Here Are Some of Xi’s Options for His Next Move in U.S. Trade Talks

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Stronger economic data has given U.S. President Donald Trump more freedom to take a tougher stand in China trade talks. The problem for those hoping for a speedy resolution is that the same is true for Xi Jinping.

Xi’s top trade envoy, Liu He, is slated to arrive in Washington on Thursday for what’s shaping up to be a test of each leader’s confidence in his country’s economy. After recent slowdown scares, both men have seen signs of recovery that give them less incentive to accept a weak deal and more space to play rough in response to latest tariff threat.

“While ultimately a trade deal would be great news, the need to hastily reach an agreement with considerable concessions on either side is likely no longer desirable,” Helen Qiao, chief Greater China economist at Bank of America Merrill Lynch, wrote in a note Tuesday.

Still, no course of action is risk-free for Xi as he weighs the need to firm up the economy against the demands to political constituencies at home. Here are some of his options:

1. Blow for Blow

Xi could slap retaliatory tariffs on Trump in areas which could cause the U.S. leader political pain such as agriculture. China was preparing the imposition of retaliatory tariffs that would take effect immediately after the U.S. levies comes into force, people familiar with the matter told Bloomberg on Tuesday. Xi could also take measures against U.S. companies in China.

“Chinese policymakers will have to come up with some form of counteraction to avoid losing policy credibility at home,” Qiao said. In the most bearish case, U.S. tariffs would be met by tariff hikes from China, especially on American-made cars, and by diverting purchases of products such as soy beans to countries like Brazil.

While such an approach would certainly look tough, the risk is that it would probably prolong the trade war and undermine China’s ability to present itself as a champion of free trade.

2. The Silent Treatment

When Trump flirted with a more formalized relationship with Taiwan early on in his presidency, China refused any contact until he reaffirmed the U.S.’s “one-China” policy. Xi could take the same tack now: Sit on his hands until Trump cuts out the threats.

The trick is, it’s not clear Trump will blink this time. The American president is newly emboldened by stronger poll numbers and the special counsel probe that recommended no action against him. He might just want a fight with a rival superpower as he thinks about re-election in 2020.

Jim McGregor, China chairman of consulting firm APCO Worldwide, described the situation as combustible. It’s “global brinkmanship between two leaders who don’t really understand each other, who each have a powerful, but tenuous grip on their own political and economic systems,” he said.

3. Back Channels

China could also split the difference between hawks and doves by being testy with the U.S. in public, while talking in private. In the past, Beijing has kept talks between lower-level officials going even when it said it didn’t want to negotiate. It could also look to intermediaries like former U.S. Treasury Secretary Hank Paulson or ex-Secretary of State Henry Kissinger. 

But back channels haven’t worked well for China in the past and -- from a domestic standpoint -- Xi would likely prefer to get the trade war behind him and return to playing the long game in China’s competition with the U.S. A resolution would free him up to focus on domestic priorities.

4. Go Ahead With Talks

In some ways, Xi’s riskiest option is the current official position: the Chinese delegation will travel to Washington despite the pending tariff hike.

On the upside, this option is most likely to result in a nearer-term deal, but the risks are considerable. If Xi keeps talking to the U.S. in the face of foreign pressure and especially if he makes compromises to secure a deal, it could risk denting his nationalist credentials.

If China digs in and is merely seeking to stall Trump by talking, then again he risks the U.S. President becoming frustrated and going ahead with higher tariffs. There’s also little time left -- just days until higher duties are set to kick in.

“President Xi cannot move comfortably ahead as there are no guarantees of behavior and outcomes that will fit within the Chinese political construct of an all knowing leader besting an adversary,” said McGregor, of APCO. “The way Trump operates is difficult for the Chinese political system to digest.”

©2019 Bloomberg L.P.