Chinese President Xi Jinping’s speech at Boao assuaged investors’ concerns about a potential trade war — at least temporarily. The overt message was that China will continue to gradually open up on its own terms, and the implicit message was that American firms may lose out on the benefits if President TrumpDonald TrumpTexas announces election audit in four counties after Trump demand Schumer sets Monday showdown on debt ceiling-government funding bill Pennsylvania AG sues to block GOP subpoenas in election probe MORE pursues the trade war.
The speech was short on specifics. Xi did say that China would liberalize restrictions on investment in the auto sector by the end of the year, and the deadline was new. He reiterated general pledges to open up financial services, strengthen intellectual property rights protection and improve the investment climate in order to attract more foreign investment.
Xi did not directly mention the trade dispute with the U.S. and did not say anything that is likely to escalate trade tension with the U.S., which is probably why markets reacted well. He made some indirect swipes at the U.S. when he said that we should put aside “Cold War mentality” and not view trade as a “zero-sum game.”
China was unhappy that the Trump administration’s National Security Strategy identified China as a country trying to subvert U.S. interests. Indirectly responding to this, Xi said that China would not try to subvert the current international system and that China was a defender of the international order.
While Xi’s speech did not inflame trade tensions, other comments by government officials have taken a firm line. When the Trump administration outlined $50 billion of imports from China that would be subject to a 25-percent tariff, China quickly responded with its own list including soy beans and aircraft.
Geng Shuang, a Foreign Ministry spokesman, said on Monday, “This trade conflict was initiated by the U.S. alone and it is entirely the one to blame. The U.S. is wielding the big stick of sanctions while keeping saying they are willing to talk…” For trade talks to take place under the current environment is “even more impossible.”
Vice Premier Liu He has been telling visitors that China will retaliate proportionally to trade protection from the U.S. In his talks with U.S. officials, he has reportedly offered to reduce the trade imbalance by $50 billion through purchases of liquified natural gas (LNG), semiconductors and agricultural products.
Buying LNG would be particularly smart for China because they need diversified sources, and it could make a big dent in the bilateral deficit. China also reportedly offered to open up financial services more rapidly and to give U.S. firms access to the rapidly growing e-commerce market in China.
However, China was not willing to accede to a key U.S. demand — that it stop subsidizing the 10 high-tech industries targeted in the “Made in China 2025” program.
From all this, it is clear that China is willing to negotiate some modest changes in policies and purchases that Trump could take as a victory, but that they are not willing to negotiate with a gun to their head. The Trump team has been inconsistent in their statements about what happens next.
Trump has to decide whether in the next 60 days to accept something like the deal offered by Liu He or to proceed with the tariffs on $50 billion of imports. China then would certainly proceed with the matching tariffs on $50 billion that it has identified.
Whenever Trump or his officials talk tough on China, the U.S. stock market falls. Whenever there is more conciliatory talk about negotiating an agreement, markets rise. This is an indication that major companies have a lot at stake in resolving the dispute, preferably with some better market access, rather than having a trade war.
Aside from big companies, there are a lot of farmers in Trump country who have a lot to lose if exports to China are penalized. So, there are pretty strong incentives for Trump to accept something like the deal offered by China and to declare victory.
However, reason does not always prevail in politics, and there may have to be tit-for-tat tariffs and trade conflict, if not all-out war, before the two sides can come back and negotiate something that would probably look a lot like what is on offer now.
David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution. From 2009 to 2013, Dollar was the U.S. Treasury’s economic and financial emissary to China.