The most common negotiation question I am asked these days relates to the current U.S.-China trade war standoff: who has stronger leverage? Here’s my answer, which may surprise some of you.
But first, some history and how we got here.
- The U.S. initiated a tariff-based trade war with much of the world on April 2 – “Liberation Day” – and two days later paused it for most countries for 90 days.
- But the pause didn’t apply to China. China retaliated and the U.S. escalated.
- At its height, the U.S. imposed 145% tariffs against Chinese goods and China had 125% against U.S. goods.
- · Last month, the pain started to hit both countries, prompting the U.S. and China to meet in Geneva and step back from the ledge – reducing their tariffs by 115% each and pausing the war for 90 days while they tried to negotiate a deal.
- The U.S. and China negotiated a trade arrangement (not a formal agreement) in the first Trump Administration, but China didn’t buy the agreed-upon amount of U.S. goods, and it lapsed.
- Chinese President Xi Jinping felt his chief negotiator for the “Trump I” arrangement got a bad deal and demoted him shortly thereafter. Xi has assigned a more hard-line negotiator to lead the current effort.
So who has stronger leverage?
As my regular column readers know, there are two elements of leverage:
1) Level of Need – the more a party needs a deal, the weaker its leverage and the less a party needs a deal, the stronger its leverage; and
2) the strength of its Plan B – or alternative to the deal (any deal being the party’s Plan A). The stronger each party’s Plan B or alternative, the stronger their leverage and vice versa.
On the Level of Need scale, both countries really need a deal – basically canceling each other out. The U.S. economy, consumers, small businesses, and the supply chain for many critical U.S. industries are extremely dependent – some might even say addicted – to China’s goods, cheap labor and rare earth minerals.
Plus, a lot of U.S. debt has been financed by China.
And China really needs the U.S. market – some would even say it’s extremely dependent upon the U.S. – as its economic health is reliant on U.S. consumers and exports to the U.S. And its economy is not doing well right now, making it need the U.S. even more.
But now it gets interesting. What about the countries’ Plan Bs? In other words, what happens to each if they don’t reach a deal?
The U.S. has a very weak Plan B, especially in the short-term. Worst case scenario – which is likely if the trade war renews – U.S. consumers start seeing substantial price increases for all goods coming from China, some of which will just stop coming. Massive tariffs would just make it too unprofitable for many companies, especially small businesses, to even import them (think of empty shelves for toys shelves for toys this fall as the U.S. imports almost all its toys from China).
Inflation ensues, many small business importers go under, and the economy takes a big hit. And the manufacturing of cars, planes and other industries dependent on the import of rare earth minerals from China experiences a significant slowdown and may even grind to a halt.
In short, a really bad Plan B.
Of course, China has a really bad Plan B, too. Its economy starts to tank as it can’t get the semiconductor chips and other materials it needs from the U.S. and its unemployment skyrockets, etc.
So if both parties have such bad Plan Bs – they cancel each out, right?
Not necessarily. What do I mean?
It’s not just the value of each countries’ respective Plan Bs that impacts their leverage. There’s one additional crucial factor – which country and leader has the political will and fortitude to stick to their guns, walk away and actually go with their Plan B.
Think about two busses hurtling toward each other on a one lane road at 100 mph. Then assume both drivers have huge airbags and will be fine in a collision – but their passengers will all be significantly harmed. Which driver will hit their brakes to avoid their passengers experiencing catastrophic harm?
Here China holds a significant edge, in part due to the nature of its authoritarian dictatorship. President Xi has for years consolidated his power and demonstrated a willingness to let his people suffer in order for him to accomplish his long-term political and economic goals.
During covid, he refused to even allow Western vaccines into China and stuck with a lockdown for an inordinate amount of time despite the extreme hardship and deaths of a ton of Chinese as a result. His nationalist pride took precedence.
President Xi also feels he got the short end of the stick in his previous trade deal with the U.S. and appears personally committed to some payback. This makes him even more intransigent.
President Trump’s negotiation history and actions, and the nature of our democratic system in which our political leaders are highly (and appropriately) sensitive to voters, on the other hand, will almost certainly lead Trump to cave long before the U.S. experiences even close to an economic disaster.
It only took two days after Liberation Day for him to pause his tariffs, despite multiple statements from him and his aides that he would never do this.
Critically, Xi knows this.
Bottom line: China has stronger leverage vis-à-vis the U.S. in this trade war.
President Trump this week wrote on Truth Social that “I like President Xi of China, always have, and always will, but he is VERY TOUGH, AND EXTREMELY HARD TO MAKE A DEAL WITH!!!”
There’s a good reason for this.
Latz’s Lesson: Your willingness to go with your Plan B – even if it’s really bad – can strengthen your negotiation leverage. China knows this well.
* Marty Latz is the founder of Latz Negotiation, a national negotiation training and consulting company that helps individuals and organizations achieve better results with best practices based on the experts’ research. He can be reached at 480.951.3222 or Marty@LatzNegotiation.com.