The risk of Trump's trade war gambit with China
Trump has become increasingly frustrated with a serious lack of progress in China's trade talks after believing he had made progress in his meeting with Chinese President Xi Jinping on the sidelines of the G20 leadership summit in Osaka, Japan, according to several officials familiar with Trump's thinking. Since then, the President and others have become more pessimistic over the past week that a trade deal is not possible in the short term, and Trump has acted against the advice of key economic advisers.
President's decision to label China a currency manipulator came months after top economic advisers, including Finance Minister Steven Mnuchin and his former adviser Gary Cohn, repeatedly tried to talk Trump out of provocation, arguing that it could be more harmful the long run.
The political challenge for Trump now is to keep his 2016 campaign promise to beat China, while risking to undermine his own economy and record stock market, his favorite measurement barometer from the presidency.
"He now faces this dilemma that these actions against China and other partners are bad for the US economy, bad for the global economy," said David Dollar, a former Treasury Department official currently at the Brookings Institution.
"There can be a lot worse, and it has a huge impact on the prospect of re-election for a sitting president, "Dollar said. "On the other hand, he promised to be very tough on China."
Larry Kudlow, Trump's top economic adviser, tried on Tuesday to send an insurance message to the markets and tell reporters that the door is "open for further negotiations with China." He said the administration is still planning a meeting with Chinese retailers in the White House in September.
Trump's aggressive strategy to raise billions and billions of tariffs to push China to the negotiating table has already shown signs of a slowing US economy, and around the world, as businesses have sidelined, reluctant to make investments and purchases due to persistent uncertainty.
Still, the presidents seem to be betting on the fact that he has some insurance that the Federal Reserve will continue to cut interest rates to avoid the economy starting to cool off and that a two-year budget deal will significantly increase spending to help to stimulate the American economy as he heads into the 2020 elections.
"He takes a big risk," said Maurice Obstfeld, an economics professor at the University of Berkeley. "He's betting that the economy is strong enough and that the Fed will be reactive enough that he can wave these commercial and currency wars and come out a winner without hurting the economy too much, but he may be fooling himself."
China stops?
After declaring in March 2018 that "trade wars are good and easy to win," Trump opened the door late last month – publicly acknowledging for the first time – that China is likely to slow down any deal until after the 2020 elections, where they speculate that they will want to wait and see the result first.
And so far, China seems to be more willing to absorb more financial pain rather than appear to cave in to Trump's demands, as it seems to strategically play a long game that is likely to surpass even another presidential term for the former New York real estate mogul.
"He is absolutely right that the Chinese are trying to stop until after the election," said Derek Scissors, a China expert at the conservative think tank American Enterprise Institute, who has occasionally advised the Trump administration.
"Just right," the case added. "They are open about it in private conversations. Their story is that they do not believe he is a reliable trading partner."
Aggressive Strategy
As a candidate – and even now as president – – Trump has sought to portray himself as the country's top leader who can win the best deals and will fight to protect the country's best interests . But both of these goals have often been at odds with each other as he has worked to make a deal with Xi, which is facing its own domestic pressure now to bow to US demands.
Trump has repeatedly pulled up the usual Washington playbook in favor of a more unorthodox approach to his economic policies, especially on trade.
In May, he made the unexpected decision to leave talks and threaten tariffs on China after dealers changed the landscape, with a capsule of confidence that decision makers, let alone markets and investors, could confidently predict the future.
"What he is doing is trying to create a picture of a president fighting foreign enemies to protect the US economy, especially the trade industry," says Obstfeld. "This is his kind of political persona to be a fighter on the trade front."
CNN's Kaitlan Collins and Kevin Liptak contributed to this report.
