Is China-US fighting talk a ploy ahead of Trump-Xi summit?

Deal or no deal, next weekend's high-stakes summit between President Xi Jinping and his United States counterpart Donald Trump will determine the trajectories not only of China-US relations but also the world economy, and particularly the stock and capital markets.

As investors wait nervously for clues coming out of the crucial meeting, expected to take place on the sidelines of the G20 summit in Buenos Aires, any kind of deal that would bring a ceasefire in the trade war would help reduce uncertainties that have already led to a rout in global markets.

But the lack of a deal would not only escalate trade tensions and darken the clouds hanging over global economic growth, it could also expand the trade war into a cold war with dire geopolitical implications.

With so much at stake and plenty of potential deal breakers, it is little wonder that pessimism has prevailed.

But there are also reasons to remain optimistic as after nearly a year of trade tensions, both Xi and Trump are under rising pressure to thrash out a deal to calm the markets and bring respite to the turbulent bilateral ties.

On the surface of things, the war of words and displays of bravado between the two countries in the run-up to the summit hardly augur well.

US Vice-President Mike Pence at the APEC summit in Papua New Guinea. Photo: AFP

At the recent Apec summit in Papua New Guinea, Xi and US Vice-President Mike Pence traded barbs over trade, security, and regional developments in strong and forthright language as both presented conflicting visions of the future. In his speech, Xi did not mention the US directly but clearly referred to it when he blasted unilateralism and protectionism which would add uncertainty to the world economy, and declared "history has shown that confrontation, whether in the form of a cold war, a hot war or a trade war, produces no winner".

In turn, Pence was more direct by saying that China had taken advantage of the US for "many, many" years and those days were over. "The US will not change course until China changes its ways," he said.

In diplomacy, known for its coded words and understatements, such bare-knuckle language is about as tough as it gets.

The exchanges came just weeks after Pence delivered what was widely seen as one of the most hawkish speeches against China by a senior US official in decades. In the speech in October, Pence accused China of military aggression, stealing US technology, and meddling in US politics.

In Beijing, Pence's speech was briefly seen as the Trump administration's comprehensive and full-frontal policy declaration on China, but the worries eased somewhat when there was no immediate follow-up from the US.

It is true that Pence's speeches may have reflected the sentiments of China hawks in the Trump administration, but his strong rhetoric - along with China's - could also be seen as part of the manoeuvring in the run-up to the summit between Xi and Trump.

Buenos Aires: the setting for the next meeting between US President Donald Trump and Chinese counterpart Xi Jinping. File photo

The strong words from both sides, if nothing else, help play down expectations for the summit and make it easier to play up any agreement to be had.

The reality is that as both sides spar publicly and show intransigence on their demands, they have been in constant dialogue at different levels and through official and unofficial channels over the past months to narrow their differences for a possible deal.

There have been suggestions that the US side has presented a list of more than 140 demands and China is believed to have responded that it could work to meet at least two thirds of them, even though the details are sketchy at present.

As repeatedly argued in this space, China has good reasons to make concessions over trade, such as ramping up purchases of US products and lowering import tariffs, and expanding market access to American and other foreign investment. Doing so is in China's own interests - as is taking effective measures to better protect intellectual property rights, another US demand - because it is striving for technological innovation.

History shows China needs external pressure to push its reforms and opening up at critical junctures. This is one of those moments.

For the US side, the pressure on the White House to seek a truce with China is also intensifying. This is vividly illustrated by the outburst of Peter Navarro, a trade adviser to Trump and an outspoken China hawk, who recently accused Wall Street bankers and fund managers of being "unpaid foreign agents" to pressure Trump into some kind of a deal.

Since this outburst, Navarro appears to have been sidelined by the White House after Larry Kudlow, another adviser to Trump, rebuked him and said his remarks "were way off base".

Previously, White House officials including Kudlow had cited the buoyant US economy and stock markets as arguments that the US could afford to play the long game and outlast China.

It is true that amid a slowing economy and a ballooning trade war, China's stock markets have fallen about 30 per cent this year, making it among the worst-performing equity markets in the world, but the uncertainties caused by the China-US tensions have also erased all of the US stock market gains this year.

Interestingly, there have been suggestions in the US that China has no intention of making a deal with Donald Trump as it will wait to see what happens with his domestic political problems after the Democrats retook the House of Representatives.

That view is lopsided, to say the least. Despite his unconventional presidency, Trump could be the best US president for China at a time when anti-China sentiment cuts across a wide spectrum in the US.

He may be close to China hawks such as Navarro, who see China as an existential threat, but Trump seems more interested in riding the anti-China sentiment to advance his domestic goals, which include beefing up his voter base for a re-election bid in 2020.

As Trump often boasts that he is his own man and he makes all the important decisions, he should meet his match in Xi, China's most powerful leader in decades.

Trump said recently that China had largely completed its response to the US' demands and was missing four or five big issues. Naturally, those can only be sorted out between Xi and Trump themselves.

This article originally appeared on the South China Morning Post (SCMP).

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