At the G20, 'Xi still believes he has the upper hand'
<tr><td class="bg-holder"><img width="100%" src="https://www.atlanticcouncil.org/images/newatlanticist/2019/Trump_Merkel_G20_large.jpg" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">Atlantic Council</p><p class="excerpt">'Lurking as the largest concern among G20 members are fears regarding what experts call “deglobalization,” driven above all by fears of an increased decoupling of the US and Chinese economies.' </p><p><strong>‘The G20 </strong>this weekend faces its biggest collective challenge since the group of world leaders first met in November 2008 in the jaws of the financial crisis,’ <a href="https://www.atlanticcouncil.org/blogs/new-atlanticist/special-g20-edition-historic-test-for-world-adrift" target="_blank">writes</a> Frederick Kempe, president of the Atlantic Council.</p><ul><li><strong>‘A toxic trifecta</strong> of growing political instability, escalating trade tensions and slowing global growth would be challenge enough, but the perils don’t stop there.’</li></ul><p><strong>‘How the G20 plays out</strong> in its group setting – and perhaps more importantly in the sideline meeting between US President Donald Trump and Chinese leader Xi Jinping – will shed light on whether today’s leaders are up to the challenge of navigating those unsettling, interlocking shifts. They include':</p><ul><li><strong>‘new dangers</strong> of major power conflict,'</li><li><strong>'the related struggle</strong> between democratic and authoritarian capitalist systems,'</li><li><strong>'uncertainties</strong> about the nature of US global engagement after 70 years of relative consistency,'</li><li><strong>'questions</strong> regarding the relevance and capability of global institutions, including the G20, to manage emerging threats,'</li><li><strong>'and an escalating</strong> competition for the commanding heights of next generation technologies (and whether they will be harnessed for the common good or will instead create a new battlefield).’</li></ul><p><strong>‘What makes</strong> this moment even more perilous is that world leaders come to the table with far less cohesiveness, nursing wounds from a series of trade skirmishes.’</p><p><strong>‘Beyond that</strong>, governments and major central banks have nowhere near the fiscal and monetary tools – given low interest rates and high public debt – that were available to them before 2008 to manage unanticipated shocks.’</p><ul><li><strong>‘Most worrying</strong> is that the US Federal Reserve – the closest thing to a global central bank due to the dollar’s leading role – enters this downturn with a depleted arsenal: a benchmark policy rate of 2.25 to 2.5% compared by 5.25 % in September 2007.’ </li><li><strong>‘And Japanese</strong> and European central banks are already in negative-rate territory, so how to cut further?’</li></ul><p><strong>‘Most advanced</strong> economies have more debt and larger deficits than they had in 2008.’</p><ul><li><strong>‘That leaves</strong> less room for stimulus spending, despite European Central Bank President Mario Draghi’s calming of global markets last week by signaling that if the economic outlook doesn’t improve, he might restart using monetary tools such as “quantitative easing” – the unconventional purchase of securities to increase the money supply and encourage private lending and investment.’</li><li>‘“<strong>The monetary and fiscal</strong> interventions and private-sector backstops used after the 2008 financial crisis simply cannot be deployed to the same effect today,” <a href="https://www.chinadebate.com/newsletter/roubini-on-the-us-china-trade-war" target="_blank">writes</a> economist Nouriel Roubini, one of the few economists to predict the US housing market crash of 2007 and 2008. “Under these conditions, a severe enough shock could usher in a global recession, even if central banks respond rapidly.”’</li></ul><p><strong>‘Particularly</strong> telling last week was Fed Chairman Jerome Powell’s reasoning for last week’s market-moving decision not only to hold rates stable but also to signal a lean toward further easing than tightening when governors next meet July 30-31.’</p><ul><li><strong>‘An anticipated</strong> cut of at least a quarter-percentage point - and perhaps as much as a half point - would be the first since December 2008.’</li><li><strong>‘Powell for months</strong> had resisted President Trump’s demands that he reduce rates – unprecedented pressure for a US president to place on his independent central bank.’