Why Xi Won’t Cave to Trump at G-20

(Bloomberg Opinion) -- Hopes are already fading that China’s President Xi Jinping and his U.S. counterpart Donald Trump will achieve a breakthrough in their trade war during this weekend’s Group of 20 summit in Argentina. Even Trump poured cold water on the idea, saying only days before the conference that it was “highly unlikely” he’d hold off on a planned boost to tariffs.

For those who favor Trump’s sanctions-laden approach, the continuing stalemate may be frustrating. Surely China’s sagging economy, slumping stock market and pressure from its largest export customer would bring Beijing to its knees? But here we are, almost a year after Trump initiated tariffs on Chinese imports — and Xi isn’t caving.

With growth slowing, Xi would love to get the trade war out of the way, and he might offer a minor concession or two to get a deal done. Maybe the two leaders will call a truce or promise renewed negotiations. Perhaps they can even sketch the rough outlines of an agreement. That could cheer U.S. stock investors, at least for a day or two.

But don’t expect Xi to budge on the real meat of the U.S.-China conflict. He won’t significantly widen access to the China market for U.S. companies. He can’t be trusted to stop pilfering U.S. technology. And most of all, Xi won’t reverse his state-led industrial policies aimed at nurturing national champions.

At this point, supporters of Trump’s tariffs are probably saying: Give him more time. The duties are only now starting to pinch. That’s true, but it doesn’t matter. Xi won’t come begging no matter how many tariffs Washington slaps on Chinese exports.

Part of the reason is that tariffs can’t inflict as much pain on China’s $12 trillion economy as the White House thinks. More than that, Xi firmly believes that the course he has set is the correct one for his nation’s future.

With costs rising and growth stumbling, Xi knows China’s debt-addicted economy needs to upgrade from thin-margin exports of basic consumer goods and industrial commodities to high-tech sectors that can create new markets and higher incomes. Otherwise, China could tumble into the dreaded “middle income trap” — in other words, stall at a moderate level of development, as many other emerging economies have.

Xi’s chosen method lies at the heart of the trade spat with Trump — the protectionism, technology theft and subsidy-heavy industrial policies that so enrage Washington. We can debate whether Xi’s program will work, but from his perspective, the stakes are too high to give up his agenda.

If anything, the dispute may have further convinced Xi that his program is both necessary and urgent. The scuffle over law-breaking telecom firm ZTE Corp. showed how easily U.S. technological dominance could be wielded to destroy major Chinese companies. And though that worked out in Xi’s favor, Trump later sanctioned another Chinese company in another critical technology industry, chipmaker Fujian Jinhua Integrated Circuit Co., over accusations it stole U.S. intellectual property. Add in tighter reviews on foreign investment by both the U.S. and the European Union, obviously intended to block Chinese access to know-how, and Xi can only conclude that relying on the West is too dangerous and his country must develop and control its own key technologies.

Then there’s politics. Xi paints himself as a champion of China on the world stage, so he can ill afford to be seen as wilting under American pressure. Moreover, he can also play a long political game. Able to serve as president for life, Xi is thinking 10 to 15 years down the road, about China’s future and his own legacy.

Trump has no such luxury. Weakened by the Democrats’ successes in midterm elections, he’s also facing a stock slump as anxiety mounts about the U.S. economy — in part because of his own trade policies. That’s deprived Trump of the comfort of negotiating from a position of strength. The question is increasingly becoming not how long Xi can hold out, but how long Trump can.

None of this is to say Xi’s course is the right one for China. He’d arguably be better off cooperating with the U.S. and keeping its market and technology open to Chinese companies. But the trade war is spiraling into something much bigger — a clash of perceived national interests. Xi won’t sacrifice what he believes is mission critical for China’s future to appease a wounded, erratic and unpopular U.S. president. Only when Trump wakes to that reality can the trade war be brought to an end.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael Schuman, who is based in Beijing, is the author of "The Miracle: The Epic Story of Asia's Quest for Wealth" and "Confucius and the World He Created."

©2018 Bloomberg L.P.