Trump Gets Xi’s Attention

Mock Donald Trump not. He has emerged the winner in preliminary, warm-up bouts with South Korea, Mexico and Japan. And in the main event, with Donald Trump in the red, white and blue trunks vs. Xi Jinping in the red trunks, the American president again looks very much the winner. A must for the self-styled Tariff Man.

Trump hears the clock ticking down to 2020. He needs the gyrations in share prices to stop. After all, he has told voters that by share prices they shall measure him. And as one veteran of a lifetime on the trading floor of the New York Stock Exchange says, Trump’s tweets aimed at lifting markets are no longer credible, because reacting to them can cost you a great deal of money when a few hours later he contradicts himself.

Trump also needs a buoyant economy, one growing at a minimum annual rate of 3%. And soon. It takes time for a feelgood glow to develop among voters. At present, with talk of an economic slow-down late in 2019, even the good jobs market might not be enough for voters. Especially those hurt by tariffs, most notably farmers like those who grow soybeans and other products the Chinese stopped buying. The President may be a first-class reality avoider when it suits him, but this is no such case. Neither wishing, nor lying, nor tweeting can produce a second term. A growing economy, with the uncertainty produced by tariffs eliminated or at least reduced, just might. Trump needs the trade skirmish with China to end, and end with what he can reasonably claim as a victory. He also needs the Democrats to come up with another unelectable candidate in the great tradition of Al Gore and Hillary Clinton, but that’s a discussion for another day.

His opponent, China’s president-for-life, is fighting a defensive battle. The men in his own corner believe his battle plan is seriously flawed. For one thing, his boast that his “Made in China 2025” plan would enable him to dominate his opponent and replace America as the world champion economy only served to galvanize Trump into action and to reverse the policy of previous American presidents who refused to enter the ring with China, and watched as two million American manufacturing jobs were destroyed, and with them many communities.

Trump believed that the time was ripe to challenge Xi by raising tariffs on Chinese goods, with more to come. The American economy is growing and strong. The Chinese economy is not. It is debt-ridden, pockmarked with empty cities and tower blocks created by communist bureaucrats who seemed to believe that if you build it, they will come. Xi prepared for the confrontation with Trump by enabling state banks to make loans to state-owned – and some privately owned – enterprises. Many cannot repay, leaving Xi to support zombie companies, sapping his strength. Debt incurred by Chinese companies is now 164% of GDP; the roughly comparable figure in the US is 45%, and that far lower level has American regulators worrying about a debt bubble.

Many of these duff loans, made to avoid a sharper slowdown, are backed with property collateral, but with about one-fifth of all apartments vacant, that is not the most reassuring backstop. Corporate defaults are at a record high. Local governments are swimming in red ink, $5.8 trillion of it in hidden debt according to Bloomberg. Zhou Xiaochuan, S&P credit analyst Gloria Lu, says “The potential amount of debt is an iceberg with titanic risks.” And Zhou Xiaochuan, a former governor of the Peoples Bank of China, the nation’s central bank, warned as early as 2017 of a build-up of financial risks that are “hidden, complex, sudden, contagious and hazardous.” In short, while Trump draws strength from his market-based economy, Xi is slowed and weakened by the drag of an economy that cannot support a contender for the championship, unless that contender is free to commit fouls.

Xi has one advantage: Trump is as eager for a deal as Xi is. Trump opened negotiations by agreeing to postpone an increase in tariffs on Chinese goods. Xi responded by reducing tariffs on imported cars, although only to their pre-trade-war level (seven times US tariffs on imported cars), thereby helping German carmakers BMW and Mercedes, who sell into China from plants located in the US. Trump then defied his advisers by offering to arrange the release of Huawei executive Meng Wanzhou if that would clinch a trade deal. Xi continued the pleasant tit-for-tat by allowing his buyers to order somewhere between 500,000 and two million tons of soy beans (reports vary), small but significant amounts in the context of these negotiations.

That’s the easy part for Xi. China needs soy beans. The harder part will be abandoning or amending China’s plan to dominate the markets of the future, Xi’s signature fight plan, “Made in China 2025”. That entails ending the theft of American intellectual property, the requirement that American firms have Chinese partners and turn over to them such IP as China has not already stolen,
numerical targets that require Chinese firms to concentrate their purchases on domestic suppliers.

More important, Xi would have to adopt a policy of what is called in the jargon of specialists in global trade, “competitive neutrality”, a reform that requires a government not to favor state-owned enterprises over privately-owned firms. That would put a damper on subsidies such as those that have allowed China to burden several sectors – steel and cement among them – with excess capacity and flood foreign markets with cheap products. It is not clear how an enforcement mechanism can be devised by Trump’s March 1 deadline, with Christmas and China’s lunar new year eating up several days. But does seem, at least now, that Trump’s strategy for getting China to change its ways has a better chance of success than the EU’s complaint to the WTO about China’s trade tactics.

If Xi can’t go that far, he will face 25% tariffs on virtually all of China’s exports to America. If he does make these concessions, and Trump satisfies himself that means of verification are available, the old trading order will give place to the new, and other countries will share the benefits of a fairer trading regime. The White House mail room undoubtedly will be overwhelmed with thank-you notes from world leaders who find Trump’s attacks on the existing world order so irritating.