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Xi right to play for time in trade war with Trump

Beijing set to win breathing space as it mulls confrontation versus cooperation

| China

In early March last year, the eve of the U.S.-China trade war, President Donald Trump declared in a tweet that "trade wars are good, and easy to win." A year later, as American and Chinese negotiators put the finishing touches on a trade deal to end their trade war, it should become abundantly clear to the former real estate magnate that trade wars are not only bad, but also very hard to win.

What Trump expected to be a "cake walk" turned out to be a monthslong slog with Beijing, a clear underdog in the fight. Yet, by refusing to capitulate and dragging out the talks, President Xi Jinping bought valuable time in dealing with his toughest foreign policy challenge since coming to power in late 2012. In the event of a deal, Xi will gain even more time to formulate and execute a long-term strategy to confront a United States that has elevated China to the unwelcome status of its most serious strategic adversary.

Of course, should Washington and Beijing actually reach a deal by the end of April -- a likely but not guaranteed outcome -- Trump would undoubtedly tout it as his triumph (he has already called the deal-in-progress "epic"). But based on the details of the deal leaked to the press, it seems that its modest scope will hardly deserve the adjective "epic," and the meager concessions offered by Beijing (such as purchase of American goods China will need to import anyway) will make Trump look more like a loser than a winner.

Few could have envisioned this outcome when Trump launched his trade war against China in June last year. Given the lopsided trade balance in favor of China, the conventional wisdom was that Trump had all the leverage to force China to agree to a radical overhaul of its trade practices, which would also require major reforms of its state-dominated economic system. Additionally, initial Chinese miscalculations -- such as responding hastily to Washington's first-round of tariff increases on $50 billion worth of Chinese imports with proportional retaliation -- allowed Trump to raise the stakes further by levying 10% tariffs on an additional $200 billion of Chinese imports and threatening to increase the tariffs to 25% starting in January 2019.

There was no question that Trump's shock-and-awe tactic initially produced desired effect. Business confidence in China tanked while foreign companies accelerated plans to relocate supply chains out of China. It was commonly assumed that, if China wanted to preserve its lucrative trade with the U.S., which registered a surplus of $419 billion in China's favor in 2018, it would have to accept America's stringent demands to open its economy and implement credible policies to protect American intellectual property rights and end subsidies to state-owned enterprises.

Despite its huge disadvantage in a dollar-for-dollar tariff duel with the U.S., China held firm and consistently stuck to its bottom-line: agreeing to substantial increases of Chinese purchase of American products and limited market opening measures but little else. Such a negotiating position might not have been tenable had Trump maintained his uncompromising stance and high-pressure tactics.

But Trump's political calculations, and his actions, quickly changed after the Republican Party took a drubbing in the November midterm elections. By that time, the escalating trade war with China had alarmed investors and sent stock indexes, which Trump sees as gauges of his personal popularity, tumbling down around the world. American economic momentum also began to slacken as the effects of Trump's tax cut dissipated.

The trade war, started as a surefire move to make Trump look resolute and strong, now could derail Trump's reelection bid if its further escalation produced enough damage to send the American economy into a recession next year. The survival instinct inside Trump apparently persuaded him to agree to a truce when he met Chinese president Xi Jinping in Argentina in late November.

Even though the business community may breathe a sigh of relief that the worst trade war since the U.S.-Japan trade tussle in the 1980s may soon be over, Chinese leaders know that it is too soon to celebrate. Consummate realists themselves, they understood from the outset that the Sino-American trade dispute was only part of a larger geopolitical contest between China and the U.S.

Additionally, Trump's protectionist instinct and demonstrated pattern of reneging on his promises made Chinese leaders worry about his commitment to the proposed deal. If Trump is chiefly motivated by his need to win reelection next year, he could tear up the agreement and restart the trade war after he gains a second term.

Despite the likely lack of durability of a trade deal due to the Sino-American rivalry and Trump's personality, Beijing still sees real, albeit limited, value in ending a costly trade war. While it is true that China cannot trust Trump and that further escalations in the Sino-U.S. strategic competition will seriously endanger trade ties, a deal can nevertheless buy valuable time for Beijing to adjust to a radically changed external environment. Strategically, this deal can put a temporary pause in the downward spiral in U.S.-China relations. Domestically, a break in the trade war will help Xi repair the political damage he has sustained for mishandling the Sino-American relationship.

How Beijing makes the best use of the time it is seeking to buy with a trade deal really depends on Xi's policy decisions in the coming two years. He will be faced with two opposite courses of action. His realist advisers will try to persuade him to take advantage of the time gained to reduce Chinese dependence on American markets and technology since such asymmetric dependence makes China highly vulnerable to U.S. pressures. This course will allow China more autonomy to manage the U.S.-China economic decoupling made inevitable by clashing geopolitical interests. But another group would urge him to embrace even tighter economic integration with the U.S. Flinging China's doors open to American products and companies will help create powerful interests in the U.S. with an even bigger stake in maintaining stable ties with China, and drastically raise the costs of confrontations for Washington, thus making another trade war less likely.

At the moment, it is far from clear which route Xi will pick. His strongman instincts and ideological antipathy toward the West would propel him toward confrontation but cool-headed economic calculation may lead him in a more cooperative direction. Both are huge gambles with profound consequences for China, Sino-American relations, and the future of the global economy.

Minxin Pei is a professor of government at Claremont McKenna College and currently holds the Chair in U.S.-China Relations at the Kluge Center of the Library of Congress

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