</li><li><strong>‘Powell and Fed</strong> governors are more likely to move now, spurred more than anything else by the global impact of Trump’s trade policies and resulting tensions with China, rather than due to US economic fundamentals.’</li><li>‘“<strong>The case for</strong> a somewhat more accommodative policy has strengthened,” <a href="https://www.wsj.com/articles/fed-holds-rates-steady-hints-at-possible-cut-if-outlook-dims-11560967516?tesla=y&mod=article_inline&mod=article_inline" target="_blank">said</a> Powell last week. “It’s really trade developments and concerns about global growth that are on our minds.”’</li></ul><p><strong>‘The downward</strong> growth shift is sobering.’</p><ul><li><strong>‘The World Bank</strong> this month <a href="http://www.worldbank.org/en/publication/global-economic-prospects" target="_blank">cut </a>its 2019 global growth forecast to 2.6% from 2.9% and cut its forecast for growth in trade to 2.6% from 3.6%.’</li><li><strong>‘The World Bank</strong> had already forecast the US to slow to 2.5% in 2019 from 2.9% in 2018 and for China to slow to 6.2% from 6.6%.’</li><li><strong>‘Those worrisome</strong> numbers are made more so by what World Bank President David Malpass said is driving them: falling business confidence, the slowest pace of global trade growth since 2008 and sluggish growth in emerging and developing economies.</li></ul><p><strong>‘Lurking as the largest concern</strong> among G20 members are fears regarding what experts call “deglobalization,” driven above all by fears of an increased decoupling of the US and Chinese economies.’</p><ul><li><strong>‘Markets</strong> haven’t even begun to price in that danger and its potential impact on product costs and existing supply chains.’</li></ul></td></tr>
<tr><td class="nl-post"><table class="intable"><tr><td class="intable-border"><img width="100%" src="https://assets-global.website-files.com/5c864c33af62620dca1373ac/5d16751df6e4ce3c582b5d51_Fred%20Kempe.jpg" alt="CHINADebate"><p class="caption">CNBC Television</p><h5>‘This isn't about tariffs. This is about two competing systems.’</h5><p><strong>‘This isn't about tariffs</strong>. This is about two competing systems,’ <a href="https://www.youtube.com/watch?v=q2s1y7TZjtA" target="_blank">says Frederick Kempe</a> in a CNBC video interview.</p><ul><li><strong>‘These are</strong> two men who are trying to outfox each other, to see who's going to blink first.’</li></ul><p><strong>‘The g20</strong> so Friday and Saturday is going to be the biggest collective challenge for these leaders since they started these meetings in 2008 in the jaws of the financial crisis and there are three reasons why that's the case':</p><ol><li><strong>'First</strong>, the us-china relationship it hasn't been this bad in 30 years.'</li><li><strong>'Second</strong> is the cohesiveness of the Western leaders isn't that great.'</li><li><strong>'And the third</strong> is if we hit another shock because of the low interest rates and because of high debt levels central banks and others just don't have the wherewithal to stimulate to address it.’</li></ol><p><strong>'So I think</strong> it may be even more perilous in geopolitical terms than was 2008.'</p></td></tr></table><table class="intable"><tr><td class="intable-border"><a href="https://youtu.be/hbIQBiPMst8" target="_blank"><img width="100%" src="https://assets-global.website-files.com/5c864c33af62620dca1373ac/5d1676d4f6e4ce131b2b640e_Derek%20Scissors-%20China%20trade%20deal%20looked%20close%2C%20but%20we%20were%20nowhere%20near%2090%25%20.jpg" alt="CHINADebate"></a><p class="caption">CNBC Television</p><h5>‘Trade deal: No change in attitude on either side – at least in public’</h5><p><strong>‘Q: The Treasury secretary</strong> before he had said we were 90 percent of the way done on this, but the last 10 percent is the hardest part. Do you think that's still the same situation we find ourselves in today?’</p><p><strong>‘Scissors: ‘No, and I think</strong> in retrospect he was wrong - although it was a surprise to most people,’ <a href="https://youtu.be/hbIQBiPMst8" target="_blank">says AEI’s Derek Scissors</a> in a CNBC video interview.</p><ul><li><strong>‘The Chinese</strong> changed up on us - they say no deal is done until the whole thing's done that's fair - but it looked like we were close’</li><li><strong>‘It no longer</strong> looks like we're that close’</li></ul><p><strong>‘The Chinese blew up</strong> the talks in early May because they did not want the enforcement mechanism on intellectual property that we wanted.’