Bet on Trump to fold in China trade talks

A person who says something can’t be done shouldn’t interrupt the man doing it. This old Chinese adage leaps to mind as Donald Trump’s negotiators joust with Xi Jinping’s over what could be history’s most important trade deal.

President Trump is the one saying China won’t be allowed to surpass America’s economy. Washington will never cede its leadership of the global financial system – no way, no how. President Xi is the one investing hundreds of billions of dollars in leading sectors from autos to aerospace to pharmaceuticals to semiconductors to robots within six years. Quite a contrast to Trump’s making coal great again.

The divergent directions in which the two biggest economies are headed is the subtext of the Trump-Xi faceoff.

High-level talks in Beijing ended on Friday with no visible progress, although Trump said on Saturday that he had been briefed at his Florida resort by negotiators and described the talks as “very productive.”

Washington and Beijing are staring at a March 1 deadline. Among the many possible outcomes, here are the two most likely.

The first, and most likely, is China agreeing to buy more US goods and vague steps to open the economy. That way, Trump can claim a win on the global stage and give Wall Street reason to bid stocks higher. And Asia can breathe a sigh of relief as the Group of Two steps down from DEFCON 1.

The second – a genuine reordering of China’s practices – is far less likely. Still, its mere specter will tantalize investors over the next couple of weeks. If Trump’s negotiating team was wise, it would hold out for deal No. 2.

Sure, Trump has Xi’s back against the proverbial wall. Beijing is anxious for a deal. In reality, though, Xi has greater latitude – and pain threshold – than Trump, thanks largely to the calendar.

No, Xi isn’t enjoying Trump’s tariffs on roughly $250 billion of mainland goods. The angry tweets, the threats of a dollar devaluation, the suggestion Chinese workers are somehow victimizing Trump’s economy are a drag indeed.

But Xi, the strongest Chinese leader in decades, isn’t facing a plethora of investigations. His Communist Party isn’t reeling from recent losses in mid-term elections. Xi’s legislative prospects aren’t dependent on the whims of a resurgent opposition party. Nor is Xi legitimacy tied to a jittery stock market, as is Trump’s. All Xi needs to do, really, is get Trump off his back.

A deal to buy, say, $100 billion or $200 billion of US goods would sound grand. It wouldn’t much matter, though. The odds of China finding anywhere near that amount of Made in America stuff are slim. Most important from Xi’s perspective is that a gleeful Trump directs his ire elsewhere.

Asia will just have to hope that doesn’t mean Tokyo or Seoul. Trump is prodding Japanese Prime Minister Shinzo Abe to negotiate a bilateral trade deal. In general, though, a truce between Washington and Beijing would brighten prospects for Asian growth and markets. It also would give policymakers breathing space to upgrade domestic economies.

This scenario worries investors like J. Kyle Bass of Hayman Capital Management. “There’s speculation that Trump has told his negotiators to ‘get a deal done’ in order to put an end to recent market volatility,” Bass wrote in a recent Bloomberg op-ed with Daniel Babich. “But that would mean foregoing a historic opportunity to come to a major restructuring of America’s relationship with China at a moment when China is most inclined to agree to concessions. We have come too far for Trump to take the easy way out.”

The trick is getting Beijing to dismantle “an industrial policy that grants unique advantages, namely widespread government subsidies, protected domestic markets and regulatory preferences, to Chinese government-affiliated national champions.” The priority, Bass and Babich argue, is to “end China’s long-standing policy of bulk economic espionage and theft, which annually costs America’s economy at least $300 billion, according to US government estimates.”

This, of course, is the reason many Democrats in Washington give tacit approval to Trump’s trade antics. In the 18 years since Beijing joined the World Trade Organization, a succession of US leaders hoped it would start acting like a stakeholder in world affairs, not just a shareholder.

Trump took his own crack at doing something others said couldn’t be done. Odds are, though, Trump will interrupt himself.

Trump’s fellow Republicans are urging him to stand firm. Case in point: Republican Senator Marco Rubio, who last week proposed legislation that would curb and tax mainland investment to combat Xi’s “Made in China 2025” scheme.

“US policy,” said the Florida lawmaker, “should respond to the practical and political economy challenges. This includes enacting strategic US-China capital flow restrictions and corresponding defensive measures for domestic industries targeted by the plan.”

Fair enough, this too ignores why America is walking in place as China raises its game. More open Chinese markets won’t fix America’s crumbling infrastructure, make workers more innovative or productive or stabilize health care costs. It won’t improve America’s education system, prod executives to boost wages or make corporate America more inventive. Nor will a trade deal prepare the workforce for automation and artificial intelligence advancements remaking the job market.

The real problem is that as Xi prepares China for the global marketplace it will confront in 2025, Trump seeks to pull the US back to 1985. That was a simpler time, back when the White House, the Federal Reserve and corporate America controlled the global economy. And reaped the lion’s share of the spoils.

Trump isn’t wrong to demand that China trade fairly and transparently. But his tariff arms race must be accompanied by heavy lifting at home to reorient the US for a fast-changing globe. Odds are, Trump will take deal No. 1 and move on. Xi, meanwhile, will keep doing what Trump says China can’t.

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