US-China trade war spats: Where to next?

The recent APEC summit in Papua New Guinea has ended without a communiqué for the first time reflecting the deep divisions between the USA and China on trade issues. For the first time since leaders began attending the annual Asia-Pacific Economic Cooperation meeting in 1993, no statement was issued after two days of talks in Papua New Guinea. The Pacific island nation’s Prime Minister Peter O’Neill blamed “two big giants in the room” for the discord.

It does not leave it to much imagination to guess who are the two big giants he is referring to. Reading the press that followed , traders might be forgiven for thinking the tough cross-talk between US Vice President Mike Pence and China’s President Xi Jinping at the APEC summit was setting the stage for a new war of sorts between the countries. But for all the verbal acrimony, senior officials in both Washington and Beijing are perfectly capable of separating out the heated long term strategic rivalry and rhetoric that has now marked President Trump’s broader bilateral strategy towards China for two years running, from the near term objective of working towards progress on the trade front at the upcoming G20 summit meeting in Buenos Aires between Presidents Donald Trump and Xi at the end of this month.

China's expectations

Indeed, while the more highly visible visit of China’s Vice Premier Liu He to Washington may not now occur before the summit as envisioned before, senior officials in Beijing continue to expect enough concessions on offer in Buenos Aires to set the stage for a cease fire in the automatic escalation in January of tariffs on existing, or new, Chinese exports to the US as threatened by Trump, at least through the first quarter of 2019, as negotiations go on.

Chinese officials clearly do not expect the trade wars to end suddenly, or for existing sanctions to be rolled back or lifted, certainly in this round. They believe, however, as the Federal Reserve hikes rates, and as the US, and global, growth momentum perhaps slows, the China-US trade wars could be concluded in full by 2020 – which of course would also represent the year for new US Presidential elections. In the meantime the USA is playing good cop and bad cop strategies, although it might be forgiven if the Chinese do not see a good cop in the US negotiating team.

OPINION: Awaiting the G20 Summit

This time the US Vice President who seems to like being in the background has stepped up as the bad cop face of the USA . Tensions were already high heading into the APEC summit after Xi and Vice President Mike Pence traded barbs in back-to-back speeches a day earlier. Pence warned nations against taking Chinese loans, saying the US “doesn’t drown our partners in a sea of debt,” while Xi said implementing tariffs and breaking up supply chains was “short-sighted” and “doomed to failure.” When it comes to the Pence speech at the East Asia and APEC summits, China is indeed, not surprisingly, angered at his direct, as well as veiled, attacks on Beijing’s behaviour, past and present.

But this is not the first time the Vice President has been dispatched to deliver the toughest of messages to China, and they note that Trump himself has refrained from such direct attacks on Beijing, and most especially on Xi himself. Rightly or not, they see Pence as a voice comparably in the same camp as other hard liners such as National Security Adviser John Bolton, White House Trade Adviser Peter Navarro, and US Trade Representative Robert Lighthizer.

They furthermore suspect Pence’s remarks may represent part of a coordinated effort to pile the pressure on Beijing right before the G20 summit. And so while on high alert for any sudden U-turn of sorts, Chinese officials are looking beyond the verbal spats of Papua New Guinea, and do not believe these particularly impact the current state of China-US relations or the existing trade discussions either way. In the meantime, Beijing admits the current trade tensions have hurt China more than the US in the first year. But they maintain, if they are to be escalated, that they will hurt both countries equally in 2019, and, for what it’s worth, the US more so -- in 2020.

Mutual benefits

This important for both countries and the global energy markets that have seen oil prices fall dramatically over the last few weeks to the $65 levels on trade worries and global oversupply. A month is a long time on the energy markets and it was not long ago that prices were above $80 a barrel with some wondering if new higher levels can be reached. And then came the surprise Iran oil sanctions waiver that caught many off guard and the rest is history.

How President Trump reacts is important for this transactional President. If there is one thing President Donald Trump does not take kindly to, it is having his negotiating stance on China undermined by “globalists” seemingly eager to grab any deal proffered by Beijing beneficial in the short term to corporate interests and Wall Street. It is with that in mind that the comments should be taken from US Trade Representative Robert Lighthizer before the APEC summit , a tough negotiator himself, in which he firmly denied rumors he was telling business executives the bump up in tariffs to be imposed on China come January were effectively already off the table. That is certainly not an assurance one would telegraph before a key negotiation.

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The dynamics in Washington given the recent mid term Democratic blue wave in Congress, are indeed shifting to where, beyond a simple photo-op when President Trump meets with his counterpart Chinese President Xi Jinping at the November 30 - December 1 G20 summit in Buenos Aires, President Trump is willing to accept a “victory” and with it a cease-fire or truce that would entail a likely postponement of the threatened escalation of tariffs on China in January. But the USA feel that China has to make the first move. Key to that “truce” would be for Beijing to deliver on a framework of negotiations to be followed through next year addressing Intellectual property theft and forced technology transfer issues on top of the traditional trade tariff and barrier issues.

And for Beijing’s very real concerns about longer term strategic pressure from Washington on China, senior Chinese officials believe indications are that both Xi and Trump are interested in a mutual compromise, and are fully prepared for the summit to achieve a trade war truce if not an actual agreement, even if temporary and focused largely in principle.

Nevertheless, the Chinese side believes the US ban on the import by Chinese companies of certain sensitive technologies will not be lifted. The Trump administration, they believe, is still sending mixed signals in public that include both a willingness to reach a reconciliation with Beijing, and tough rhetoric accusing China of being untrustworthy. Once again the world is holding its breath to see if the big boys will manage a truce at the G20 Argentine meeting but until then the global energy markets will remain destabilised affecting the Gulf economies fiscal balances.

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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘ OPEC in a Post Shale world – where to next ?’ His latest book is titled ‘Saudi Aramco 2030: Post IPO challenges.'