</p><ul><li>‘<strong>That's huge</strong> because without an enforcement mechanism any agreement they make on intellectual property is worthless.’</li><li>‘<strong>The intellectual property</strong> piece of the talks is half the talks the other half being purchases and tariffs.’</li></ul><p>‘<strong>So there's no way</strong> you get 90% after what the Chinese did.’</p><ul><li>‘<strong>When Secretary Mnuchin</strong> talks about its path forward he really means we have to get somehow back to where we were before the Chinese decided they didn't want the deal.’</li><li>‘<strong>But not only</strong> do we have the same problem on IP enforcement that we had before, now time is running out for China to make those purchases that the president wants.’</li><li>‘<strong>Every month</strong> that goes by there's less time for those purchases to make an impact.’</li></ul><p><strong>Q: ‘Do you think</strong> there's been a change in attitude by either side in terms of what they're willing to accept and if so which side would that be.’</p><p><strong>Scissors: ‘Well you don't see</strong> it in public.’</p><p>‘<strong>The Chinese in public</strong> say they have the same attitude about their sovereignty and other such high-profile concepts.’</p><ul><li><strong>‘The level </strong>of Chinese propaganda since early May is really unbelievable.’</li><li>‘<strong>It's the worst I've seen</strong> in 20 years in terms of insisting on cliches associated with the greatness of the Communist Party and so on.’</li></ul><p>‘<strong>On the American side</strong>, the president said today you know China better give us a deal or tariffs going to go up.’</p><ul><li>‘<strong>After China</strong> I'm going after Vietnam.’</li><li>‘<strong>So he still has</strong> the same attitude about trade deficits.’</li></ul><p><strong>‘In private</strong> I think the negotiators know that they felt they were close in April.’</p><ul><li><strong>‘The question</strong> is whether the leaders will allow them to go back to where they were in April or stay with these public position.’</li></ul></td></tr></table><table class="intable"><tr><td class="intable-border"><a href="https://www.youtube.com/watch?v=MFEdnaPYLNY" target="_blank"><img width="100%" src="https://assets-global.website-files.com/5c864c33af62620dca1373ac/5d16751d2daf2f4ffa2cbaa1_Leland%20Miller-Chinas%20Economy%20Is%20Holding%20Its%20Own%20Against%20Trump.jpg" alt="CHINADebate"></a><p class="caption">CNBC Television</p><h5>‘China's Economy Is Holding Its Own Against Trump’</h5><p><strong>Q: ‘How is China doing</strong> right now when it comes to the impact of the trade tensions and where it could all go from the G20? Is a lot of the damage that has already been done reversible if we get any sort of deal here?’</p><p><strong> Miller: ‘Yeah, I think it is</strong>,’ <a href="https://www.youtube.com/watch?v=MFEdnaPYLNY" target="_blank">says Leland Miller, CEO</a> of the China Beige Book, in a Bloomberg video interview.</p><p><strong> 'At China Beige Book,</strong> we're seeing better data than what's being released officially right now - we see our data ahead of official data by two to four months.’</p><ul><li><strong>‘Manufacturing </strong>is interesting - outperforms in our Q2 data.<ul><li><strong>‘This is principally</strong> because they borrowed more, and they borrowed for cheaper.’</li><li><strong>‘You could see</strong> the government's hand at work - there was clear policy support.’</li></ul></li><li><strong>‘Retail </strong>also outperformed.’</li><li><strong>‘Hiring</strong> is doing quite well.<ul><li><strong>‘That's important </strong>because if, as the U.S. claims, they're hitting China hard where it hurts, then you'd see a reaction in the jobs market.’</li><li><strong>‘You're not seeing</strong> that at all - you're seeing the other direction.’</li></ul></li></ul><p><strong>‘So you there is some</strong> pain and a lot of pressure.’</p><ul><li><strong>‘But at this point</strong> China's economy is doing well.’</li><li><strong>‘And China is able to</strong> hold its own against Trump for now.’</li></ul></td></tr></table></td></tr>
