America alone? US Treasury Secretary Steven Mnuchin (C) arrives for a G-20 gathering during the IMF spring meetings on Friday. Photo: Reuters/Yuri Gripas

Over the weekend, US Treasury Secretary Steven Mnuchin finally pushed the ball forward in a US-China trade dispute that has in recent weeks screeched to a tense standstill, after the two sides had exchanged threats of harsh tariffs, prompting unease among world leaders and throughout global financial markets.

Mnuchin told reporters he met with China’s newly minted central bank governor, Yi Gang, on the sidelines of an International Monetary Fund gathering, conveying a message that he was interested in traveling to Beijing. He declined to comment on timing of a potential trip, and China’s Commerce Ministry responded on Sunday simply that they “welcomed” the visit. The development came while policy makers brought a unified message of opposition to protectionist trade measures to the meeting, leaving the US representative feeling a bit isolated, judging from his body language (pictured above).

One Chinese official “with knowledge of Beijing’s decision-making process” said “it’s very likely” that Mnuchin will make the trip, according to reporting from The Wall Street Journal. But regardless of Beijing’s feelings about whether or not the Trump administration will make such a decision, anyone with knowledge of US President Donald Trump’s decision-making process knows that cable TV coverage, or lack thereof, might be the key to a successful trip. Trump’s favorite source of punditry, Fox News, gives air time to plenty of critics of tariff action. A large portion of his personal political base, on the other hand, are incensed by any perceived backsliding on protectionist promises.

If Mnuchin does go, how will the two sides come to a truce? Since a tit-for-tat series of announcements on proposed tariffs, initiated by the US and then matched by China, Beijing has announced a series of highly anticipated market-opening reforms. Has that changed the equation? Have intense lobbying efforts from those American firms most vulnerable to a trade war softened the Trump administration’s resolve?

Why this trip might be the first step towards coming to a deal:
Mnuchin has indicated the US has “appreciated” China’s planned opening up some markets. Those included removing limits on foreign ownership of manufacturing in China, including in autos, shipbuilding and aircraft. He also added praise for China’s help on North Korea, suggesting the administration may try to avoid further deterioration in the relationship amid the president’s direct engagement with North Korean leader Kim Jong-un.

Echoing previous comments by Trump administration officials, the Treasury chief said he was “cautiously optimistic to see if we can try to reach an agreement.”

A delay in an official proposal of an additional US$100 billion in tariffs, threatened by Trump several weeks ago, could be a signal of willingness to strike a deal and avert a trade war, as the WSJ suggested.

Should tariffs officially come into effect as tentatively slated for this summer, a blow to global growth – which economists of every stripe acknowledge would be inevitable – would also coincide with the run up to mid-term elections in the US.

China has signaled that it is confident market opening measures that it has been rolling out in recent weeks have proven its free and open market bona fides. Leaders in Beijing have suggested that there will be more market opening to come.

Why Mnuchin will likely fail to make a breakthrough:
The president has repeatedly undercut cabinet officials on foreign policy-related issues, giving them little authority in negotiations abroad. His decision-making process has been described as free-flowing and flexible, which makes it hard to enter into a negotiation with clear objectives. Case in point: amid widespread optimism that the US was nearing an agreement with Mexico, the president tweeted Monday morning that he was imposing a new precondition to any deal, which would be impossible for Mexico to meet.

Officials cited by the WSJ said that the hawkish US Trade Representative Robert Lighhizer may tag along on any trip, amid fears Mnuchin might take a softer approach than the president would be willing to accept.

The bottom line:
In the short term, despite the rhetoric, a deal is not entirely unlikely. The blunt instrument of tariffs will inflict massive pain on US firms and dampen growth prospects, which polls show is Trump’s strongest asset politically. As such, he will look for a way out. China has worked hard to sell any market openings as part of a commitment to free trade, and not a concession to Trump. But if they go just far enough, Trump may be able to claim a small political victory at home.

In the long term, it is hard to be so optimistic about the bilateral trade relationship. As we have reported, many analysts and commentators see the true aim of the US confrontation with China on trade is to force Beijing to reconsider its Made in China 2025 strategy. The plan hopes to see China move up the value chain by becoming a leader in high-tech industries that have until now been dominated by advanced economies. Giving up any part of this plan is a non-starter for Beijing, but also the minimum asked of by trade hawks in the administration such as Robert Lighthizer. He is not alone. A growing constituency in the US on both sides of the political aisle agree, and policies looking to thwart Beijing’s plan, short of tariffs, will begin piling up, which will only complicate the impasse. For instance, recent penalties placed on Chinese telecoms giant ZTE, along with other restrictions proposed for Chinese investment in the US technology, are only serving to speed up Beijing’s plans.

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