Speech Delivered to the Association of Foreign Intelligence Officers: Why Tariffs? Why Sanctions? Does Trump Really Have a Game Plan?
Good evening. I am delighted to join you this evening to talk about what President Trump is trying to accomplish with the tariffs, the trade battles, and the sanctions. What his ambitions are, how he expects to achieve those aims and, finally, his odds of success.
First, I want you to imagine a U.S. President, who, in partnership with his national security advisors and Treasury officials, comes up with a plan. The plan, simply, is to stimulate the hell out of our economy by cutting taxes and loosening regulations and then use the resulting growth and good times as a cudgel to mend the predatory and threatening behavior of our rivals and enemies.
I could be talking about Ronald Reagan, who cut taxes his very first year in office, got the economy humming and subsequently directed a substantial build-up in military spending and innovation which most people think led to the demise of the Soviet Union.
But I’m actually talking about Donald Trump. I won’t for a moment pretend that everything that has transpired over the past two years was part of a master plan, but I know for a fact that weaponizing the U.S. economy to confront out adversaries – has been a core strategy directing the president since the first day he took office.
I’m not alone. Columnist Mark Leonard reported recently in the Financial Times that Beijing officials and intellectuals have told him they believe that President Trump is engaging in “creative destruction” aimed at “renegotiating the world order on terms more favorable to Washington.” Leonard claimed the Chinese see Trump as the “first U.S. president for more than 40 years to bash China on three fronts simultaneously: trade, military and ideology.” They describe him as a “master tactician.”
That’s high praise from a people accustomed to planning 100 years in the future. That’s not what you hear from the New York Times.
To Donald Trump, businessman, the U.S. has not taken advantage of our strengths. We have many strengths, of course, starting with our intelligence professionals like you – but to Trump, the fact that we have the deepest pockets on the planet is clearly number one.
And, by the way, he is correct. Under President Obama it became fashionable in some circles to belittle our ability to grow – remember Larry Summer’s theory of “secular stagnation”, which led to the notion that 1%-2% growth was the new normal? Or remember Obama claiming Trump would need a “magic wand” to lure manufacturing jobs back to our shores?
Refuting that pessimism, growth has recently accelerated to better than 4% and, over the past year, we have added 327,000 manufacturing jobs, the most of any 12- month period since April 1995. And, by the way, for all the excitement about China’s extraordinary expansion over the past decade, the U.S. is still the world’s biggest economy, by far. Our GDP last year of $19.5 trillion was nearly 40% larger than China’s.
More important to the current trade battle underway, our imports from China last year totaled $523 billion; our total exports were $187 billion. Exports make up 20% of China’s economy; that compares to only 12% for the U.S. You tell me – who has the most to lose?
Today we have a booming economy which has created the best jobs market in more than a decade, rising incomes and unparalleled optimism among consumers and small business owners. According to Gallup, we also have a nation more satisfied with the direction of the country than at any time during the Obama presidency.
Against that backdrop, the White House is confidant this is the perfect time to reset our relations with allies and enemies alike. Let’s talk about how that is working.
There are numerous theaters in which the White House is using our economy to achieve foreign policy objectives, but I will focus on three: China, North Korea and Iran.
I’ll start with China. I probably don’t need to convince this group that China represents a threat to the U.S. and to the world order unlike any other. China is rich has increasingly used its riches to build its military presence and extend its influence. Trump is correct that much of China’s progress has come at our expense. China has blocked our companies from entering their markets and in numerous ways circumvented rules set down by the WTO, which China joined in 2001.
In the simplest terms, they do not play fair. For starters, they impose higher tariffs than we do on 20 of 22 major categories of goods. More important, they have persistently stolen our technology. Various studies have estimated the loss of IP to China as amounting to $225 billion to $600 billion per year.
It hasn’t all been industrial espionage and cyber invasions. China’s cheating for years took a simpler path. Generally, the Chinese have allowed U.S. companies to set up shop only if they took on a local partner, with whom they of course had to share manufacturing know-how, marketing and other techniques.
