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China overplayed its hand with Trump on trade, and it could cost them dearly

Hong Kong(CNN) China and the United States were moving towards an agreement to end a months-long trade war when, suddenly, it all fell apart this week.

Now as negotiators scramble to resurrect the deal, revelations are emerging that indicate both sides appeared to think they had the other over a barrel. As a result, they pushed for more, setting the stage for a rapid escalation in tensions which undid session after session of hard-fought negotiations.

Over the weekend, US President Donald Trump promised to raise tariffs on $200 billion of Chinese goods, sending markets plummeting and wrong-footing Beijing, which did not issue an immediate response and muzzled state media from reporting on the threat.

On Wednesday, the Chinese government threatened to retaliate, as its top trade negotiator, Vice Premier Liu He heads to Washington for what was supposed to be among the last rounds of discussions with US trade envoy Robert Lighthizer and Treasury Secretary Steven Mnuchin.

"The escalation of trade friction is not in the interests of the people of the two countries and the people of the world," the Chinese Commerce Ministry said in a statement Wednesday.

US President Donald Trump speaks during a "Make America Great Again" rally in Florida on May 8, 2019. BRENDAN SMIALOWSKI/AFP/Getty Images

On Twitter, Trump accused Beijing of attempting to run out the clock on his administration in the assumption it will be dealing with a Democratic administration after 2020. Speaking at a rally in Florida later Wednesday, Trump said the new tariffs were because China "broke the deal."

"You see the tariffs we're doing?" the President asked his supporters. "Because they broke the deal!"

"The vice premier is flying in tomorrow, good man, but they broke the deal. They can't do that," he added. "If we don't make the deal, nothing wrong with taking in over 100 billion a year. We never did that before."

When Liu, Lighthizer and Mnuchin sit down, however, they will not be engaging in handshakes and backslapping, but instead acrimonious negotiations pushed most of the way back to square one.

A deal may still result from those talks, but it will be a far harder fought one than anyone expected only a month ago.

What happened?

In launching his trade war, Trump hoped to force China to further open its market to US exports, stop the forced sharing of intellectual property with China, and rewrite trade deals he said have unfairly benefited Beijing.

To do so, he has launched an all out assault against the Chinese economy, massively ramping up tariffs on a large variety of goods and industries. In response, China has imposed its own tariffs, hitting in particular US farmers.

Trump's strategy is based on the fact that, as the US is the net buyer and China is the net seller in their trade relationship, Beijing will blink before Washington. The Chinese economy is also fundamentally more vulnerable than that of the US, and Chinese President Xi Jinping faces a host of political pressures that make a prolonged trade war difficult.

At first -- despite widespread criticism over the damage to US economic growth and particularly agriculture -- Trump's strategy seemed to be paying off: He forced Beijing to the negotiating table, and in December the two sides agreed to a temporary truce.

In April, Chinese state media reported that negotiators had "reached new consensus on such important issues as the text of the ... trade agreement," while the White House said the talks beginning this week would "cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement," suggesting they were entering their end stage.

That all changed with Trump's tweets on Sunday.

Crossed wires

Trump has a habit of making policy on Twitter, but his pronouncements on Sunday did not come from nowhere.

US officials told CNN that at the most recent round of trade talks in Beijing, their Chinese counterparts sought to renegotiate significant aspects of a prospective deal that the Americans felt were already wrapped up.

According to Reuters, a cable sent from Beijing to Washington late Friday included systematic edits "riddled with reversals by China that undermined core US demands." These reportedly included backtracking on commitments to change laws over intellectual property and trade secrets, competition policy, and currency manipulation.

Speaking to reporters on Monday, Mnuchin said there were "some signs" negotiations were "going substantially backwards," prompting him to update the President.

US officials said that Trump's tweets were meant to rattle Beijing, and were made without extensive discussions with his economic advisers.

What exactly inspired Beijing's broadside is unclear -- a constant peril of dealing with such an opaque political system -- but it appears to be based on a misreading of statements and actions by Trump that he was concerned about the state of the US economy and would be willing to make concessions.

Last week, Trump laid into the US Federal Reserve on Twitter, echoing criticism he made of its chairman Jerome Powell last year, while praising Chinese policy.

"China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing," Trump said in a series of tweets.

"Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records (and) at the same time, make our National Debt start to look small!"

Beijing's perception of US weakness was likely buoyed by its own improving economic situation, with solid first-quarter growth and renewed commitment to Xi's trademark Belt and Road Initiative, which was feted at a conference in the Chinese capital last month attended by dozens of world leaders.

The assumption that this position of renewed strength would be enough to make Trump blink seems wildly miscalculated, however. Not only is the US economy not nearly as weak as some in Beijing appear to believe, this type of last minute renegotiation seems almost specifically designed to infuriate Trump.

The US President has already shown himself willing to walk away from deals when they don't go his direction -- storming out of his second meeting with North Korean leader Kim Jong Un in Hanoi, derailing months of rapprochement between the two nuclear powers.

That he would respond equally poorly to strong arm tactics on trade would have been obvious to any longterm observers of Trump except, it turns out, those in Beijing.

CNN's Kaitlan Collins, Nikki Carvajal, Kevin Liptak and Steven Jiang contributed reporting.
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