<tr><td class="bg-holder"><img width="100%" src="https://files.foreignaffairs.com/styles/article_lead_1x/s3/images/articles/2019/06/27/rts1j4pe.jpg?itok=HgFY1Zcv" alt="CHINADebate"></td></tr><tr><td class="nl-post"><p class="caption">Foreign Affairs</p><p class="excerpt"></p><p><strong>‘When Presidents Xi Jinping</strong> and Donald Trump meet on the margins of the G-20 summit in Osaka later this week to seek a trade deal, Xi is likely to soften the customary formality of Chinese diplomacy by calling the U.S. president “my friend,” writes Andy Nathan of Columbia University in <a href="https://www.foreignaffairs.com/articles/china/2019-06-27/how-china-really-sees-trade-war" target="_blank">‘How China Really Sees the Trade War’</a> in <em>Foreign Affairs</em>.</p><ul><li><strong>‘Beneath the cordial surface</strong>, however, Xi will yield nothing. Trump must then decide whether to accept the Chinese offer that has been on the table ever since early 2017 and end the trade war or to allow the U.S. and Chinese economies to drift further toward decoupling.’</li></ul><p>‘“<strong>We’re going to win either way</strong>,” Trump likes to say.’</p><ul><li><strong>‘But according to</strong> two Chinese colleagues who contributed to this article but cannot attach their names, Beijing policymakers believe he is either misinformed or bluffing.’</li></ul><h5>CHINA'S BOTTOM LINE</h5><p><strong>‘The basic Chinese position</strong> on the trade war has not changed since 2017.’</p><ul><li><strong>‘Under its proposal</strong>, China would buy more U.S. products in an effort to narrow the trade deficit, and it would reaffirm its long-standing commitment to the legal protection of intellectual property rights’.</li><li><strong>‘But if foreign firms</strong> voluntarily decide to share trade secrets with Chinese firms in order to gain access to the Chinese market—a practice the United States characterizes as “coercive transfer”—China would do nothing to interfere.’</li><li><strong>‘China would continue</strong> on its established trajectory of opening its market to foreign banks and businesses, but it would not accelerate the pace of opening.’</li><li><strong>‘Its currency </strong>would remain pegged to a basket of foreign currencies, and Beijing would not artificially deflate it, since China sees no benefit to a currency war.’</li><li><strong>‘The Chinese government</strong> has already lowered the volume of propaganda about its Made in China 2025 program, which pushes for Chinese dominance of modern technologies such as robotics and artificial intelligence.’</li><li><strong>‘But it is not willing to</strong> ramp down the research and development projects that form the substance of that program.’</li><li><strong>‘In short</strong>, China has offered to change nothing structural in its development model, but it is willing to grant Trump a nominal victory he could use in the 2020 presidential campaign.’</li></ul><p><strong>‘At the start of negotiations</strong>, the Chinese side believed that Trump was likely to accept their offer, following the advice of administration figures such as Treasury Secretary Steven Mnuchin and Trump whisperers such as gambling magnate Steve Wynn.’</p><ul><li><strong>‘But then the Chinese watched</strong> as hard-liners such as trade adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer got the president’s ear.’</li><li><strong>‘The two men</strong> persuaded Trump that only fundamental changes to the Chinese economic model would enable the United States to maintain its position as the world’s leading economy.’</li><li><strong>‘The strong U.S. economy</strong> and stock market also emboldened Trump to take a tougher position.’</li><li><strong>‘In April</strong>, the American negotiators therefore submitted a draft agreement demanding that China stop giving special support to its state-owned enterprises, allow U.S. firms to serve the Chinese market without sharing industrial technology with Chinese partners, amend Chinese laws that were inconsistent with the U.S. demands, and allow Washington to establish an office in Beijing to monitor China’s compliance.'</li><li><strong>‘The Trump team</strong> offered to lift U.S. tariffs step by step upon proof that China had met the terms of the agreement.’</li><li><strong>‘The Chinese side</strong> balked and struck many of the U.S. demands from the draft accord.’</li><li><strong>‘The Americans</strong> accused them of going back on the deal.’</li></ul><p><strong>‘In a little-noticed </strong><a href="https://news.ifeng.com/c/7ma1xgATP3g" target="_blank">interview</a> with Chinese media on May 10, the day that trade talks broke off, the chief Chinese negotiator, Vice Premier Liu He, acknowledged that the Chinese side had crossed out many of the provisions the Americans had added.’</p><ul><li><strong>‘It was reasonable</strong> to do so, he said. “Nothing is final before a deal is closed. So we don’t agree with the U.S. characterization that we ‘reneged.’”