Trump-Xi truce does little to bridge vast U.S.-China divide


For most of the past year, the U.S. and China have failed to make significant headway in resolving issues at the heart of an escalating trade war. Another 90 days is unlikely to change much.

Donald Trump and Xi Jinping called a truce at a high-stakes meeting on Saturday night in Argentina, with the U.S. president agreeing to postpone a planned tariff hike on Chinese goods for three months in return for greater purchases of American goods. The arrangement provides breathing space to both leaders as they face slumping stock markets and economic warning signs.

While the detente is a welcome relief to equity investors, the fundamental divide between the world’s biggest economies is still vast. Negotiations have long been stuck over U.S. demands for deep structural reforms such as stopping forced technology transfers, enforcing intellectual property rights and ending state subsidies for strategic industries — all of which China sees as an American strategy to thwart its rise as a global power.

“I will eat my hat if this means anything substantive,” Michael Every, head of Asia financial markets research at Rabobank in Hong Kong, said of the truce. “Neither side is fully ready for the war, but neither side will budge.”

Even so, the agreement should help alleviate immediate concerns that trade tensions would further stoke geopolitical tensions, a prospect that has raised worries of a new Cold War. The White House emphasized that Xi agreed to continue pushing for a nuclear-free North Korea, while Beijing said Trump would respect the “One-China” policy regarding relations with Taiwan — one of the biggest potential flash points between the nations.

It also showed that both sides could be pragmatic. Xi won at least another three months before punitive tariffs on $200 billion in goods rise to 25 percent, allowing Chinese policy makers more time to offset the blow as growth slows.

‘Santa rallies’

Trump, meanwhile, got China to buy more American agricultural, energy and industrial goods while still maintaining the leverage of a tariff increase to pressure Xi into making greater concessions on structural issues. China also pledged action to clamp down on the synthetic opioid fentanyl, and Trump said Xi was open to approving a possible $44 billion deal for Qualcomm Inc. to purchase NXP Semiconductors NV if the companies are still interested.

Risk appetite returned to markets on Monday, as U.S. equity futures climbed alongside Asian stocks, the Australian dollar and the Chinese yuan. Shares from Sydney to Seoul gained and the 10-year Treasury yield jumped back above 3 percent.

“The presidents want the markets to enjoy Santa rallies first,” said Junheng Li, the founder of JL Warren Capital LLC, a China-focused research company in New York. “And when February comes we can start worrying again.”

Farmers to benefit

All in all, the moves give Trump a positive message for the business community as well as farmers, particularly those growing soybeans in states he needs to win to get re-elected in 2020. He hailed the “incredible deal” on Air Force One while heading back to the U.S., telling reporters that China will buy “a tremendous amount’ of agricultural goods.

“Trump doesn’t give up much by a short pause and gets a chance to ship the soybean harvest to China while the negotiations are ongoing,” said Brad Setser, a former Treasury official and now a senior fellow at the Council on Foreign Relations in Washington. “The hard part is finding the basis for a real deal that settles the broader issues rather than agreeing on a pause.”

One sign of the discord was the failure to issue a joint statement laying out the framework for talks. Each side gave its own readout of the outcome, and they contained key differences: China, for instance, made no mention of the 90-day time frame, while the U.S. didn’t reference the “One-China” policy regarding Taiwan ties.

China’s omission on the deadline indicates it has reservations on how to handle U.S. demands, according to Wang Peng, an associate research fellow of the Chongyang Institute for Financial Studies, Renmin University of China. Making the type of domestic reforms sought by the U.S. is “extremely difficult as such moves involve the country’s reputation, the party’s authority and the structure of the domestic economy,” he said.

The crux of Washington’s deeper concerns with Beijing could be found in a 53-page report issued by Trade Representative Robert Lighthizer’s office about 10 days before the Trump-Xi meeting. It accused China of continuing a state-backed campaign of intellectual property and technology theft, downplayed its moves to ease foreign investment restrictions and raised alarm about its “Made in China 2025” policy to lead the world in sectors such as artificial intelligence and robotics.

In China, officials repeatedly say moves to ease rules on foreign ownership of financial firms and automakers show they are opening up to the world. They also strictly rule out dropping government support for companies in strategic “Made in China” industries over fears that would undermine China’s future economic prospects and threaten the power of the ruling Communist Party.

The divergence in worldviews makes any lasting solution difficult to achieve unless either Trump or Xi backs down. Still, given the emerging risks to the global economy, and the political costs that entails for each leader, it may be in both of their interests to keep dragging out the talks.

“Growth is going to slow in both countries,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “While it doesn’t remove the sword of Damocles hanging over trade, having blinked tonight you’d have to guess that the U.S. will blink again in March.”