Stakes are high for G-20 talks with China, but 'you can only fight so many wars,' say economists

Trade experts say rising geopolitical tensions with Iran and Mexico could compromise U.S. negotiating power.
Image: China's President Xi Jinping, first lady Peng Liyuan, President Donald Trump and first lady Melania attend a state dinner at the Great Hall of the People in Beijing, China
Presidents Xi Jinping and Donald Trump at a state dinner in the Great Hall of the People in Beijing. At left are the two first ladies, Peng Liyuan and Melania Trump on Nov. 9, 2017. Thomas Peter / Reuters file

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By Martha C. White

President Donald Trump and Chinese leader Xi Jinping are scheduled to meet at the G-20 summit in Japan this week as tensions between the two countries grows. Although the stakes are becoming higher for businesses in both countries, as critical tech industry players have been drawn into the dispute, analysts say there is little hope for a breakthrough that would reverse the economic costs of a trade war.

“The U.S. is systematically destroying global supply chains, and many companies in China and the U.S. that live on them,” said Peter Petri, professor of International Finance in the Brandeis International Business School.

“The talks in Osaka will hopefully de-escalate the rhetoric, mainly to quiet markets,” he said, although he and other international trade experts say this week’s meeting will be more symbolic than substantive.

“The question is, does it seem like a promising negotiation or is it just going through the motions?” said David Dollar, a senior fellow at the Brookings Institution. “I’ll be looking for some signal that the U.S. is willing to compromise.”

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“Negotiating a serious deal would take months, and far more trust than now exists,” Petri said, although he added that it would not be surprising to have a minor deal reached. “Both presidents need something to show for the battles of the past two years.”

Experts say the two extremes of the U.S. dropping all tariffs or immediately escalating to a 25 percent levy on all Chinese imports are unlikely. A more realistic outcome might include leaving existing tariffs in place but holding off on the final tranche that would hit Americans’ wallets more directly. Analysts also say it is likely that the two sides will establish a new deadline and agree to return to the negotiating table.

China could announce that it would purchase a certain amount of key U.S. exports — which Trump could tout as a win, even if China’s commitment is only an affirmation of a previously agreed-upon transaction. “There has to be a face-saving agreement in the middle,” Dollar said.

The market uncertainty that has led to stock volatility and slumping business investment is probably not over yet, though. Analysts from Goldman Sachs described the likely outcome as “a hiatus, not a breakthrough” in a research note published Friday. “We do not expect whatever announcement they make following the meeting to provide very much clarity on whether the U.S. has finished increasing tariffs or whether a deal will eventually be reached with China,” they said. “The most likely outcome seems likely to prolong trade policy uncertainty.”

To some extent, Trump has painted himself into a corner with his protectionist rhetoric, heightening expectations among trade hawks, Dollar pointed out. “Certainly, if the U.S. makes a move toward compromise, there will be some critics in the U.S.,” he said.

Goldman Sachs analysts also noted that the president’s threat to levy tariffs on Mexico even as the USMCA trade deal, or United States-Mexico-Canada Agreement, was being finalized could lessen the incentive for China to make concessions.

But rising geopolitical tensions elsewhere might make the president less eager to play chicken with business and market sentiment, De Bolle said. “For the moment, I don’t really expect either leader to step this up. Trump may not because he now has Iran on his hands, and you can only fight so many wars,” she said.

The prospect of negative economic repercussions could force his hand, Dollar said. “The administration is keeping an eye on the stock market,” he said, and a Trump-Xi meeting ending without at least the prospect of a trade deal would be poorly received.

“I think that will have a negative effect on investment sentiment,” Dollar said.