G20 stare down will not deescalate tensions

November 29, 2018

It’s easy to see why financial markets are optimistic that the G20 will herald a détente in the US-China trade war. But it won’t and they’re wrong.

The two main protagonists have much to gain from effective displays of personal diplomacy. Both will return home with some points scored.

However, the victory celebrations will be short lived. Personal diplomacy is useful for seeking common ground and reducing geo-political tensions. However, it rarely yields progress in the thorny issue of trade, where agreements need to be ratifiable and enforceable.

More importantly, President Trump and his Chinese counterpart Xi domestic agendas means the two countries remain on a collision course.

The US has two broad aims. One is to help restore jobs in domestic manufacturing. This is a direct appeal to the blue collar workers that form the core of Mr Trump’s support base. The other aim is to rebalance the diplomatic and economic relationship with China. Both objectives are underpinned by a belief that the terms of trade between the countries are skewed too far in China’s favour.

China has its own objectives. Its ‘One Belt One Road’ initiative is the largest attempt going on in the world by any country to extend its influence far beyond its borders. It has trade on Chinese terms at its very core. Meanwhile China is pressing on with its ‘Made in China 2025’ initiative. The industrial policy is an ambitious attempt to expand its high tech sector and establish an advanced manufacturing base. The US sees it not only as a threat to US companies but also a huge security risk. China’s view is that it is a bold attempt to borrow from the industrial policies of other countries to establish industries that will allow it

To compete in a fast evolving world economy. Of course, a trade war is the very last thing the global economy needs. The medium term outlook is already dim with weak productivity growth, persistent global imbalances, rising financial vulnerabilities and income inequality. Will either man blink in the face of a more serious downturn? This is probably some way off.

The US President is unlikely to change tack unless there is some domestic political backlash, a really disruptive bout of financial market volatility or US growth hits the buffers. The mid-terms elections suggest his domestic audience is fairly content for now and, in spite of some recent financial market volatility, they think the US is still ‘winning’. The US economy could well slow over the medium term and that could force Trump to change his tune. But that slowdown is unlikely to be imminent.

At a broad strategic level, China does not want to be seen to concede to what it might regard as US bullying tactics. However, a global downturn would complicate China’s already difficult task of engineering a controlled slowdown in its economy. The problem is that few of its proposed concessions are likely to appease Trump’s leadership team or his domestic audience. The danger is that appeasement will simply lead to more demands. Without a resolution in sight a slowdown may be inevitable. The irony is that the blue collar workers that support Trump will be amongst the hardest hit. There are no winners in trade wars. Only compromises. Sadly we cannot expect many of these this weekend.

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