Will Xi-Trump meeting result in a thaw or deep freeze?

THE harsh war of words between China and the US in recent months, combined with the tough speech by US Vice President Mike Pence during the recent Apec Summit in Papua New Guinea, has led some analysts to believe that a new era of tension between the two countries has only just begun.

There is now much anticipation and speculation surrounding the upcoming G20 Summit in Argentina, where Chinese President Xi Jinping and US President Donald Trump will meet to address the trade war head on. Will the meeting result in a much needed thaw in relations or an even deeper freeze?

Based on the rhetoric on display from both sides, it would appear that neither leader will be inclined to back down publicly, since they have both backed themselves into a corner and do not wish to lose face with their respective citizenries. Envisioning a pathway for both to do so while genuinely ratcheting down the tension would appear to be even less likely. But China and the US are both suffering as a result of the conflict and both leaders should be incentivised to find a palatable solution.

Mr Xi is under increasing pressure as a result of the sustained erosion of Chinese economic indicators. The country's equity markets have lost nearly a third of their value over the past year, and the yuan has depreciated to values not seen in a decade. The Chinese economy is unaccustomed to such an assault. It functions well when GDP growth rate is at least 6.5 per cent, but is coming close to breaching that red line.

Mr Trump is under pressure from US agricultural and manufacturing sectors, which have become addicted to the Chinese market for decades. He is betting that his brethren are willing to sustain economic pain for an extended period of time, but he surely wishes to resolve the issue before the presidential election in 2020.

PROGRESS

Both economies have benefitted greatly from their "Chimerica" economic relationship and both ultimately desire to continue to be able to do so. There is reason to believe that at least some progress toward a resolution will either be commenced or made in Buenos Aires.

A number of scenarios appear possible:

The two leaders could have decided that now would be a perfect time to avoid a bilateral (and potentially global) economic calamity. Since their respective business communities want them to find a way out, they may each have already mapped a pathway out of the abyss.

If so, the challenge will be to arrive at meaningful and identifiable compromise from both sides. Mr Xi could agree to start to clamp down on the alleged theft of US intellectual property and Mr Trump could agree to benchmarks that would be clearly and easily verifiable.

But Washington may be leery, as it has seen this movie before from Beijing. During the Obama administration, Mr Xi had agreed to stop cyber intrusions against US government and commercial interests, yet the intrusions have continued. But this time could be different given that this year marks the 40th anniversary of the commencement of China's reform initiatives. Mr Xi has repeatedly vowed to deepen the reform process even further, the Chinese government has initiated concrete measures to reduce its tariff and non-tariff trade barriers, and to enhance intellectual property protections.

Alternatively, both leaders might decide that more pain is inevitable so they may choose to wave their flags a little longer before meeting again (or sending delegations) to craft a solution further down the road. Doing so would allow them to illustrate that they have not backed down too quickly, on the assumption that the Chinese and American people want the dispute to last a bit longer. While this may make little sense from a business perspective, it may make sense in terms of national psyches and would be in sync with the narratives of hawkish politicians from both sides.

Less likely would be a situation in which neither side has any real interest in negotiating a solution and may instead prefer to identify long-lasting alternative market options. There is a case to be made that some Chinese and American businesses may actually prefer this, with an orientation toward a future in which bilateral relations between China and the US may be tense in the long term.

These businesses may see it as beneficial to avoid the potential for conflicts between the two nations in the future and impact their ability to trade, invest, and lend with each other. Even if this were to materialise, the deeply interdependent China-US economic and trade relationship will not disappear overnight, but there is clearly scope for more bumps on the road.

OPTIMISTIC

Both leaders are transaction-oriented and understand the obvious benefits of finding a solution to this imbroglio. While Mr Trump is often fickle and unpredictable, and Mr Xi is under significant pressure, we are cautiously optimistic that meaningful progress will be made during the Xi-Trump discussions.

It took decades to arrive at this juncture and the ultimate resolution to the trade war will take months, if not years, to achieve and implement. Regardless of the result of the meeting, the deeper bilateral challenges between China and the US will remain, although the Thucydides Trap - in which China's rising power could lead to a state of war with the US - is not inevitable.