This is the week that financial markets should abandon any remaining illusion that U.S.-China trade talks would be a time-constrained, tradable event that ultimately would result in a deal reassuring investors. Near dead is the notion that both sides would inevitably compromise because they so badly need an agreement for their own political and economic purposes.
What markets have misunderstood since US-China trade negotiations resumed last December – but US and Chinese officials have understood – is that the talks had become just one of many events of a new era of geopolitical and systemic competition that will define our times. To earn their pay, market analysts will have to get a lot better at pricing in geopolitical risk.
Most global attention this week was on President Trump’s more than doubling yesterday (Friday) of tariffs on $200 billion of Chinese goods, to 25% from 10%, on the argument that China was backing out of already negotiated terms of a draft agreement. His move has the potential to be the most significant of the many trade moves of his administration.
What went less noticed were escalated tensions of other sorts. On Monday, two US warships sailed within 12 nautical miles of disputed islands in the South China Sea, the third time this year Washington has challenged China’s maritime claims. At a 5G security conference in Prague a few days earlier, the US and its allies drilled down on the dangers posed by the Chinese telecom giant Huawei – even as its CFO remains in Canadian custody.
Make no mistake. Even if the two sides seek out a trade agreement in coming weeks, it would do very little to change the fundamentally altered nature of the relationship over past months from one of strategic engagement to one of sharper competition. Expect economic, political and even military risks to rise until skilled strategists and diplomats from both sides establish principles and rules-of-the-road to govern the world’s most decisive bilateral relationship.
It’s worth rewinding this Sino-US movie by about a week to understand how trade talks have been increasingly less about trade. The details behind the scenes underscore how history, nationalism, systemic differences, and increasing mistrust and miscalculation, have become a combustible mix.
Last weekend, it’s a safe bet that President Trump didn’t know about the historic Chinese anniversary that made his tweeted trade bombshell even more inflammatory. His decision to turn the tariff screws tighter coincided with the 100th anniversary of Chinese student protests that then became the legendary May Fourth Movement. The upheaval was a nationalist and anti-imperialist response to what the students considered their government’s criminally weak handling of terms posed upon them in the Treaty of Versailles.
It’s been reliably reported that President Xi Jinping personally intervened last weekend to pull back his negotiators. The provisions Beijing changed in the draft deal appear to have been several, but what seems to have been most unacceptable to President Xi was US insistence that he agree to specific language about how China would change it national laws to abide by the deal’s terms.
In each of the seven chapters of the draft, Reuters reported, China had deleted commitments to change laws to resolve US complaints: theft of U.S. intellectual property and trade secrets, forced technology transfers, competition policy, access to financial services and currency manipulation.
May Fourth Movement activists, many of whom became Communist party leaders in the years that followed, would have been rolling in their graves if negotiators had given that kind of ground to American rivals on their centennial. For a leader like President Xi -- who has staked his legitimacy on ending what his supporters see as China’s ‘century of humiliation’ at the hand of foreign powers – the on-again and off-again trade talks had become about so much more than trade.
What President Trump had been wagering was that the US economy was so strong, with growth at 3.2% and unemployment at historic lows, that he had the greater leverage. At the same time, he reckoned the Chinese economy was fragile, based on its 2018 performance, and that its leaders ultimately would make the required concessions.
By contrast, Chinese President Xi represented a conviction among many in China that President Trump would need a “win” that would reduce the deficit and create US jobs before 2020 elections, and thus his negotiators would blink first. Xi also had grown more confident after a first quarter economic rebound as the government’s stimulus measures took hold and helped produce 6.4% growth.
This week one could watch the hardening attitude of Chinese leaders through a series of tweets by Hu Xijin, the editor-in-chief of the Global Times. Though he’s not as authoritative as a Trump tweet, he’s become a fair barometer of Chinese leadership thinking.
At 8:47 am on Thursday morning, he tweeted that someone from the Chinese side “who knows the trade talks well,” said that there was zero chance of a deal by Friday.
Two hours later at 11:09 am, he tweeted, “China has fully prepared for an escalated trade war. It is a new strategy of China to engage in trade talks while fighting a trade war. I think China bets on the fact its politics is more powerful than US politics. Trade war will be decided by domestic politics eventually.”
Then a little more than two hours after that, at 1:17 pm, he put it all into perspective: “More and more Chinese now tend to believe the current US government is obsessed with comprehensively containing China. A trade deal, even if reached, will be limited in actual meaning and could be broken constantly. So they support being tough on the US, giving up any illusion.”
A lot of illusions are dying this week.
After talks ended on Friday without progress, Hu Xijin brought down the curtain on the week: “Based on what I know, Chinese side insists on a few core points: US side should remove all additional tariffs, amount of purchase the US requests should be in line with reality; the text of the agreement must respect sovereignty and dignity.”
How the trade talks unfold now has become of even greater significance because they are about so much beyond trade. They are a prism through which one can judge whether and how our era’s two most significant powers can manage their differences.
