In its 2019 Third-Quarter Forecast, Stratfor identified a potential face-to-face meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G-20 summit in Japan as a possible turning point in the U.S.-China trade war. While the overall climate does not favor a breakthrough during their planned sit-down, their discussion will increase what has seemed until now to be a limited possibility for a trade cease-fire to buy more time for talks to be revived.
With their trade war at a full boil, the U.S. and Chinese governments both said on June 18 that a face-to-face meeting would take place between Presidents Donald Trump and Xi Jinping on the sidelines of the Group of 20 summit in Osaka, Japan, at the end of the month. Trump had tweeted the news after a telephone conversation with Xi, followed soon after by an announcement by the Chinese government confirming Xi's participation — which carefully noted that the United States had been the one to request the phone call that solidified the meeting plan.
Why It Matters
The meeting will offer the United States and China a chance to step away from the tit-for-tat cycle of retaliation that has been building since trade negotiations broke down in May. While the sit-down between Trump and Xi is unlikely to produce a breakthrough in the larger impasse, the summit could revive the hope that trade talks would resume. However, if the meeting does not at least result in a pullback from hostilities that leads to an eventual commitment to return to the negotiating table, Trump will likely follow through on his threat to add tariffs to another $300 billion in Chinese products.
China, which faces U.S. demands to overhaul its economic system and make a series of changes to its laws, has been deliberately avoiding Washington's overtures, hinting that it was prepared to weather the imposition of deeper U.S. tariffs instead of granting such heavy concessions. Trump's recent threat to impose tariffs on Mexico as a means to pressure it to step up efforts to curb illegal immigration has only reinforced Beijing's perception that a trade deal struck with Washington could easily fall apart, making it reluctant in the current environment to offer substantial concessions on U.S. terms.
As the two leaders prepare to meet next week, one crucial signal to monitor will be whether either side will change their approaches to one of the stickiest points of their negotiation: The mechanisms both will use to enforce the trade rules they agree upon. The enforcement provisions are a core concern for the White House, which wants to be able to use tariffs as a means of holding China accountable while also seeking legal changes on China's part. Beijing has rejected both of these demands.
President Trump's recent threat to impose tariffs on Mexico has only reinforced China's perception that a trade deal struck with the White House could easily fall apart, making it reluctant to offer substantial concessions on U.S. terms.
Trump will not have much leeway with Xi to back away from the enforcement issue because of strong bipartisan support in the U.S. Congress for including those provisions in a trade deal. Meanwhile, the president is also feeling the pinch of domestic industrial and agricultural pressure to move toward an agreement, especially as his campaign for reelection begins to gear up. As the backlash mounts on Trump and as Huawei Technologies continues to reel from U.S. export restrictions, it also bears watching whether the U.S. president will offer to add the blacklist of the tech giant to the trade talk agenda as a potential carrot for Xi.
Given the ongoing protests in Hong Kong, an issue the White House has hinted it could include in the trade talks, and potential U.S. arms deals with Taiwan that have drawn Chinese concerns, the current climate for discussion does not look particularly favorable. China will push for the United States to steer clear of these areas, which it sees as indisputable parts of its sovereign purview. And despite congressional calls for a more forceful response over the Hong Kong protests, Trump has yet to use the issue as a meaningful pressure point against Beijing. Washington also appears to have stayed its hand, at least for now, in regards to the weapons deals with Taiwan. That said, between now and the G-20 gathering, developments in those areas could again inflame U.S.-Chinese tensions, robbing momentum from the Trump-Xi discussion.
The May breakdown in the U.S.-China trade talks came just as it appeared that both sides were close to clearing the final hurdles between them. Since then, the White House has increased tariffs on $200 billion worth of Chinese goods to 25 percent, blacklisted Huawei and threatened to slap tariffs on the remaining $300 billion in Chinese products. China hardened its own position by instituting its own retaliatory measures, including adding U.S. companies to its newly established "unreliable entities" list. It also increased nationalist economic rhetoric and visibly weighed potential restrictions on the export of rare earth elements.