Trade war truce trumps multilateral concerns at G20

At the weekend’s G20 meeting in Osaka, US President Donald Trump and his Chinese counterpart, Xi Jinping, agreed that their countries would resume economic and trade negotiations.

Trump also said US companies could resume sales to Huawei. As he put it: ‘[W]e sell to Huawei a tremendous amount of product that goes into the various things that they make. And I said that that’s okay, that we will keep selling that product. These are American companies, John, that make product. And that’s very complex, by the way. Highly scientific.’

This comes from two things. First, US companies that supply Huawei—like chipmakers Qualcomm, Intel and Broadcom—don’t want to lose revenue. As Trump said, we’re talking about ‘a tremendous amount of money’ and US companies were ‘very upset’ about a loss of sales.

The second reason flows from Xi’s line that the US must respect the Chinese state’s ‘core interests’ in any negotiations. Huawei qualifies here. It’s a core element of Xi’s drive for global strategic and technological dominance, and the company was obviously hurting more from the US freeze than its bullish media statements indicated.

But the Huawei issue is parked, not resolved. The company remains on the Commerce Department’s entity list, so it’s about granting licences to US firms where the sale of their products is no threat to national security. Trump also said he wants to see ‘where we end up’ before entering any discussion on Huawei with Xi, noting that ‘we have a national security problem, which to me is paramount’.

In return, it seems Xi has promised that Chinese companies will buy more US farm products, starting soon and not waiting for a larger US–China deal—a savvy move that plays to Trump’s base and ego.

What this tells us is that the big outcome Trump seeks from Beijing is cash—for farmers and US companies. In his words again: ‘Buying American product is very important to me. It’s a big—it’s a big thing.’ He mentions national security, but his brain is focused on the dollars, his base and probably the 2020 election.

For now, then, we have a ‘deal’ for resuming talks that trades US relaxation of pressure on China’s tech sector for Beijing forcing Chinese companies to buy more US farm produce (and presumably less from other suppliers—like Australian farmers).

If that were to be a harbinger of any final deal Trump strikes with Xi, then you’d have to wonder why he bothered with confrontation, because the future of US strategic and economic power is not soybeans, but technology.

It’s not just Huawei that has been parked until later. The deep disconnect yet to be bridged is the one on trade between Trump’s ‘gut’ and the views of his key advisers. The assessment of much of Congress and corporate America is that the US is in deep strategic, economic and technological competition with the Chinese state.

It’s possible that months from now Trump will sign a very big, very great, beautiful deal that only he could have made, but that makes no progress on changes to the fundamental structural policies and practices of Xi’s party-state.

If that happened, stock markets around the world would probably get a bounce, and other G20 leaders would congratulate Xi and Trump for listening to their calls to not harm broader global economics with their bilateral troubles. It’d be a dead cat bounce though, because if Xi’s signature policies like ‘Made in China 2025’ persist, then Trump, or any other US president, will find themselves back where Trump started, but with less credibility in taking on Xi a second time.

Beyond the art of the deal, a deeper disconnect was on display in Osaka. This one has to do with the World Trade Organization’s future. Reform was on the agenda. Again, the root cause of the need for reform lies in longstanding policies and practices of the Chinese state, accelerated by Xi who sensed China’s moment when he became president.

At its most basic, the WTO problem is that China joined the organisation in late 2001 as a developing economy and has taken single-minded advantage of this as its economy has changed.

Back in September 2001, the Chinese leadership ‘agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules.’ That didn’t happen.

Instead, the Chinese state used the preferential rules for developing countries and ruthlessly slow-rolled and distorted moves to liberalise and open key sectors of its economy. Huawei and other Chinese ‘national champions’ rose and operate now through these distortions.

Russia and China aside, almost every G20 country agrees that WTO reform must address these practices and recognise that China, despite major social inequality, now exhibits the features of a developed economy.

The most the G20 can agree to is reaffirming ‘support for the necessary reform of the World Trade Organization to improve its functions’. There’s no timeframe and no agreement on what those reforms should be.

On the tech sector, which is heartland stuff for US and Chinese competition, the multilateral news is worse.

Some choice bits from the G20 leaders’ communiqué have a distinct post-modern flavour:

To further promote innovation in the digital economy, we support the sharing of good practices on effective policy and regulatory approaches and frameworks that are innovative as well as agile, flexible, and adapted to the digital era, including through the use of regulatory sandboxes … We affirm the importance of protection of intellectual property. Along with the rapid expansion of emerging technologies including the Internet of Things (IoT), the value of an ongoing discussion on security in the digital economy is growing.

Agile ‘regulatory sandboxes’ and an ‘ongoing discussion’ aren’t phrases that inspire much confidence.

The Osaka summit shows that for multilateralism to work, someone still needs to drive the agenda. So far, no leader is stepping forward with any vision beyond calming the markets, urging the US and China to ‘resolve their trade dispute’, and saying that Trump and Xi understand the merits of this for everyone. Their arm-wrestle affects everyone, but it’s not about everyone. It’s about their own power and roles in the world.

In a pre-G20 speech, Prime Minister Scott Morrison came closest to the core issues when he said, ‘It is now evident that the US believes that the rule-based trading system—in its current form—is not capable of dealing with China’s economic structure and policy practices.’ He added that the ‘current trading system seems incapable of acknowledging, let alone resolving, these issues’.

It’s a good diagnosis, but it’s no prescription. And there’s no mention of the key ingredient: sustained international pressure leading to verifiable policy and behavioural changes in Beijing.

Of course, any such agenda will be very uncomfortable for Beijing, and G20 members will need to make a concerted effort to shift China’s ways.

Sadly, it seems that our best hope for resolving the core international distortions and problems resulting from Xi Jinping’s drive for global power is Donald Trump.