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Trump’s legal trouble weakens his hand on trade

Let’s say you’re Chinese president Xi Jinping. President Trump wants to sharply lower the American trade deficit with your country, and he’s imposing punitive tariffs on your imports to get it done. Are you in a hurry to cut a deal?

Hardly. Trump isn’t yet a lame-duck president, headed for the exits. But his intensifying legal troubles, including the recent convictions of two former aides, could weaken Trump politically. Trump’s approval rating is relatively low to start with, which means a marginal drop in his popularity could erode domestic support for his controversial trade policies. That would strengthen China’s hand, which China undoubtedly knows.

For now, Trump is ratcheting up his trade wars. New tariffs just went into effect, as scheduled, on $16 billion worth of Chinese imports, for a total of about $50 billion in Chinese imports subject to new Trump tariffs this year. China has retaliated by placing tariffs on roughly the same amount of U.S. exports to China. Trump has now slapped new tariffs on $107 billion worth of imports, and threatened tariffs on another $608 billion. Trading partners have fought back with tariffs of their own on about $73 billion worth of U.S. exports. Here’s a scorecard on where we stand:

Illustration by David Foster for Yahoo Finance
Illustration by David Foster for Yahoo Finance

A Chinese delegation is visiting Washington this week to negotiate a possible détente. But trade experts don’t expect a breakthrough any time soon. “The two sides are pretty far apart,” says Scott Kennedy of the Center for Strategic and International Studies. “The Chinese are hesitant to lean too far forward. And we have an American president who appears to believe he’s winning the trade war, and it’s beneficial economically and politically for the United States. So expectations are quite limited.”

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If anything, Trump is preparing to increase the pressure on China, with proposed tariffs on an additional $200 billion worth of Chinese imports he might impose this fall. What Trump doesn’t seem to be factoring in is eroding political capital that could turn his tariffs into a personal liability. And the recent convictions of Paul Manafort, his former campaign manager, and Michael Cohen, his former lawyer, make that more likely, not less.

Democrats running for Congress this fall are certain to highlight Trump aides guilty of crimes—which total five, so far—as they try to paint the Trump administration as corrupt. The Trump tariffs will be another factor in the midterms, as Democrats draw attention to farmers, small-business owners and others hurt by more expensive imports and retaliatory tariffs on exports.

That makes the outcome of the midterms a key factor in the ultimate direction of Trump’s protectionist trade policy. If Democrats win enough seats to capture the House of Representatives, it will mark a domestic repudiation of Trump’s trade policy. “If Democrats take the house, it would probably make it harder for him, and would weaken the hawks’ position,” says Kennedy.

Will China stall?

That doesn’t mean Trump would throw in the towel, and rescind all his tariffs. But he might be more likely to strike a face-saving deal, especially if fellow Republicans begin to turn on him in large numbers. That suggests Chinese negotiators are probably content to stall and see how Trump fares in the midterms.

If the Democrats do win the House, that creates a more dramatic scenario—a move to impeach Trump. On the surface, it might seem like that would weaken Trump further. But he might also find renewed support from voters who feel he’s being unfairly attacked, emboldening Trump in his battle with China.

The best outcome for China might occur if Trump leaves office. Vice President Pence, who would replace him, is more of a traditional, big-business Republican who favors free trade and might back down from Trump’s trade wars. The odds of Trump resigning or being forced from office still seem low. But they’re higher than zero. A nation like China that plays the long game would probably be willing to wager a few chips on a low-probability outcome that would nonetheless be favorable to its interests.

White House economist Larry Kudlow and other Trump supporters argue that the trade wars are hurting China’s economy, making the Chinese eager for a deal. And they’re right that the Shanghai stock index is down about 18% this year, while the American S&P 500 is up about 6%. But Chinese citizens are less exposed to the domestic stock markets than Americans are, and by other measures the Chinese economy is humming along. Chinese policymakers haven’t resorted to any of the emergency measures they’ve used to stabilize the economy during prior scares, such as those in 2015 and 2008.

From China’s perspective, then, it probably pays to stall on trade, and see how much trouble Trump finds himself in three or six months from now. If Republicans prevail in the midterms, and maintain full control of Congress, Trump will still need to contend with the report of special counsel Robert Mueller, likely to come out after the midterms. And prosecutors are digging ever deeper into Trump’s business practices and 2016 campaign activities. Trump obviously doesn’t agree, but the best time for him to strike a trade deal with China may be now.

Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.

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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman

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