Donald Trump is once again roiling the waters, this time with his talk of tariffs aimed to reverse US trade deficits. The word “brinkmanship" is being freely bandied about, but are we really in a situation that can be described as such?
Brinkmanship refers to a high stakes confrontation carried out at the edge of a precipice. Every moment brings the participants closer to an inevitable disaster. Yet the adversaries continue to hold firm, in the attempt to coerce the other to back down. Inherent in brinkmanship are (a) the magnitude of harm awaiting all parties in case a resolution is not speedily achieved, and (b) the establishment of credibility by each party through giving up of control on their ability to back off. It’s like saying: “I know we will both die if this continues but, sorry buddy, you’re the one who is going to have to back down, since I have gone way past the ability to stop myself."
No doubt, the risks of the present standoff are sizeable. The disruption of networks of global trade would lead to a level of uncertainty and cost escalation that would bring the world economy to a breaking point. To understand the level of interdependence, consider that 37% of US imports from China consist of parts and components on which US-based manufacturers rely.
And yet, for a situation to be classified as brinkmanship, we also need both parties to give up a measure of control. Unless they do so, each knows the other can pull back and the threat loses its credibility. On one side we have China which, more than ever before, after Xi Jinping’s assumption of greater powers, is a dictatorship. Hence, it can step back from the precipice at one word from its supreme leader. On the other side we have Trump who is a democratically elected president.
And yet, Trump did not base his decision on a resolution of the US Congress. To implement new taxes on imports of steel and aluminium, Trump relied on Section 232 of the Trade Expansion Act of 1962 that allows the president to bypass Congress and impose tariffs by executive order.
In other words, we are not in a situation where matters are the outcomes of various institutional processes that represent the will of nations, and are therefore irretrievable. Indeed, the sense of the US Congress seems to be overwhelmingly against the measure, with 107 House Republicans having written to the president opposing broadly applied tariffs. At a systemic level, there is not a whiff of the loss of control that is necessary to classify an episode of confrontation as one of brinkmanship, either on the US side or the Chinese side. The bottom line is that the situation was conjured into being by one man alone, and that man has the power to undo the policy.
Except, of course, that the man in question is Donald Trump.
Trump’s leadership style is characterized by a willingness, indeed a preference, for hewing to contrarian positions, an appalling absence of understanding (he started the trade war by imposing 25% tariffs on steel in which all the top suppliers are US allies and China only a bit player), a highly exaggerated sense of self (he expected all his suppliers to come to the table one by one to re-negotiate terms), and a willingness to settle for appearing to “win" when his gambits fail, as they often do (witness his tall claims on North Korea or on Obamacare).
Such a person would be only too willing to retreat once he understands that a trade war will spell the death of the stock market, provided he can be made to look good in his retreat. Even if he is not quiescent, in which case this is indeed an episode of brinkmanship, there is some good news on the Chinese side. The Organisation for Economic Co-operation and Development (OECD) estimates that around a third of the content of US imports from China is actually of foreign origin. Chinese value added in all its exports to the US taken together is approximately $329 billion—only 2.7% of China’s $12 trillion economy. Hence, there is plenty of wiggle room for Trump to appear to have got his way without significantly hitting China.
In a speech made on 11 April, President Xi promised to reduce tariffs on imports of cars (lowering import duties on cars will benefit relatively few US companies, most of which already produce and ship their vehicles from within China) and improve its record on protecting intellectual property, a promise that he has been reiterating for close to two years. The speech was immediately followed by appreciative tweets from the US president.
The events on tariffs, together with the standoff on North Korea, reveal a leadership style that operates almost exclusively through the creation of apparent crises, as much for theatrical effect as for real impact. Other actors in the world economy need to get adept at the art of face-saving manoeuvres to make the US president look good.
The following is a suggestive checklist: (1) Repackage existing measures to make them appear as concessions; (2) Make concessions that are redundant given the existence of substitute provisions addressing the same issue; (3) Choose concessions that can be reversed when matters die down; (4) Play for time till ground realities change; (5) In case “4" does not work, go back to “1" and start again.
In the next two years, expect many re-runs of China and North Korea. Not all will be as straightforward as the present trade standoff.
Rohit Prasad is a professor at MDI, Gurgaon, and author of Blood Red River. Game Sutra is a fortnightly column based on game theory.
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