In these ventures, everything would go swimmingly for a couple of years, and then sales would mysteriously start to fall off, clobbering profits. The U.S. owner would discover that the local partner had set up shop down the road, replicating the joint venture, and was busily undercutting the original enterprise. This was not an unusual event – this was routine, and one of many methods by which the Chinese took advantage of U.S. firms. Now, of course, the hijacking of our patents and know-how has gone much higher tech.
In part, I blame our biggest corporations for letting China get away with enormous cheating. The Chamber of Commerce crew was so hungry to enter the fast-growing consumer market in China that they turned a blind eye, and encouraged numerous U.S. presidents to turn a blind eye, to China’s misdeeds.
After all, the first report on China’s massive IP thievery – authored by former Intel head Dennis Blair and by Jon Huntsman – was published in 2003. Our officials have known for many years what was going on.
That brings us to today, when China’s ambitions are becoming more apparent, and more alarming. I’m sure you’re aware of China’s increasing military build-up in the South China Sea which some interpret as Beijing challenging U.S. naval supremacy in the Pacific. Last month, China launched its first aircraft carrier, part of its rapid build-up of naval capabilities.
China has also launched its grandiose “Belt & Road” project, which to some means an effort to strategically extend its financial power and influence. The trillion-dollar project is projected to span three continents, 70 nations and touch some 60% of the world’s population. The infrastructure investments being undertaken are mostly built with exported Chinese labor and generally ignore environmental issues; they are cloaked in secrecy and reportedly riddled with corruption.
Some analysts believe China is encouraging weak but strategically important countries like Pakistan to borrow recklessly to participate in Belt & Road projects, so that when those countries get in trouble, China will in effect “own” assets that can be used to foster their military and commercial interests.
In fact, the Belt & Road project has a new name: “debt trap.”
An example is found in Sri Lanka, where the government borrowed heavily from China to construct a $1.3 billion southern port, which began to quickly bleed red ink. Unable to pay back the Chinese loan, Sri Lanka instead handed Beijing a 99 year lease on the facility, which is considered critical to China’s ambition of creating a vast network of such maritime hubs.
In Pakistan, China agreed to projects valued at $62 billion, with most of the money going to power plants. The numerous projects are failing financially, adding to Pakistan’s debt burden and suggesting the country may be headed for an IMF bailout. In response, Pakistan has backed away from further Belt & Road initiatives, joining Malaysia, Myanmar and other countries that are reconsidering their participation.
James Mattis described the initiative this way: “The Ming Dynasty appears to be their model, albeit in a more muscular manner, demanding other nations become tribute states, kowtowing to Beijing.”
If the West wants to curtail China’s growing influence, reining in their economy through pressuring their exports is a good place to start. As of today, President Trump has imposed tariffs on roughly $250 billion of exports from China into the U.S. The measure has elicited retaliatory tariffs from Beijing, but so far China appears to have suffered more from the tit-for-tat than has the U.S.
One measure of how investors look at the difference is that China’s Shanghai stock market is down 24% since Trump imposed tariffs on washing machines and solar panels in late January – the first round — while the S&P is ahead about 3%. And by the way, that is in spite of the inclusion of many Chinese stocks for the first time ever in the global index compiled by MSCI, which generated a lot of purchases by international funds.
Moreover, China’s second-quarter growth was the lowest in two years and industrial production has fallen short of expectations. China has tried to prop up the economy by reversing gears on its effort to reduce debt, and is again resorting to massive infrastructure spending to boost growth. Its currency has taken a bath and President Xi has, for the first time, faced criticism for his increasingly authoritarian rule.
What does the White House hope to gain from the trade battle with China? Trump and his advisors want China to allow U.S. companies greater access to their markets, and a more level playing field in terms of tariffs. They also want to stop the pilfering of IP and generally, better behavior from Beijing.
I believe one piece of the plan is to demand an overhaul of the international system, which would require partnering with the EU.
In a joint statement issued in July, Trump and EU head Jean-Claude Juncker agreed to “work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.” There isn’t much mystery about who would be targeted by those changes.
The WTO’s shortcomings are no mystery either. After Beijing joined in 2001, members of the organization undertook formal discussions aimed at updating global trade rules, but those talks were abandoned 10 years ago. More recently, numerous U.S. allies have tried to reboot the drive for reforms.
