President Donald Trump has announced that the United States will impose tariffs on an additional $200 billion worth of Chinese imports, marking a significant escalation in economic tensions between Washington and Beijing as China is expected to take a retaliatory measure.

The bigger problem is that, if a deal is reached, only a year and a half of calm may result. The two countries' short-term behavior is being fueled by the realization that no agreement will last.

(Derek Scissors)
[Supplied photo]

The U.S. administration is a difficult negotiating partner because it is divided on China goals. A lower bilateral trade deficit? Retaliation for coercive technology practices? A fundamental change in China's economic model?

For more than a year, the Chinese view was President Trump would be pacified by a few headline deals. This was proven wrong in May, when Treasury Secretary Steven Mnuchin failed to sell the president on Beijing's low-ball offer.

Since that failure, the United States has been seen as unstable or bent on crushing China. But Beijing's own statements are of little use, calling for the same dialogue that has been empty for more than a decade. There are even specious claims that the latest version of decades of expensive, discriminatory industrial policy is merely non-binding guidance.

The situation has deteriorated. The bilateral goods deficit in the first half of this year was estimated as of Aug. 3 at $185 billion, 14 percent larger than the first half of 2016, when candidate Trump assailed it. The yuan has dropped 7 percent against the dollar since the May deal failed, a response guaranteed to further provoke Trump.

The United States just moved to limit technology cooperation by passing the Foreign Investment Risk Reduction Modernization Act (FIRRMA). Chinese investment in the United States has plummeted since 2016 and now faces indefinite restriction. Some American national security officials wish to strengthen export controls beyond FIRRMA. American investment in China would thus be curbed even without retaliation by Beijing.

U.S. second-quarter economic results trended stronger while China's trended weaker. Both economies have important flaws, starting with greatly excessive debt. But there remains no risk for the United States equivalent to the $337 billion in foreign exchange China gained last year from bilateral trade, money Beijing needs to finance the Belt and Road initiative, among other things.

Politically, broad criticism of Trump administration trade policy has recently been muted by the creation of a negotiating framework with the European Union and an agreement with Mexico. The American business community has shifted from aggressively pro-China toward neutrality.

Given this situation, why hasn't Beijing made a better offer, to attempt to preserve the status quo as fully as possible? A public offer would also build pressure for the United States to respond constructively. The answer may be that the value of a U.S.-China deal declines almost every week, because both sides know it won't hold for long.

                                                              (Donald Trump and Xi Jinping)

Within 18 months, President Trump will probably become more hawkish on China trade since the issue will be taken up again as the next presidential campaign gears up in the fall of 2019 in preparation for the primaries starting the beginning of 2020.

In his June 2016 job speech, Trump promised retaliatory economic action against China by saying he would use every lawful presidential power such as the imposition of tariffs if China does not stop its illegal activities, including its theft of American trade secrets.

If the bilateral trade deficit hasn't been cut or there aren't clear, meaningful, and enforceable changes in Chinese policy, the extremely strong language against China will be thrown back at him again and again by Democratic presidential hopefuls. They will criticize President Trump for failing to solve it or Trump will have to take even stronger action than he has already taken so far to solve it.

And that's only half the story. Chinese President Xi Jinping has cultivated the image of another Mao rather than another Deng, a political strongman uninterested in pro-market reform. Xi will be in power indefinitely, leaving little hope for genuine change and leading to broader American antagonism as his personal dictatorship persists.

American policymakers demanding China abandon much of its industrial policy can seem naive. It's more likely they have come to accept a painful trade conflict because they don't believe China is truly willing to become a good partner. After 25 years of enormous expansion, the U.S.-China economic relationship is going to shrink, sooner or later.

(Derek Scissors is a resident scholar at the American Enterprise Institute (AEI). He was a senior research fellow in the Asian Studies Center at the Heritage Foundation and an adjunct professor of economics at George Washington University. He has served as an action officer in international economics and energy for the U.S. Department of Defense. This article was originally posted on the AEI web site, supplemented with an interview with the author)