The Art of the Cave

Blink. Blink blink blink blink blink.

Photo by Jackson Simmer on Unsplash

Two weeks ago, after Trump paused the “reciprocal’ tariffs he had announced with such fanfare a week earlier, I wrote, “In essence, Trump got Trussed — i.e., the markets reacted negatively enough to his self-destructive policies — and the recognition that there is no master plan, his advisors are worthless, and Trump might not understand trade — to force his hand.”

A week ago, after reports surfaced that U.S. Treasury Secretary Scott Bessent wanted to magically convert the wreckage of the reciprocal trade war into a united front directed against China, I expressed some healthy skepticism, “The basic problem is that as hard as this task would have been under normal circumstances, Trump has made it that much harder for the U.S. to corral any allies.”

So as reports suggested that, “Beijing has built an arsenal of tools to hit the U.S. where it hurts,” the hard-working staff here at Drezner’s World kept waiting for Trump to cave. And lo and behold, here we are.

The incipient signs were there from the get go. Two weeks ago CNN reported, “In private discussions hours before China announced new retaliatory tariffs, the Trump administration warned Chinese officials against such a move, according to a source familiar with the discussions. The Chinese were also told – once again – that Chinese President Xi Jinping should request a call with US President Donald Trump. Instead, US officials woke up to news of increased Chinese tariffs and no request for a leader level call. Xi also made comments that only dug him in further.” This did not sound like a country that was ready to acquiesce in any way.

Over the next few weeks, Trump kept demanding that Xi call him, and Xi kept not doing that, preferring more conventional negotiations. Then Trump backed down on consumer goods, and China… continued to do nothing. In the meanwhile, markets continued to not like the U.S. trade war and public opinion about Trump’s handling of the economy nosedived.

And now we arrive at the last 48 hours. Yesterday CNBC reported that Bessent told JPMorgan behind closed doors that something was gonna give:

Treasury Secretary Scott Bessent told investors in a closed-door meeting Tuesday he expects “there will be a de-escalation” in President Donald Trump’s trade war with China in the “very near future,” a person in the room told CNBC.

“No one thinks the current status quo is sustainable” with tariff rates at their current levels, Bessent said at a private investor summit in Washington, D.C., hosted by JPMorgan Chase.

Bessent said he believes that the prospect of de-escalation between the economic superpowers “should give the world, the markets, a sigh of relief,” according to the person in the room who was granted anonymity in order to describe a private event.

“We have an embargo now, on both sides, right?” he said.

Bessent also insisted that, despite the U.S. ratcheting up tariffs on Chinese imports to 145% and China retaliating with 125% duties on American goods, the goal of Trump’s policy “isn’t to decouple.”

The U.S. Cabinet secretary noted that negotiating with China is likely to be “a slog.”

But neither side “thinks the status quo is sustainable,” Bessent added.

Later Tuesday, White House press secretary Karoline Leavitt echoed Bessent’s positive outlook toward talks with China, though neither official suggested that those negotiations have actually begun.

What is noteworthy in what Bessent said there and in a subsequent speech is not that the U.S. and China were talking. Indeed, Bessent said that the U.S. and China were not engaged in trade talks because “the tariffs both countries have imposed on each other have ‘to be de-escalated before trade talks.’”¹ In other words, Bessent suggested the status quo was so intolerable that both sides needed to de-escalate before talking about any deal.

That is not the rhetoric of a Treasury Secretary confident in his bargaining position.

This was followed by Trump himself being tutored in the pain caused by his trade war with China. According to Axios’ Marc Caputo and Ben Berkowitz:

President Trump got a scare from CEOs and markets on Monday. On Tuesday, he blunted some of his sharpest threats — signaling a softer stance on China and retreating from fiery rhetoric targeting the Fed.

The president is resolute in his goal of reshaping the economy. But he's sensitive to the movement of the markets and the pleas of powerful corporate leaders and investors who fear the worst from his sweeping efforts.

The CEOs of three of the nation's biggest retailers — Walmart, Target and Home Depot — privately warned him that his tariff and trade policy could disrupt supply chains, raise prices and empty shelves, according to sources familiar with the meeting.

"The big box CEOs flat out told him [Trump] the prices aren't going up, they're steady right now, but they will go up. And this wasn't about food. But he was told that shelves will be empty," an administration official familiar with the meeting told Axios.

Another official briefed on the meeting said the CEOs told Trump disruptions could become noticeable in two weeks.

And so, Trump signaled a backtrack last night and then, earlier today, the Wall Street Journal reported that the Trump administration was “considering slashing its steep tariffs on Chinese imports—in some cases by more than half—in a bid to de-escalate tensions with Beijing.”

And, again, China is… unmoved:

China responded to Trump’s perceived softening remarks on tariffs by repeating its calls for the U.S. to negotiate based on equality and mutual respect, rather than threats.

“China’s stance has always been clear: We do not want a fight, but we are not afraid of one,” Foreign Ministry spokesperson Guo Jiakun said today at a regular briefing in Beijing. “If there is a fight, we will see it through. If there are talks, our door is always open.”….

Trump’s comments were widely discussed on Chinese social media, where one of the trending hashtags today was #TrumpWimpsOut. “He’s extremely unreliable,” read one popular comment on the Chinese social media platform Weibo. “His attitude changes more quickly than the weather in June.”

Karoline Leavitt can claim all she wants that Trump has not softened his position on China. What the above demonstrates is that Trump has softened his position on China. Indeed, he has softened his position multiple times over the past two weeks. Paul Krugman is spot on when he writes:

While news media and some investors may still be credulous enough to believe Trump’s boasts, harder-headed players will look at his U-turns and conclude that he runs away when confronted. Why would China be "very nice” now that it knows that Trump can be rolled? On the contrary, China will be even less likely than before to make concessions. And other countries will be more willing to stand up to Trump and more likely to make deals with Beijing.

We are, in short, in a worse position than we were before Trump began his tariff bluster. Being a cowardly, loud-mouthed bully presiding over utter chaos is not an effective negotiating strategy.

The hard-working staff here at Drezner’s World has little doubt that the Steven Miller Band will proclaim Trump’s statements and subsequent stock market enthusiasm as evidence of Trump’s art of the deal. Make no mistake, however — China is fully aware of what just happened. And they will fold this new information into any future bargaining.

Donald Trump’s primary bargaining gift is his ability to paint a tactical retreat as a strategic victory to his political base. But the rest of the world is no longer buying what he is coercing.

1. Note that this somewhat contradicts Trump’s own claims that China and the U.S. are talking. Given the vague nature of Trump’s remarks, however, I’m inclined to believe Bessent more in this instance.