The WTO’s great flaw is that its definitions and rules were not written with China in mind. Beijing joined the trade group long before it had the financial wherewithal to pursue many of its current objectives and before it had built up its state-owned companies. As a recent editorial in The Economist explained, “China’s state-owned firms and its vast and opaque subsidies have distorted markets and caused gluts in supply for commodities such as steel… But holding China to account is hard with the existing rule book.”
Unfortunately, getting an institution with 164 members to act is difficult. The White House has been applying pressure to the organization, for example by refusing to approve judges to sit on its appellate panels, thereby handcuffing the WTO’s enforcement practice. The theory is that only by threatening the organization’s very existence will the White House get the members moving forward with reforms.
How will these issues be resolved? Projections are complicated by the ongoing dance with North Korea and also by our upcoming midterm elections. But generally, I think the U.S. will prevail in forcing some modification of Beijing’s behavior. Though China recently cancelled pending trade talks, I believe the U.S. has the upper hand in this battle, especially if the EU comes on board. European companies, too, have been hurt by dumping and IP theft; the EU won’t lead in confronting China, but I think if Beijing sees a unified western response developing, they will back down. They already offered one round of concessions. We’ll see more, though it may not be until after the elections in November.
China is not the only country targeted by the Trump administration. The White House is also using our economy to change the behavior of our enemies, including most clearly North Korea and Iran. In both cases, the U.S. has leaned on our allies and others to join in imposing sanctions that damage those countries’ economies. In both cases, it is the sheer size of our economy that allows us to browbeat China, Russia and numerous EU countries into compliance.
With North Korea, those efforts initially bore fruit, driving Kim Jong-Un to the negotiating table. The UN, led by Nikki Haley, imposed tough sanctions on North Korea in August last year after a series of brazen – some thought threatening – nuclear tests and also the launches of long-range ballistic missiles which might reach the U.S. The feeling was, something had to be done.
The sanctions worked; North Korea’s economy posted its worst decline in 20 years, falling in real terms by 3.5%. The reason the sanctions were suddenly effective – after all, the country has been under sanction since 2006 – was because China participated. China accounts for more than 80% of North Korean exports and is by far Pyongyang’s biggest trading partner. Overall, exports tumbled 37% last year as China stopped buying coal, lead and other goods – a staggering hit. By the spring of this year, the border between North Korea and China was eerily quiet; numerous reports confirmed that trade had ground to a halt.
The bad news is since then, and since President Trump held his Singapore summit meeting with Kim, the pressure on North Korea has eased. Some blame the president for being too hasty to declare progress; after the summit, he tweeted that “there is no longer a nuclear threat from North Korea”, which some say was taken as a signal by China and Russia that the crisis was over and they could resume trading with the country.
I’m sure you’ve read about China and Russia evading the sanctions by transferring refined oil products from foreign tankers to North Korean ships on the high seas. In July, the U.S. informed the UN panel charged with overseeing the sanctions that it had a dozen satellite images showing 89 tankers unloading into North Korean ports. According to the U.S., those vessels had the capacity to unload nearly three times the volume of oil allowed under U.N. sanctions.
That report never officially made it out of the UN, but it has been leaked; Russia and China, perpetrators of the sanctions violations, blocked its publication.
Nikki Haley responded furiously to the dispute, calling out Russia, in particular, for not cooperating. Both China and Russia have argued that the sanctions regime is too tough, and unlikely to lead to denuclearization. The U.S. continues to apply pressure, most recently imposing secondary sanctions on companies like a Chinese tech firm called Yanbian Silverstar Network Technology Co, as well as its North Korean chief executive , and a Russian-based sister company. Treasury Secretary Mnuchin said the measure was to stop the flow of illicit revenue to North Korea from overseas information technology workers hiding behind front companies.
According to any number of stories in the past two years, such networks are plentiful; the Treasury has its work cut out for it. South Korea’s foreign ministry said the enforcement of secondary sanctions was in line with the United States’ resolve to keep the pressure on the north, as it attempts to push complete denuclearization of the Korean peninsula.
