As we expected, the meeting between Presidents Trump and Xi at the G20 yielded the trade truce that both leaders need right now. And it looks as though Xi went to the summit with some unexpected gifts from North Korea. So not only the trade talks between China and the US will resume, but also the nuclear negotiations between America and North Korea will restart after Trump’s historic step onto North Korean soil at the weekend.  

The next date investors should focus on is October 1^st – the 70^th anniversary of the founding of the People’s Republic of China. Xi Jinping is planning a huge celebration to mark the occasion and he will claim that his Communist Party and he himself have made China great again. 

Our analysis of the stance of both sides suggests that it is highly unlikely that the status quo on trade will change ahead of the festivities.

As we’ve said before, this dispute is fundamentally about much more than trade – it’s part of a longer-term Great Decoupling that stems from a conflict over technological supremacy and geopolitical power. It is about redefining the world political and economic order, a process that will see periods of relative calm and also periods of significant turbulence.

In this Enodo Insight I will discuss the trade truce and take a deeper look at the key American stakeholders. In next week’s Enodo Insight I will outline Xi’s thinking and how Taiwan factors into this confrontation as well as what to expect over a longer timeframe with respect to trade, tech and Taiwan.

The trade truce to last at least until October 1st

America’s trade and tech sanctions are hurting China’s economy while Beijing needs more time to complete its supply-side transformation and climb the value-added chain. So, the Chinese president has been trying to focus Trump on areas where they can cooperate, and that includes North Korea.

Xi’s recent visit to Pyongyang yielded some positives for Trump, which gave him an additional incentive to halt the escalation of US pressure on China in this all-encompassing geopolitical conflict. Beijing’s agreement to buy more farm products from the US has also played to Trump’s constituency and his re-election bid.

In return, Trump, with his eyes on the stock market and on next year’s presidential campaign, has agreed to continue the trade negotiations and hold off on imposing the additional tariffs on Chinese goods he had earlier threatened. While support for a tougher stance towards China is broad-based in the US, the use of tariffs has not been.

Importantly, Trump has also temporarily thrown a lifeline to China’s tech giant Huawei, a move which has angered some hardliners in Congress and his own administration. But it is interesting to note that the statement published by China’s official Xinhua news agency and the foreign ministry did not mention Huawei; it said only that Xi had asked Trump to treat Chinese firms fairly.

The trade talks will resume, but there is no timetable. Huawei will be able to source some components from American firms, but only those available widely around the world, ensuring US national security is not compromised. Neither Xi nor Trump wanted to see Sino-US relations deteriorate in the short term, but neither can afford to appear weak by making fundamental concessions.

This is a trade truce for now – for Xi, ahead of the Communist Party celebrations in October; for Trump, how long it lasts depends on how his campaign unfolds in the run-up to the presidential election on 3^rd November 2020. 

The third crucial date which is set to frame Sino-US negotiations is 11^th January 2020 – the date of Taiwan’s general election.

Sweeping change in US attitudes towards China, but key stakeholders have different priorities

My recent visit to Washington confirmed our assessment that the bipartisan change in US attitudes to China runs deep. Under the current administration it is a free-for-all for any department that has a gripe with China. Policy coordination is minimal and those at the negotiating table lack deep China knowledge and expertise.

In this context, there are four major stakeholders or groups vying for power: Trump, the 2020 group, the rational economic group and the national security group. Trump is his own man. He likes to keep his administration on their toes and will ultimately make his own decisions. But in the coming months he is likely to be more influenced by the 2020 group – the political advisers whose sole concern is his re-election.

Seen through the prism of election strategy, if Trump’s campaign is going well he will be unwilling to take a big risk and sign a comprehensive deal with China ahead of November 2020. 

Any agreement is likely to be criticised heavily by the Democrats. Although China’s economy is struggling, Beijing is not under enough pressure to make the real concessions the US wants. Nor is there a workable mechanism to check that any deal is implemented.

If Trump feels secure in his re-election, the more rational choice is to leave any serious negotiation with China to his second term, when he will be focused on his legacy. If he feels victory is slipping through his fingers, he will be more willing to take significant risks – which could go either way. But for now, the US economy is doing well while the stock market’s relief at the trade truce suggests Trump doesn’t have a powerful enough incentive to strike a deal.

Additionally, the more progress we see on a potential North Korean denuclearisation agreement, the more likely it is that Trump will put China on hold. 

If Trump were to win a second term, he might be able to deal with China more effectively and finish what he had the courage to start. Perversely, if Trump wins re-election he might end up with an A-team administration. Typically, a president starts with his A-team but has to fall back on his B-team after two to three years as the relentless pressure of high office wears people down. Then, by the second term, an incumbent president has to resort to even his C- and D-teams. 

But with Trump, a lot of Republicans shied away from taking posts in the administration. If he secures a second term the temptation to join him could be strong.

The rational economic group comprises those who would like to rewrite the rules of engagement between China and the US on trade and technology but do not seek a military conflict or regime change in Beijing. On balance, they would favour a multilateral rather than a bilateral approach, but nearly everyone recognises that the WTO is no longer fit for purpose. None of these groups is a coherent entity, but the rational economic group is probably the least determined of them all.

The national security group is the most structured in its tough stance towards China. The hawkishness, of course, varies. At its most extreme, the group’s attitude can be summarised as: “Military conflict is inevitable and the sooner we face up to it, the more likely we are to win.”

In contrast to global terrorism, a well-defined adversary like China is much easier to deal with for most of those in the security complex, including when it comes to convincing Congress to increase the budget for the military and security services.

Some also view the power struggle with China as an opportunity to gain the upper hand in the Pentagon’s relationship with private technology firms in Silicon Valley. Ties between the two have been uneasy at best. But the high priority China is putting on AI as part of its agenda for military-civil research and development has heightened the unease of some in Washington over the degree to which the US depends on private industry for the defence of the country and projection of American power.

While the groups I have described are united in thinking that America needs a new, firmer approach to China, they differ in their understanding of what went wrong and how; their ultimate objectives and preferred approach to achieving those goals also differ. They do not work as one. Beijing has found this fragmentation difficult to handle, especially because at the outset the leadership was slow to understand how deep American frustration and disillusionment with China runs.

For now, the incentives for America and China to make swift progress on a trade deal are not aligned, so do not expect any change over the summer. 

I’ll expound on Beijing’s thinking and what to expect after October 1^st in next week’s Enodo Insight.