This week US President Donald Trump will meet Chinese President Xi Jinping in a high-stakes encounter for both the global economy and their own political careers.
Trump has about a year to bring down the trade deficit and boost jobs, before the mid-term US Congress election in 2018. If he fails to deliver, unhappy voters may take away the Republicans’ majority in Congress.
Xi, meanwhile, is likely to be re-elected in the 19th Party Congress late this year but still needs to strengthen his position by giving further proof of his ability to manage international affairs, following his stunning defence of economic globalization three days before Trump’s inauguration.
The significance of this bilateral meeting goes far beyond their respective political careers. Its success is sine qua non for the openness, fairness, and sustainability of the global economy in the decade to come, as China and the US together contributed 52% to global economic growth from 2014 to 2016.
Despite the China-bashing during Trump’s presidential campaign and a recent tweet from the US president that the meeting will be “very difficult”, there are encouraging signs that it could be a success. By agreeing to meet within Trump’s first 100 days in office, both sides have shown their intention to avoid worst case scenarios, and a recognition that it is this specific counterpart that can help achieve their respective goals.
In this context, I recommend that Xi and Trump bear three principles in mind before they shake hands for the first time.
First, be humble
Arrogance or complacency will kill any business meetings or friendship. Start by being humble and appreciating your partner. Although the Trump administration has had a rocky start, Xi could commend some early successes such as his focus on job creation and upgrading of infrastructure.
Trump’s proposal to solve trade problems might be counter-productive, but the problems Trump has touched upon are pertinent for discussing the future direction of globalization such as inclusiveness, as well as free and fair trade.
Trump also has reasons to applaud Xi’s achievements in tackling corruption; the steady reduction of poverty with over 10 million people lifted out of poverty per year in recent years; an economic soft-landing after the financial crisis; supply-side reforms; and the One Belt One Road initiative that aims to reinvigorate the Silk Road across Eurasia.
Second, review the dark agenda seriously and take it off the table
During the campaign, Trump said a number of countries, including China, were “raping the US economy” with unfair trade practices and currency manipulation, and promised to slap 45% tariffs on all imports from China. After Trump took office in the White House, warnings of the perils of a trade war against China came from both the Chinese and US side.
The main argument is that a trade war will hurt the US and China equally. Direct retaliation from China could include: cancellation of orders for Boeing aeroplanes; halting the import of agricultural products from the US; preventing Chinese tourists’ from visiting the US; even throwing away intellectual property protection and not paying billions of dollars-worth of royalty fees.
Imposing tariffs on Chinese products would have an indirect negative impact as well. For example, if US consumers are forced to buy more expensive products made in the US or from other countries, they will have less money to spend on services, which will hit jobs in the services sector. The option of a trade war should therefore be taken off the table and be seen as a last resort.
The threshold for the US to launch a trade war is even higher if we put it in a global perspective. The US benefits enormously from the existing global trade framework in all areas of employment, consumption, competitiveness (of both manufacturing and services), and the leading position of the US dollar. Unless the nation is in emergency mode, the US will not take risks by destroying the current world trade regimes.
Third, focus on a positive agenda
The issue of the US trade deficit has been around for over three decades and if Trump can reduce it by 20-30% within two years, that will be a great success. With China on board, it won’t be that difficult to find a positive agenda to reduce the US trade deficit with China significantly and increase job opportunities in the US.
A positive agenda can include conventional methods, such as China increasing imports from the US. For that, China has called for the US to relax its restrictions on exporting high-tech products to China. Since Trump is opposing many of Clinton and Obama’s policies, he may try to achieve something in this area, which will not only narrow the trade deficit but also create new manufacturing and services jobs at home.
In addition to importing high-tech products from the US, China could also increase imports of oranges, wood, beef and pork, although these will not reduce the deficit by a large margin compared with the trade in high-tech products.
The other element is to reduce China’s exports to the US. China could implement voluntary export control measures or price ceilings for an agreed period on certain products that are sensitive in the US market, such as iron, steel, and automobiles.
Furthermore, there are many other new areas where the two countries could cooperate. The first thing that might be of interest to both leaders is to include the US services surplus in the statistics again; in particular, the intellectual property earnings of US companies that are now transmitted to Europe rather than the US.
For example, the basic cost of manufacturing (BOM) of a 32G iPhone 7 is less than $225, but the sale price is $649. There is one line in all iPhone documentation, stating “Designed by Apple in California, Assembled in China”, meaning that the iPhone has separate intellectual property and manufacturing costs. Of these, the manufacturing cost is listed as a US trade deficit but the intellectual property is not listed in the US services surplus, as the majority of Apple’s intellectual property revenues do not return to the US but to Ireland. Many US companies that have vast intellectual property follow this practice.
Trump can use new tax policies to bring these revenues back to the US, killing two birds with one stone: increasing the services surplus with China, and increasing the US governments’ tax intake.
The second new area is energy cooperation. According to a study by IHS, the shale gas industry will support 3.3 million jobs and reduce the trade deficit by $164 billion. This provides huge space for mutually beneficial cooperation between China and the US, through the following steps.
· China increases its oil and oil products imports from the US.
· China could increase imports of US energy companies’ technology and services, for example from the state of Texas.
· There is huge potential for China to import more liquid natural gas since the first import took place in 2016.
· China can provide financing for energy infrastructure and modern transportation to connect production with markets, for example in the state of North Dakota where about one third of its natural gas is wasted due to the lack of modern transportation infrastructure.
· The US could allow the use of ships made in China, or jointly operated by US and Hong Kong entities, to transport gas between domestic ports, as the scale of US ports and their efficiency are lower than the world average.
The third new area is to increase Chinese investment in manufacturing. There has been a misconception among Chinese investors that the manufacturing cost in the US is high. Actually manufacturing in the US is the lowest in the developed world, and only 5% higher than in China, which is mainly down to labour costs, according to a BCGperspectives paper. The price of electricity in the US is about half that of China, and the price of natural gas is one fifth of the price in China, which is a great advantage for energy-intensive industries such as steel and glass.
Trump and Xi can work together to attract Chinese investors to open manufacturing facilities in the US, which can be mutually beneficial.
Last but not least, Xi and Trump have a shared interest in the international economic rule of law that has been kept by the World Trade Organization (WTO). Rules are not perfect, requiring modification by new negotiations or interpretation by the judges and lawyers.
The last thing to make America great again or to realize the Chinese dream is the law of the jungle. Thus Xi and Trump may wish to send their right-hand men to lead their mission to the WTO to consult with each other closely and steer the system in the right direction.
The latest edition of the Economist announced: “After 70 days in office, Donald Trump is stuck in the sand”. Trump’s meeting with Xi this week could be an opportunity to dig himself out.
2600 years ago, Sun Tzu wrote: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” The hope is that Trump and Xi can find a way to combine strategy and tactics, for both countries and for the world.