U.S. and China jockey for global support as trade war ramps up

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(Oct 11): The U.S. and China are set to use the latest gathering of the world’s finance chiefs to marshal support for their respective cases in a trade dispute that shows no sign of ending soon.

Finance ministers and central bankers from the International Monetary Fund’s 189 member nations are gathering in Bali, Indonesia this week for the fund’s annual meeting. While the agenda will include discussions on the broader health of the global economy, it will also be an opportunity for American and Chinese officials to cobble together alliances.

On one side is President Donald Trump, who argues his tariffs are a necessary price to pay to force China to stop what he calls unfair trading practices and theft of intellectual property.

On the other is President Xi Jinping, who has positioned China as a champion of globalisation and the existing trading order. In a series of speeches, Xi and his top officials have warned about the danger of tearing apart that system, while promising to gradually open up the Chinese economy.

“The struggle for trade alliances carved out of political allegiances is well and truly on," said George Magnus, an economist at Oxford University’s China Centre. “This is no ordinary trade spat, such as the one we saw with Japan in the 1980s. This is existential.”

Resisting U.S. Pressure

China will resist U.S. pressure just as it overcame "bullying" by other foreign powers in the past, Chinese Commerce Minister Zhong Shan told Bloomberg this week. That comparison with the invasions of China during what is often termed the "Century of Humiliation" suggests that the government isn’t likely to back down easily.

The U.S. last month slapped tariffs on a further $200 billion in Chinese goods, prompting Beijing to retaliate on US$60 billion in American products.

Trump and Xi may talk at a meeting of the Group of 20 nations at the end of November, White House economic adviser Larry Kudlow said last week. “Better to talk than not talk, but the talks have to be serious,” said Kudlow, adding that Trump “believes that whole trading relationship is broken.”

U.S. Treasury Secretary Steven Mnuchin on Thursday met with People’s Bank of China Governor Yi Gang on the sidelines of the IMF meetings in Bali. “We discussed important economic issues,” Mnuchin wrote on Twitter, without elaborating.

However, in an interview with Bloomberg News, Mnuchin said he’s worried about the recent decline in the value of the yuan. “We are concerned about the depreciation and want to make sure that it’s not being used as a competitive devaluation,” he said in Bali.

Competing Visions

Until any diplomatic breakthrough, both sides are trying to rally support, but some observers see that the advantage, at least for the moment, lies with China.

"The U.S. is losing the battle to isolate China within the G-20. It has lost the trust and alienated its major partners," said Thomas Bernes, a distinguished fellow at the Centre for International Governance Innovation in Waterloo, Ontario, and a former IMF executive director. "The irony is that many countries supported U.S. concerns but U.S. policy actions have driven them away."

China is reaching out to Europe with pledges to improve market access. Beijing is also dangling the carrot of investment through Xi’s signature Belt and Road Initiative, a sweeping project to build infrastructure across Eurasia. However, the reception of those overtures has been somewhat cool.

In a July meeting between Chinese and European leaders and businesspeople, Cecilia Malmstrom, Europe’s trade commissioner, praised China’s "strong pleas to keep markets open and fight protectionism," but added, "we would like to see these encouraging words translated into more concrete action."

China-EU Talks

The Commission President Jean-Claude Juncker said he hopes “that globalisation and interdependent multilateralism remain the direction of the world," but warned that "the EU is open but it is not naive."

In response, Chinese Premier Li Keqiang encouraged greater European investment into China, promising to "open the door wider and create a better business environment."

China has certainly made some moves to open its economy this year, announcing that foreign companies could increase their stakes in financial and car companies, and cutting import tariffs on a variety of goods to lower costs for consumers. These changes will also reduce costs for foreign companies looking to produce or sell in China.

Democratic Coalition

For its part, the U.S. is trying to build a more traditional coalition among free-market democracies. Last month, trade ministers from the U.S., EU and Japan expressed concern that “non-market-oriented” policies are hurting their workers and businesses and undermining global trade. Without naming China, they agreed to discuss new rules for addressing the market-distorting effects of state-owned enterprises and industrial subsidies.

That’s an improvement from earlier this year, when Trump was making more enemies than friends. At meetings of the G-20 and NATO, he vexed America’s traditional allies with his tariffs on steel and aluminum and distaste for global institutions. Since then, the president has launched formal trade talks with Europe and agreed on a revised trade agreement with South Korea and to start talks with Japan.

He has also reached a deal with Canada and Mexico, which their lawmakers must still approve, on a successor to the North American Free Trade Agreement.

The new Nafta, to be rebranded the U.S.-Mexico-Canada Agreement, contains a clause that allows any of the countries to terminate the agreement if one of them signs a trade deal with a “non-market economy”. While no country is named, the measure is clearly aimed at stopping Canada or Mexico from doing a deal with China.

“The U.S. is making an effort to isolate China on trade,” said Stephen Jen, CEO of Eurizon Slj Capital Ltd, an asset-management firm based in London. Efforts by China to win European support failed “because the EU is quietly pleased that the U.S. is confronting China on issues that have also bothered the EU,” Jean said.