What’s on the menu for US/China relations in 2019? Andy Rothman reviews the landscape after Trump and Xi’s G20 dinner.
Over steak, crispy chocolate and a 2014 Nicolás Catena Zapata Malbec, President Donald Trump and his Chinese counterpart Xi Jinping agreed to stand down from their impending trade war and direct their officials to focus on resolving bilateral trade problems.
The two leaders did not reach any concrete agreements on trade, but the change in both the tone and direction of the conversation, favouring engagement over confrontation, is important and likely to provide a short-term boost to business confidence in both countries. The prospect of real progress on substantive issues with China are now better than at any point in the Trump administration.
During a trip abroad that also included the signing of a slightly modified North American Free Trade Agreement (NAFTA) agreement, President Trump appears to have abandoned, at least for the moment, his isolationist path. This change is presumably motivated by the realisation that a trade war with America's largest trading partners would damage the US economy and equity markets, and thus his chances of re-election.
Trump called the dinner conversation with Xi “amazing and productive” and said that it offered “unlimited possibilities” for both countries. The US president announced that he was postponing raising tariffs from 10% to 25% on $200 billion worth of Chinese imports.
According to the White House, China agreed “to purchase a not-yet-agreed on, but very substantial, amount of agricultural, energy, industrial, and other product from the US to reduce the trade imbalance between our two countries”.
In addition, the White House said that China would immediately “start purchasing” US agricultural products, suggesting that Beijing may drop its retaliatory tariffs on American soybeans.
Ahead of the dinner, Trump had said that he would ask Xi to take steps to halt the shipment of fentanyl (a powerful, synthetic opioid) to the US and, according to a White House statement, Xi agreed to classify the drug as a controlled substance, “meaning that people selling fentanyl to the US will be subject to China’s maximum penalty under the law”.
The two sides agreed to a short deadline for further progress on trade issues.
“President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture,” a White House statement said.
“Both parties agree that they will endeavour to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.”
More than just trade
Trump and Xi will be faced with making difficult choices if the truce is to hold, and these choices are about more than trade technicalities.
Trump will have to accept that the US must share economic and strategic power with China, while continuing to take steps to help shape how Beijing uses its influence.
Washington will also have to get used to the fact that while the past three decades of economic engagement have promoted significant change within China, from no private sector to an economy where 85% of urban employment is with small, entrepreneurial firms; accompanied by a broad expansion of personal freedom, fundamental changes to China’s political structure cannot be dictated by outsiders, but instead are likely to evolve as the country becomes wealthier.
The Xi administration will have to accept that with its professed desire to use its rising power within the existing global infrastructure, comes a responsibility to follow the rules of the system and to be transparent.
Xi will also have to accept that his policies have consequences outside China and take responsibility for them.
For example, just as the US had to consider the impact of China’s new World Trade Organisation (WTO) commitments in the 1990s on its then-impoverished north-eastern Rust Belt, Beijing must deal responsibly with the impact of its industrial policies on employment in developed countries.
In short, the two leaders will have to agree that competition between the two nations does not have to be a zero-sum game, and that it is cooperation and concessions, rather than confrontation, that will leave both sides better off.
In practical terms, this requires Xi to give US and other foreign firms the same market access that domestic firms receive, and to strengthen protection for intellectual property for all companies.
Meanwhile, Trump will have to abandon his misguided focus on the bilateral trade deficit and take a more rational approach to issues such as Chinese students and researchers in the US.
What are the odds of success?
I think that the odds of success are pretty good following the very positive spin that Trump put on the meeting - he tweeted “Relations with China have taken a BIG leap forward! Very good things will happen” – and, given his apparent desire to avoid a trade war, which would damage the US economy and equity markets as well as his re-election prospects, I expect him to instruct his team to focus on achieving a pragmatic deal.
Xi will also want to avoid a trade war that could hit Chinese jobs and hinder access to American technology, while he must understand that the majority of concessions sought by the US, such as better protection for intellectual property, are critical to the success of his own economy.
Andy Rothman is an investment strategist at Matthews Asia.
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now