This Year’s G-20 Will Be a Faceoff Between Trump and Xi

And yet, as the leaders of the Group of 20 countries prepare to gather in Japan on June 28-29, Trump is outdoing even himself. His threats to escalate a trade conflict with China into a total economic war have turned the Osaka summit into arguably the most consequential since the ones surrounding the 2008 global financial crisis. As if the stakes weren’t high enough, Trump also has the trade gun barrels aimed at the European Union and Japan, two allies he’s threatened with auto tariffs—not to mention his public fuming about both euro zone and Chinese monetary policy.

For all of that, the biggest event in Osaka is likely to be a sideline meeting between Trump and Chinese President Xi Jinping, which financial markets will be watching carefully. After playing down its likelihood, Trump raised expectations on June 18 when he tweeted that, after a “very good telephone conversation,” the two leaders would hold an “extended meeting” during the summit.

The best-case scenario laid out by officials and analysts from both countries is that the meeting might yield a pause in any new U.S. tariffs and a resumption of the talks that broke down in May. While such a truce would extend the uncertainty of the past year, it would at least offer the hope of short-term peace.

The worst-case scenario would turn the simmering trade tensions into a new cold war. If the meeting is derailed before it begins or if the two leaders merely fail to reach a firm agreement, the world will have to confront an escalating conflict between the two largest economies, with all the damage that would entail in tumbling financial markets and a further slowing of global growth.

The latter possibility cannot be dismissed. The two leaders have strikingly different approaches to negotiations, which have caused them problems in the past. Trump, with his freewheeling style, likes to keep people across the negotiating table off balance. Xi is seen as far more cautious, and those around him have resisted the idea of putting him into a meeting where the outcome hasn’t been carefully choreographed.

What some in China see as Trump’s bullying approach may also make it harder for Xi to bend to U.S. demands for reforms on everything from industrial subsidies to intellectual-property enforcement. By “claiming publicly that he has Xi over a barrel,” as he’s done repeatedly, Trump has embarrassed Xi when he should be courting him, says Robert Daly, a China expert and former American diplomat who’s now at the Wilson Center in Washington. The more the Chinese leader is boxed in, the less likely he is to make a deal that might be viewed as a surrender, analysts in Beijing argue.

Matthew Goodman, who once prepared President Barack Obama for G-7 and G-20 summits from a seat on the National Security Council, says it’s still too early to call a new cold war. Even as Trump has dialed up the heat on China—and proxies such as tech giant Huawei Technologies Co.—you can still make the case, Goodman says, that the goal is a fairer form of economic interdependence, as it’s been for the past 40 years. At the same time, he says, one might wonder: “Are we now on a different path?”

Clete Willems, who until April served a similar role for Trump, is optimistic that the U.S. and China will close a deal by the end of the year. It’s in both countries’ interest, and Trump’s recent rhetorical escalation and tariff threats are more about pushing for an agreement than a decoupling, he says. “As long as the administration stays focused on China and avoids inadvertently undermining support for its China strategy by raising tariffs on other countries, I think the U.S. show of strength helps incentivize China to make a deal.”

A big clue to the U.S. approach might have come in a June 24 speech by Vice President Mike Pence, one of the administration’s most unforgiving public voices on China. Had Pence delivered a repeat of the hawkish speech he gave last year at the conservative Hudson Institute in Washington, in which he presented a vision of all-encompassing conflict with China, it would have signaled that Trump has no interest in compromise. However the speech was postponed on June 21 as a result of “progress in conversations between President Trump and President Xi,” according to a statement from the Wilson Center, where Pence was to have spoken.

Meanwhile, though he’s arguably China’s most powerful leader since Mao Zedong, Xi is facing economic and political troubles at home that limit his room to maneuver. As the Chinese economy appears to be weakening, a sweeping trade war would mean more pain. The mass protests in Hong Kong that forced the local government to back away from passing a new extradition law have highlighted concerns over Xi’s authoritarian ways. So has the internment of Muslim minorities in the far western province of Xinjiang.

Of course, it’s not clear Trump’s hand is as strong as he believes, either. His tariffs are increasingly unpopular, and damage from them is beginning to show up in economic data. He and Xi each face opposing pressures at home: to stand strong and to resolve the fight before the economic destruction mounts. A truce may emerge from Osaka. Even if it does, though, turning it into a longer peace is likely to be difficult.

©2019 Bloomberg L.P.