China Focuses on Avoiding Trade War as Xi-Trump Honeymoon Ends

  • Washington talks end without joint statement or breakthroughs
  • Mnuchin hails ‘big’ step toward reducing trade deficit

Trump Says U.S. Working on Major Trade Deals With China

With the honeymoon period ending between Donald Trump and Xi Jinping, China is focused on making the relationship work to avoid a trade war between the world’s two biggest economies.

High-level economic talks in Washington on Wednesday began with tense exchanges and ended with no joint statements and no major breakthroughs. While Trump’s team claimed victory, China took a more conciliatory tone: The foreign ministry said Thursday that both sides agreed to start “constructive cooperation” to narrow a $309 billion trade deficit.

The post-meeting statements, while hardly positive, pave the way for more dialogue following a volatile period since Trump’s election win in which ties lurched between extremes. Initial fears of a full-blown trade war disappeared after Trump praised Xi during an April summit, only to resurface recently after the U.S. president faulted him for failing to do more on North Korea.

"Like marriage, you wouldn’t go directly for divorce just because you have some bickering," said Ruan Zongze, vice president of the China Institute of International Studies in Beijing and a former top diplomat in Washington. "China-U.S. ties have grown to be deep and strong enough to absorb setbacks, as long as these setbacks don’t turn into drastic ups and downs."

China’s two-way commerce with the U.S. last year amounted to about $600 billion, nearly twice as much as its second-biggest trading partner Japan. The U.S.’s trade deficit with China is more than three times greater than with Mexico, another frequent target of Trump’s ire.

‘Big Step’

Treasury Secretary Steven Mnuchin said before the meeting that the U.S. would push China to lift foreign ownership restrictions in its financial services industry and to remove hurdles for the technology sector. The brief U.S. statement after the meeting made clear that didn’t happen, with Mnuchin and Commerce Secretary Wilbur Ross saying China “acknowledged our shared objective to reduce the trade deficit.”

Still, Mnuchin cast the meeting as a success, telling the Financial Times that the administration achieved a “very big step forward” in tackling the deficit. He told the newspaper that Beijing had “heard the direction of the marching orders” Trump had given them.

In Beijing, the foreign ministry said that both sides agreed to narrow the gap and the main result was establishing a "correct direction" for bilateral economic cooperation -- a standard phrase indicating the need to resolve disputes only through dialogue.

Read More: Trump Honeymoon With China Ends as Dialogue Turns Frosty

China’s vague comment acknowledged that the meeting didn’t yield anything concrete, according to He Weiwen, deputy director of the Center for China and Globalization in Beijing.

"Nobody here really expected the first talks to produce much," said He, a former business attache at China’s consulates in New York and San Francisco. "What we’ve got is not some contingent plan. China plays a long game with the U.S., and won’t be discouraged by a small setback like this one."

Early on, Trump linked trade policy with China’s action to stem North Korea. After a few months went by with little action, the administration has indicated it’s weighing tariffs or restrictions on imports of Chinese steel and aluminum, which it says unfairly flood global markets and make U.S. producers unable to compete.

While that stance means China remains vulnerable to U.S. protectionism, the approach "seems to reduce the risk of more significant harm to China’s exports to the U.S.," said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. The former World Bank and International Monetary Fund economist said China sends little steel to the U.S. and both sides ultimately "don’t really want to see an escalation."

Tug-of-War

Chinese Vice Premier Wang Yang warned on Wednesday that the two countries were so mutually dependent economically that "confrontation will immediately damage the interests of both." He cited Xi’s remarks at Mar-a-Lago: "There are a thousand reasons to make the China-U.S. relationship work, and no reason to break it."

That contrasted with comments by Ross, who scolded China about trade imbalances and said they need to improve.

"There’s a tug-of-war between the economic nationalists and the more corporate-friendly Trump camps, and it had seemed the former were winning -- Ross’s words suggest so," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. "However, China is simply not going to budge. It probably figures the U.S. will just back off."

The U.S. had higher hopes immediately after the Trump-Xi meeting, and saw some initial results. The 100-day action plan, which expired Sunday, reopened China’s market to U.S. beef after 14 years.

Read More: China-U.S. Trade Talks Near 100 Days Jarred by North Korean Test

Despite tensions, Trump has maintained praise for Xi of late. While visiting Paris last week, he called his Chinese counterpart a "terrific guy" and "great leader." Those personal bonds may at least help avoid some of the worst-case scenarios.

"There will be bumps on the road as both China and U.S. test each other’s position," said Chua Hak Bin, a senior economist with Maybank Kim Eng Research in Singapore. "Trade negotiations will be more of a dance than a fight. We don’t think the trade talks will degenerate into a broader trade war, as both sides stand to lose big."

— With assistance by Miao Han

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