When Donald Trump meets Xi Jinping, the reality emerges

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The media and most analysts tend to emphasise the differences between Donald Trump and Xi Jinping. Xi has risen to power meretriciously as an appointed party cadre and has gained administrative experience through different levels of government. Trump, on the other hand, is a life-long businessman elected as president but with little political experience. They also have quite different temperaments and styles of communication.

There are, however, many similarities between the two leaders. Both are nationalists aiming to make their countries great again.  Both have come to power by appealing to the public for change, in terms of anti-corruption in China and job creation and fairer trade in America.  Both prefer to resort to executive orders when making decisions.  Both are seen as toeing a hard line against a free press (and even intellectuals in China’s case), and both have prioritised domestic affairs but simultaneously tried to link internal challenges with foreign competition.

These similarities set the stage for the two leaders to break the ice when they met, as they shared personal experiences related to Sino-US relations. And a personal relationship is no small matter as it helps build mutual respect, contrasting sharply with Trump’s China-bashing rhetoric and Xi’s criticism of US foreign policy.

Xi had personal ties with the US before he became China’s president. He studied modern agriculture in Iowa in 1985.  His daughter graduated from Harvard in 2014 with a degree in psychology. His wife Peng Liyuan has worked extensively with US institutions and NGOs on poverty reduction, public health, orphan care and education.

As for Trump, he nominated Iowa governor Terry Branstad as the ambassador to China. Mr. Branstad met Mr. Xi in 1985 and they have kept their friendship for over three decades.  So Trump’s nomination sent a signal about his desire to foster a workable relationship with Xi. Trump’s five-year-old granddaughter can sing Chinese songs and recite Chinese poetry in fluent Mandarin. Her videos of Lunar New Year greetings by reciting classic Chinese poetry was applauded by millions of Chinese both onshore and overseas early this year.

Ignoring these similarities between the two presidents is to risk making a distorted assessment of the future Sino-US relationship.

Trump faces the reality

To underscore this benign start of the new Sino-US relationship, Trump announced just a week after his meeting with Xi (on 12 April) that he would not label China a currency manipulator. To a large extent, such a reversal of his position on the renminbi reflects the political reality that he faces in the upcoming negotiations with the Chinese on various thorny issues.  Trump’s near-term goals are reportedly to get Chinese concessions on its huge trade surplus with America, North Korea’s nuclear programme and territorial disputes in Southeast China sea. What are the strategic options for him and for China (from an Asian perspective)?

On trade

If Trump wants to cut America’s trade deficit with China by imposing high tariffs and forcing US and international manufacturers to move their production bases to America, he may not succeed for the obvious reason that such actions will trigger trade retaliation by China, which will hurt American exports to the Middle Kingdom. It will also raise sharply the prices of affordable products from China and hurt American consumption, especially of the group of Americans who helped vote Trump into office.

If Beijing were to expand the trade war to include US foreign direct investment (FDI) in China, the US may have more to lose than China because it has far more FDI in China than China has in the US (see exhibit 1). Trump may be better off trying to persuade China to import more from the US. It will take China a long time to make that change, however.

Exhibit 1: Cumulative foreign direct investment (FDI) in China and the USSino-US

*2003-2015; **1991-2015

Sources: CEIC, BNP Paribas Asset Management, 24 April 2017

On politics

Trump has tried to use trade issues to bargain with China for its help to rein in North Korea’s nuclear mischief. Xi may not necessarily buy in to this, however, as he knows Trump does not have the upper hand on trade. Xi may even take advantage of the situation and counter-bargain with Trump to scrap the US’ deployment of the Terminal High Altitude Area Defense (THAAD) system in South Korea in exchange for China’s help with reining in Pyongyang. But Trump may not buy into this either.

Meanwhile, China’s strategic interests in North Korean may not necessarily align with those of the US. China does not want a North Korean collapse for fear that a collapse would create a massive refugee problem for the country. Beijing also does not want a unified Korea under US backing, which could align with Japan and form a strong US-led alliance against China. So it may want to keep a defiant North Korea, within some limits, to counter the US’ influence. China has also been assertive in its stance on the South China Sea and defined its claim as a “core interest”, implying that it would use force to defend its position there.

Under these circumstances, Xi may be unlikely to offer many strategic concession to Trump to contain the North Korean nuclear threat, and Trump’s bargaining power may not be as strong as he thinks. Thus, his retreat from naming China a currency manipulator may be seen as an olive branch extended to China to build on the rapport that he developed with Xi in their first meeting and foster cooperation on wider strategic issues. Trump should also appreciate having China as an ally in the face of rising tensions with Russia over Syria and other strategic issues.

Sino-US cooperation, if it plays out, means one less geopolitical risk for Trump and the markets to face.


Written on 24 April 2017

Chi Lo

Senior Economist for China

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