TRICK OR TREAT

– By Norm Thomas, Board Member, Rational Games

The current stand-off in trade negotiations between the U.S. and China provides an instructive lesson for what happens when tit-for-tat slaps and punches become a proxy for true conflict resolution. It is also a vivid example of the signature game of Rational Games: RED & BLUE.

For context, here’s a brief recap of this summer’s events substituting for meaningful trade talks:

1. 1 August – President Donald Trump tweets that beginning on Sept. 1, the U.S. will impose an added 10 percent tariff on $300 billion of Chinese goods. (BLUE)

2. 3 August – China retaliates by allowing its currency (the yuan) to depreciate significantly. (BLUE)

3. 23 August – President Trump tweets that he will raise the existing 25 percent tariffs on $250 billion in goods imported from China to a 30 percent tariff. (BLUE)

4. 28 August – The China states it will not retaliate for the new U.S. tariff increases. Equity markets rally, bond yields rise, and the yuan stabilizes. (RED)

Both countries’ announcements represent strategic choices. But China ending the retaliatory back-and-forth is less a victory for Trump and more a cessation of mutually unproductive cyclical strikes – one hopes in favor of more substantive collaboration.

The current trade conflict centers on two major points of dispute:

1. A pronounced and ongoing lack of reciprocity in terms of investment, tariffs and market access.

2. Technology transfer and high-tech industrial policy, including the Made in China 2025 initiative which China views as vital to its campaign to transform the country into a high-tech power.

Ideally, the U. S. and China should find ways to engage in constructive bilateral negotiations around both issues. China has already signaled its willingness to do this. After the U.S. published a list of 1,300 Chinese products to receive 25% tariffs, China’s Vice Finance Minister said, “Both sides have put their lists on the table, now it’s time for negotiations.”

Assuming such negotiations do commence, will they focus on just finding an equitable level of tariffs between sides, or will they tackle the deeper issues at the heart of the conflict? The reciprocally mounting tariffs are merely symptoms of the conflict and do not supply benefit for either side: a classic Lose-Lose outcome.

At the core of the conflict is China’s fervent wish to change its self-identity. China has heavily invested in ambitious plans to move away from a mud-and-bicycle backwater toward becoming a (if not the) global super-power. This is, of course, a direct challenge to the U.S.’s long-held self-identity, and one that it dearly doesn’t want changed. Slapping each other with tariffs and taxes is a surrogate battle for these identities. Like children in a schoolyard brawl, rather than exploring what’s mutually possible they escalate punches, each hoping the other side cries “Uncle” first.

In the end, it really doesn’t matter who cries “Uncle” first because neither side has come any nearer to its goal. The clarity that comes from genuine collaboration has been dodged entirely and nothing lasting has been achieved. It is not clear what President Trump wants, or what China is willing to give. Whether this now becomes a sustained conflict or some kind of negotiated settlement will turn on: (a) How many more concessions the Chinese are willing to offer which may impact their evolving identity, and (b) what the Trump administration finds acceptable for retaining America’s identity. So far, both questions remain profoundly unclear and the process profoundly broken.

There’s always an off-ramp from the road of escalating punches…when there’s clarity. But Tweets are limited to 140 letters. So far, Trump has not articulated what is realistic and what China could do that would make the U.S. stop imposing tariffs. Unsurprisingly, it’s unclear what a negotiated outcome looks like. Although both countries want a way out of this, the U.S. has set it up in a way that makes it very difficult to stop.

In his famous book Art of the Deal, Trump recommends never relying on only one main possible solution when reaching an agreement: “Having a backup strategy in your pocket at all times can increasingly improve your chances of becoming a winner.”

Tariffs should have been his back-up strategy.