</li></ul><p><strong>‘Liu also spelled out</strong> the three issues that, in China’s view, had stymied the talks.’</p><ul><li><strong>‘First</strong>, China wanted all punitive tariffs lifted before the agreement was finalized, not in stages during its implementation.’</li><li><strong>‘China would not</strong> compromise with a stick held over its head. Second, the Americans had tried to reinterpret—and make more generous—an offer to increase imports that Xi had made in 2018.’</li><li><strong>‘But the offer</strong>, Liu said, “could not be changed lightly.”’</li><li><strong>‘Finally</strong>, China wanted the text of the agreement to be “balanced,” as “all countries have their dignity.”’</li></ul><p><strong>‘China would not</strong> give up control over its economy.’</p><ul><li><strong>‘All Chinese leaders</strong> negotiate under the shadow of the “unequal treaties,” lopsided agreements China was coerced into signing with Western powers in the nineteenth century.’</li><li><strong>‘Decades of rapid economic development</strong> have not healed the wounds of what are known in China as the “hundred years of humiliation.”’</li><li><strong>Xi will only sign an agreement</strong> that is based on the principles of equality and reciprocity.’</li><li><strong>‘In a subsequent</strong> and more hawkish <a href="http://english.gov.cn/archive/white_paper/2019/06/02/content_281476694892692.htm" target="_blank">white paper</a> published at the beginning of June, Beijing reiterated that “China will not compromise on major issues of principle” and blamed the United States for the collapse of the talks, accusing it of changing its position three times since early 2018.’</li></ul><h5>XI'S CONFIDENCE</h5><p><strong>‘Although U.S. officials claim</strong> that China needs a deal more than the United States does, Xi believes that China has the stronger negotiating position.’</p><ul><li><strong>‘U.S. tariffs have</strong> hurt the Chinese economy much less than the Trump administration seems to believe.’</li><li><strong>‘Even though</strong> the tariffs are forcing retailers to charge American consumers more for Chinese goods, importers cannot find other sources for many of the products Americans want to buy.’</li></ul><p><strong>‘Chinese exports</strong> to the United States fell by just 4.8 percent in the first five months of 2019.’</p><ul><li><strong>‘Over the same period</strong>, Chinese exports to the European Union—China’s number one trading partner—rose by 14.2 percent and imports from the EU went up by 8.3 percent, while the Association of Southeast Asian Nations replaced the United States as China’s second-largest export market.’</li></ul><p><strong>‘The EU-China Bilateral Investment Agreement</strong>, which comes into force in 2020, will further strengthen China’s trading relationship with Europe.’</p><ul><li><strong>‘In Asia</strong>, China and 15 other Pacific nations are set to sign a new trade deal, the Regional Comprehensive Economic Partnership, in late 2019 or early 2020.’</li><li><strong>‘China’s trillion-dollar Belt and Road Initiative</strong> is opening up markets for Chinese exports throughout Asia, Africa, and the Middle East.’</li></ul><p><strong>‘At the same time</strong>, the trade war is doing more damage to the U.S. economy than the Trump administration seems to realize.’</p><ul><li><strong>‘While raising tariffs</strong> on U.S. goods, China has reduced them on imports from other trading partners.’</li><li><strong>‘U.S. exports to China dropped</strong> by more than 26 percent in the first five months of 2019. In many sectors, such as agriculture, the damage is probably permanent, as China has quickly found new suppliers, such as Argentina and Brazil.’</li><li><strong>‘The Chinese market has become</strong> crucial for many large U.S. companies. General Motors, for instance, now sells more cars in China than in the United States.’</li><li><strong>‘Because some of these</strong> cars are made in China, their sales are not captured as U.S. exports, but their profits come back to Detroit.’</li><li><strong>‘In 2017</strong>, <a href="http://english.gov.cn/archive/white_paper/2019/06/02/content_281476694892692.htm." target="_blank">according to Chinese statistics</a>, U.S. companies generated some $700 billion of revenue in China, with net profits of more than $50 billion. Many U.S. companies are already reporting or projecting lower earnings as a result of the trade war.’</li></ul><p><strong>‘China has many ways</strong> besides tariffs to inflict pain on the U.S. economy.’