February 1st actions against Canada, Mexico, and the PRC played out. Even though, the announced tariffs on Canada and Mexico were higher (25%), than those on the PRC (10%), the Canadian and Mexican leaders quickly negotiated with Trump directly, they agreed to take action to address the problems, and Trump agreed to postpone the imposition of tariffs from those two countries. These negotiations tended to isolate Beijing.”
Trump’s blossoming friendship with Putin can also be seen in this light i.e. get Russia to pump cheap natural resources into the global market and isolate Beijing: “Given time, Trump likely believes that he can build a stronger position of leverage against the PRC and can use concessions from third countries to show progress on the overall trade deficit.”
Towards the end of his piece, Mr Turpin says that Trump neither believes that Xi will come to be negotiation table and even if he does so, he (i.e. Xi) won’t honour any agreement that he signs. Hence the purpose of this grand exercise is to (a) isolate China from countries that have a future eg. Russia, India, Mexico, etc; (b) extract concessions from all of these other countries AND force them to squeeze China; and (c) Push weaker economies like South Africa and Pakistan towards China so that China is obliged to prop up their economies. Mr Turpin quotes Trump’s trade guru Robert Lighthizer’s OpEd in the NYT:
“Countries with democratic governments and mostly free economies should come together and create a new trade regime. This system could enforce balance by having two tiers of tariffs.
One higher level would apply to countries outside the group. These would be nondemocratic countries as well as those that insist on using beggar-thy-neighbor, aggressive industrial policies to run large surpluses. Those tariffs over time would reduce those surpluses.
The countries within the new regime would pay lower tariffs, and they could be adjusted over time to ensure balance. When a country in the group begins to run substantial surpluses, the other countries could increase their tariffs on it. Those new higher tariffs would be reduced when the surpluses were eliminated.
This equilibrium would not necessarily be with each country in the group or for every year. The objective would be to have balance within the entire group and over time — perhaps a running three-year period. The details would be negotiated. For example, developing countries that may want to run temporary deficits in order to facilitate investment and industrialization would be permitted to do so.
There are alternatives to tariffs to enforce balance and offset systemic unfair practices, but tariffs have advantages. Almost every country in the world already has a legal and administrative structure to deal with them. And they are flexible and straightforward and would have relatively fewer collateral effects.
Such a new trading system would create a large subset of the global economy that is balanced.” Effectively, Trump is planning to create a new world order where countries who want friendship with America have to fall into line with Trump.
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