In recent days the leaders of South Korea and North Korea have been meeting, and there is movement in relations between those two countries. Kim Jung-Un has pledged to dismantle a major nuclear test facility, with oversight from international inspectors, which President Trump has hailed as a breakthrough. Needless to say, many remain skeptical, especially since Pyongyang has made such promises before. And, since there is considerable evidence that the North continues to actively develop nuclear capabilities. The United States is pressing for a complete listing of Pyongyang’s weapons and sites; so far, none has been delivered.
Bottom line: the sanctions regime pushed by the Trump White House proved effective in reigniting stalled negotiations, but further progress might require a re-imposition of the tough curbs by China and Russia. At the moment, the chances of that happening are low. The path to “complete, verifiable, irreversible denuclearization” is not in view.
Turning to Iran, we have a similar situation where the US, having withdrawn from the Iran nuclear accord, is attempting to use sanctions to force the end of Iran’s mischief-making in the Middle East and to their nuclear program as well. Because Iran is a much more developed state, with a broader economy, the effort requires the cooperation of many countries, some of which are furious that the Trump administration abandoned the Joint Comprehensive Plan of Action, or the JCPOA. Or at least that is their public stance. I have been told that many EU allies privately share U.S. concern that Tehran’s mullahs have not lived up to the spirit of the agreement, instead spending the billions received as part of the deal to foment unrest across the region.
In August the U.S. re-imposed the first set of sanctions that had been suspended in 2015; those prohibit Iran from using U.S. dollars, and also ban trade in metals and numerous other products. In November, the U.S. will step it up, re-imposing secondary sanctions, which have never been enforced. The U.S. has warned companies not to do business in Iran and has sent senior emissaries to make sure they know we are serious. Europe is resisting the U.S. pressure, encouraging their companies to ignore Washington’s threats and saying it is up to them to decide where they do business.
Moreover, they adopted a rare blocking statute – last used to protect EU firms from US sanctions against Cuba – to try to insulate firms and keep the JCPOA alive. Under that statute, EU firms pulling out of Iran could theoretically be sued for complying with US sanctions.
Nonetheless, many firms have decided the risk of running afoul of U.S. prohibitions is simply too great and have started to leave the country. Daimler Benz, and French company Total, the only big oil firm to sign major deal with Tehran, have both announced that they are bowing out. Peugeot and Siemens, similarly, have announced they would withdraw from Iran.
As November and the secondary sanctions nears, EU officials are attempting to create an alternative finance channel that would allow continued commerce with Iran, defying U.S. sanctions.
How will U.S. measures proceed against Tehran? It is unclear what Iran could do to mollify the Trump White House, and it is clearly uncertain that the mullahs desire to do so. Both parties have said they are open to talks, with caveats; none has been scheduled.
It may be that Trump and his advisors hope that the ramped-up pressure will lead to regime change, though they have said that is not the aim. What they hope for, or what steps Tehran could take to ease the pressure, is not clear.
Where does all this confrontation lead? There are reasons to think the pressure brought on our adversaries, if sustained, will be successful. However, it is also true that President Trump needs to start notching some wins. Americans will be patient about prices rising modestly on goods or finding our exports cut off but only if they see his tactics bearing fruit. Like all politicians, the president has a limited amount of political capital; he has already spent quite a lot.
Where could he find a win? North of the border, for one. We are in the final stages of negotiations with Canada over the reset of NAFTA. The White House needs to conclude that agreement. The deal hashed out with Mexico was a win for the administration; getting Canada to soften its egregious 270% tariffs on dairy imports would be another win.
If the EU were to partner with us in undertaking meaningful reform of the WTO to combat China, the White House would score a huge win. Forcing Beijing to lower its import tariffs would also be a win, as would convincing Kim Jung-Un to start down the road towards denuclearization.
Though all of these confrontations are risky, progress on any one of these fronts would greatly benefit the nation, and the White House. I expect President Trump to continue a campaign of maximum pressure to reach his goals, and think some will be achieved. He does, after all, like to win.
Speech Delivered to the Association of Foreign Intelligence Officers