Trump's China dilemma: how to punish Beijing without hurting the US economy and his own reelection chances

Doing that in a way that doesn't exacerbate an already-flailing US economy won't be easy. While tougher measures like increasing broad sanctions and tariffs are being discussed, administration officials are also examining options such as expanding a crackdown on China's 5G companies, as well as various political actions aimed at punishing Beijing.

Trump is already having to deal with the fact that his signature trade deal with China is underperforming. Weeks after the official implementation of Phase One of the deal, the pace of Chinese purchases of US goods is nowhere near what was promised, raising questions about whether Trump's 18-month trade war was worth the cost.

Many Americans, particularly farmers in strategic heartland states hit hard by Trump's trade war, were hoping the additional $200 billion in US exports to China as promised by the deal would bolster their bottom lines. But so far, China has bought less than half of the energy, farming and manufactured goods set out in the deal, according to some estimates, undermining an argument core to Trump's reelection effort: that he has successfully forced China to cut a better trade deal during his first term in office.

"The agreement was always a political agreement whereby candidate Trump could go out and say $200 billion and have a nice round number to throw out there," said Chad Bown, a senior fellow at the Peterson Institute for International Economics.

But Bown points to a potential silver lining: if China continues not to live up to its side of the deal, it could simplify Trump's narrative and allow him to double-down on his anti-China rhetoric.

"What the Covid shock does is create political space for the administration to say even if they want to keep the deal, China couldn't live up to it -- and there, they have an excuse for it not working out."

Disagreement on Capitol Hill

Trump has repeatedly lashed out at China over its failure to act sooner and alert the world to the spread of the virus, which has now killed more than 329,000 people globally, including more than 93,000 in the US as of Thursday.

Across Washington, there is general agreement that something needs to be done about China, but that's where the unity ends.

As the President attempts to pin the coronavirus fallout on what the White House says was China's intentional effort to conceal the severity of the outbreak, lawmakers on Capitol Hill -- both Republicans and Democrats -- tell CNN that they believe the US needs to drastically rethink its relationship with China.

But the dynamics of a presidential election, along with internal disagreements over how far the US should go to punish China, likely limit the scope of any bipartisan deal. Democrats are loath to hand Trump a significant win, and there is also concern that any significant action will devolve into a broader tit-for-tat that could have negative impacts on the already weakening US economy.

In recent weeks, lawmakers have begun discussing a series of steps to move supply chains of critical medical supplies and drugs back to the US, including tax breaks and incentives for businesses that produce goods in the US.

China remains the epicenter of much of the world's supply chains. Disrupting that will likely take years and possibly inflict short-term economic pain in the process as nations find their own way.

In the meantime, US lawmakers are passing a handful of punitive measures.

On Wednesday, the Senate passed legislation that would crack down on Chinese companies that traded on US stock exchanges.

Earlier this month, Republican Sen. Lindsey Graham of South Carolina introduced legislation that would slap China with sanctions if the country is not forthcoming about the origins of coronavirus. The law would give the President 60 days to certify that China had complied with requests for information and other US demands, including the release of Hong Kong pro-democracy advocates that had been arrested in the wake of the coronavirus pandemic.

Republican Sen. Ted Cruz of Texas has a bill that would penalize Chinese officials, and Democrats say they are open to supporting proposals to penalize China for misleading the US and the world on how bad coronavirus was back in December.

But Democrats are also wary of playing too strongly into Trump's anti-China narrative just months ahead of the election. Admonishing China now could give Trump the scapegoat he needs to absolve his administration from its own shortcomings in the pandemic response and motivate his base to turn out in a race that becomes a referendum on "America First" vs. China.

"I don't think there is a person in the entire country who believes the coronavirus was his fault," said North Dakota Sen. Kevin Cramer, a loyal ally of the President. "Instead, it may have identified some of his strongest suits, like his warnings about China and globalism and the vulnerability of supply chains."

Sending a message

In the meantime, the administration had focused its efforts on measures that might send a message to China without having an impact on the US economy, including national security-related sanctions and a further crackdown on China's 5G networks. On Friday, the Trump administration moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, an action that could ramp up tensions with China.

Discontent toward China is growing, even among some of Trump's advisers who are prone to embracing economic ties with China. But some of his top trade advisers -- including Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer -- have been treading carefully for fear of losing the hard-fought Phase One deal.

The US agriculture and manufacturing sectors had been hard hit by the President's trade war with China prior to its signing in January.

In his 2016 campaign and since, Trump has touted his business savvy as a cure for the country's trade woes. He criticized previous trade deals with Canada, Mexico and China and promised to cut better deals with some of America's biggest trade partners.

He used his standoff with China as a cautionary tale for what would happen if Americans voted anyone else into office, and he continues to do so even now against his presumptive Democratic opponent, former Vice President Joe Biden, even as the future of his trade deal with China comes under question.

Costs for swing states

But Trump's trade war with China has had economic consequences for swing states such as Ohio and Pennsylvania, where tariffs have raised the cost of doing business for manufacturers and left farmers sitting on tons of unsold crops that would normally be shipped to China.

As a result, manufacturing saw a mild recession in 2019, with factory production shrinking by 1.3% for the year, according to the Federal Reserve. And family farm bankruptcies in 2019 increased by nearly 20% from the previous year, according to official court data. That figure trails only 2010, in the aftermath of the Great Recession, when Chapter 12 bankruptcies rose 33%.

With Chinese purchases still lagging behind their 2017 levels, the administration says it may extend the farm subsidy program for a third year -- money desperately needed by farmers trying to make ends meet. Such an extension would expand what has already been a massive industry bailout.

US tariffs increase costs for American companies that import Chinese goods, and with fewer customers making purchases as the Covid-19 outbreak saps demand, the new trade war is increasingly centering on the economy at large. The US still has most of its tariffs on $360 billion worth of Chinese imports in place, despite signing the trade deal in mid-January.

Besides the election, now may not be the right time for the US to respond. Republicans are cognizant of that, and it's why they have yet to push for a major reforms bill to move businesses back to the US or punish China for its response to coronavirus.

Republicans are sensitive to Trump acting brashly or too quickly against China at a time when they need China to hold up its end of the trade deal to buy key US agricultural goods like soybeans. Senators say that penalizing China now when the US is reliant on them for exports and for the production of products like drugs and personal protective equipment would be a mistake.

"Particularly in our (agriculture) sector, we still need China's markets," Sen. Roy Blunt, a Republican from Missouri, told CNN.

Sen. John Thune, a Republican from South Dakota, said the GOP is serious about trying to figure out ways for key US companies to relocate factories back stateside, but that won't happen overnight. In fact, industries that can pay workers less abroad aren't likely to be receptive to legislation forcing them to relocate.

"There will be a very robust discussion about that. I don't know what the outcome of those discussions will be," Thune said. "We are in the middle of a pandemic. That is our first priority, but I do think accountability in the wake of this and in the aftermath of this is going to be important and a lot of our members feel very strongly about that."