</p><ul><li><strong>‘These include</strong> tightening audit requirements for U.S. companies in China, toughening up quarantine and safety inspections for U.S. imports, and intensifying the regulation of U.S. financial institutions operating in China.’</li><li><strong>‘China has already</strong> limited the export of rare earth minerals, essential in the production of high-tech electronics, to the United States.’</li><li><strong>‘And it has drawn up</strong> a preliminary list of large U.S. companies to be deemed “nonreliable,” although what sanctions those on the list will face is not yet clear.’</li><li><strong>‘At the same time</strong>, China has made life easier for British, French, German, and Japanese companies.’</li><li><strong>‘The People’s Bank of China</strong> has <a href="https://www.ft.com/content/6ec599a8-9149-11e9-b7ea-60e35ef678d2" target="_blank">steadily reduced</a> its holdings of U.S. Treasury bonds, thus gradually constraining Washington’s ability to finance its deficit at low interest rates.’</li><li><strong>‘Even North Korea</strong> has come into the picture: Xi’s visit to Pyongyang last week was timed to remind the U.S. side that China can help or hurt the United States not only economically but strategically as well.’</li></ul><p><strong>‘Beijing believes</strong> that democracy makes the United States far more vulnerable to the political effects of the trade war than authoritarian China.’</p><ul><li><strong>‘Workers will be</strong> harder hit by tariffs in the United States, where the social safety net will do little to cushion the blow, than in China, where the state-dominated economy can create new jobs for laid-off workers.’</li><li><strong>‘Farm and manufacturing</strong> states are crucial to Trump’s chances of winning a second term in next year’s election, whereas Xi has no such worry.’</li><li><strong>‘As the Chinese point out</strong>, two years of U.S. pressure and 11 rounds of negotiations have failed to change the Chinese bottom line.’</li><li><strong>‘Xi may wind up</strong> making Trump an offer in Osaka that is actually less generous than his offer two years ago.’</li></ul><p><strong>‘Despite their assessment</strong> of U.S. weakness, the Chinese do not necessarily expect Trump to accept their offer.’</p><ul><li><strong>‘He certainly could</strong> do so and proclaim victory.’</li><li><strong>‘But he may feel</strong> backed into a corner by the hard-line negotiating position to which he has committed himself.’</li><li><strong>‘Beijing also knows</strong> that Trump faces conflicting pressures from his advisers, and whom he may listen to at any particular time is hard to predict.’</li><li><strong>‘The Chinese believe</strong> that Navarro and perhaps Lighthizer see economic decoupling not as a risk of the trade war but as its goal.’</li></ul><p><strong>‘For their part</strong>, the Chinese see no benefit—and some downside—to decoupling.'</p><p><strong>'Huawei and other Chinese tech giants</strong> depend on U.S. manufacturers for high-end chips and other components that power their 5G network gear; the United States is <a href="https://www.washingtonpost.com/technology/2019/05/16/trumps-huawei-sanctions-underscore-us-dependency-china-tech/?utm_term=.0185fb57793a" target="_blank">proposing</a> to cut off China’s access.’</p><ul><li><strong>‘In response</strong>, Xi has ordered Huawei and other firms to speed up research and development on crucial technologies such as core chips, operating systems, high-performance computing, mobile communication equipment, quantum communication equipment, and AI sensors.’</li></ul><p><strong>‘Like the trade hard-liners</strong> in the Trump administration, Xi takes a long view of the trade war.’</p><ul><li><strong>‘Sources in China quote him</strong> as saying that as China rises, it must expect 30 years of “containment and provocation” from the United States, lasting until 2049—the hundredth anniversary of the establishment of the People’s Republic of China—when he expects China to surpass the United States in economic and military strength.’</li><li><strong>‘In the service of that goal</strong>, China has long tried to diversify its markets, sources of energy and raw materials, and investment targets, as it works toward self-sufficiency in advanced technology and manufacturing.’</li><li><strong>‘Trade war or no trade war</strong>, decoupling or no decoupling, China is on the path to economic independence from the United States.’</li></ul></td></tr>