Trump, China and trade: Who blinks first?

Neither President Trump nor Chinese President Xi Jinping is showing any sign of caving in the escalating trade dispute between the world’s two most important economies, portending a standoff that could last months or even years.

Buoyed by the strong U.S. economy, Trump is feeling little pressure to strike a quick deal with Beijing, and people close to the White House say he is prepared to hold out for the best possible deal.

{mosads}“President Trump is not planning on backing down on this issue until he gets a result that addresses the long-standing, unfair trade practices the Chinese are engaging in,” said Clete Willems, a former top White House trade negotiator who recently left his post. “President Trump is going to see this one through until the end.”

Many trade experts agree that China has more to lose from a prolonged trade war with the U.S. But Xi is seen by some as playing a weakened hand because of pressure from hard-liners in Beijing who do not want to accept an agreement they believe would force their country to lose face.

The two leaders plan to meet at the Group of 20 (G-20) summit next month in Osaka, Japan, which current and former Trump administration officials have billed as another chance to strike a deal.

Trump on Friday was noncommittal about the prospects for an agreement but argued he remains in a stronger position than Xi.

“We’re taking action, and you see what’s happening. I don’t have to talk about it, but it’s expensive for them, and it’s going to have to be. … We actually had a deal, and they broke it. OK? I’m used to that. I’ve done it many times myself,” the president said in a speech to the National Association of Realtors in Washington.

Some observers say the rising tariffs could help the two leaders broker a deal in Japan, but others say the fundamental problems in the trading relationship point to a long fight.

“It’s possible neither will blink, which I think is the more probable scenario because both have significant reasons not to come to a deal,” said Gordon Chang, author of “The Coming Collapse of China.” He predicted that “this is going to be a very long struggle.”

After trade talks between the two nations ended last Friday, Trump boosted tariffs on $200 billion in Chinese goods to 25 percent and began the process of imposing tariffs on an additional $325 billion, which would hit almost all imports from China, though he has not said whether he will follow through.

China responded by announcing it will raise tariffs on $60 billion in U.S. goods to as high as 25 percent beginning June 1, which could hurt farmers and small manufacturers in states such as Michigan, Ohio and Wisconsin that are critical to Trump’s reelection chances in 2020.

Business groups on K Street are eager to see a resolution, and there is concern the two sides have not scheduled talks.  

“I don’t think we have seen the two sides set the next meeting, and I think that’s really what we’re looking for,” said an industry source, who declined to be named in order to candidly share concerns about the situation. “When are the two sides going to meet again to try and forge a path forward? This is a negotiation. Both sides are going to have to get to ‘yes’ here.”

If the trade war leads to a downward spiral for the U.S. economy, it could create an opening for a deal. But Trump’s decision to delay auto tariffs for six months and lift steel and aluminum tariffs on Mexico and Canada could ease some of the pressure caused by the China spat and encourage financial markets.

U.S. unemployment has remained below 4 percent, gross domestic product has grown by more than 3 percent, and one study showed consumer confidence at a 15-year high, despite the ongoing trade tensions. This has given Trump confidence the U.S. will not suffer major consequences from the fight with China.

“There is so much turbulence out there that even with the goodwill it will not be easy,” said Anabel González, a senior fellow at the Peterson Institute for International Economics and a former top World Bank trade official. “In escalating the trade war, they are also making it more difficult upon themselves to reach that agreement.”

Trump’s efforts to to clear the deck of other trade disputes could increase pressure on Beijing. Xi must appease multiple factions within the Chinese government, experts say, and Beijing’s economy is at greater risk because of its dependence on exports.

“[Xi] has a lot to lose,” said Michael Pettis, professor of finance at Peking University in Beijing.

Pettis said China must transform its economy to reduce reliance on debt, and the trade dispute with the U.S. has complicated those efforts. The longer the standoff with the U.S. drags on, the weaker Xi will appear and the more difficult it will be for him to enact his economic agenda.

“That, in my opinion, is why last week China seems to have given up its more moderate approach to become a lot angrier and tougher,” said Pettis. “This is playing to domestic audiences.”

Trump administration officials expressed frustration that such conditions make it difficult to negotiate with their Chinese counterparts.

A deputies-level meeting in February grew contentious when U.S. negotiators believed Chinese emissaries were pulling back on prior commitments to address core issues, such as intellectual property theft and forced transfers of technology. U.S. Trade Representative Robert Lighthizer entered the room and stated in an “extremely direct” way that a deal was slipping away, according to Willems.

The talks eventually got back on track, and Trump later announced he would delay a self-imposed deadline to raise tariffs, citing progress in the talks. But a similar reversal on China’s supposed commitment to change their laws led to the breakdown of the latest round of talks.

The dynamic has given administration officials hope a deal could eventually be reached, but Willems said it is critical for Washington to convince Beijing it is not “somehow trying to exert control over China” and allow Xi to save face — something it has thus far failed to do.

Trump has also dealt with divisions within the White House on how best to approach negotiations with China.

Some advisers, such as Treasury Secretary Steven Mnuchin, are more cognizant of how deeply entangled the two sides are economically as negotiations play out. The two countries traded roughly $660 billion in merchandise last year, and China holds more than $1 trillion in U.S. debt, further intertwining the two sides.

Another group of aides, including trade adviser Peter Navarro and former White House chief strategist Stephen Bannon, have voiced more hawkish views of China, maintaining the country is a strategic threat that must be dealt with aggressively.

“You get the sense the second faction is stronger,” said Edward Alden, a senior fellow at the Council on Foreign Relations. “Whenever the president tweets … it’s always about all the good things that the tariffs have done for the United States.”

He pointed to Trump’s recent rhetoric encouraging China-based companies to relocate production to Vietnam or nontariffed countries as well as an executive order Trump signed this week paving the way to block foreign tech companies — such as Chinese telecommunications giant Huawei — from doing business in the U.S. if they are deemed a national security threat by the Commerce Department.

Those changes could open the door to further decoupling of the world’s two largest economies, a goal of some China hawks but an outcome the business community says would be damaging to both.

“With this elongation of this period and the ratcheting up of tariffs, some of the reports you’ve seen on supply chain changes, that’s going to accelerate,” the industry source said.

Despite those factors, Trump has cited what he says is his close personal relationship with Xi as reason for optimism a deal will ultimately get done.

The White House said a possible G-20 meeting is still being finalized, but the sit-down will test the extent of the two leaders’ friendship and Trump’s dealmaking abilities.

“In every negotiation you need to keep communication lines open. I think that President Trump very much tries to signal that he’s keeping those lines open,” González said. “So from that perspective, that is a positive thing. On the other hand, however, negotiations like this are much more than personal relations.”