The G20 where the world glimpsed at a US-China clash

 At the recent G20 summit held in Buenos Aires, expectations were low and the crucial bilateral interaction was that between Donald Trump and Xi Jinping. Against the backdrop of the trade battle with China, started by the Trump administration when it imposed a 30% tariff on foreign solar panels in January 2018 – which has since escalated with more tariffs and a series of tit-for-tat moves by both sides –, a 90-day “ceasefire” has been agreed. It is a symptom of the unsettled state of the world’s most relevant economic relationship that a three-month truce is widely viewed as a positive sign – if limited in scope and (by definition) time.

The two sides have provided terse statements to explain the agreement, which are not entirely overlapping. But the broader concern is that Washington’s ambition is to immediately start discussing some of the most controversial topics, such as property rights and cyber theft. Unless there is some flexibility on these, Beijing is unlikely to accept Trump’s “maximum pressure” approach. Under these conditions, negotiations might rapidly collapse or just not start at all.

A step back can help frame the current predicament: the administration’s National Security Strategy, a broad policy document released in December 2017, defines China as “a revisionist power” and thus a direct threat to the existing global system, or at least to the present balance of power. However, in many ways the US, too, can be defined as a revisionist country under its current leadership – as evidenced by its open rejection of various international bonds that previous American administrations saw as a given. Therefore, what we are witnessing is not only an intensifying clash between two major powers with profoundly divergent interests and vastly different political systems, but also the emergence of a very unstable relationship resembling a new version of the early Cold War. Each side is striving to gain short-term advantages in the belief that the fight will be long and hard, and that its counterpart cannot be trusted.

To make matters worse, Donald Trump’s personal approach to negotiations never seems to offer his adversaries ways to “save face”, something that is especially important to the Chinese, and most others for that matter. By demanding a sort of unconditional surrender and offering deals in a “take-it-or-leave-it” format, the US President makes it very difficult for the other side to present the bargaining outcome as a genuine compromise. This is true even when the end result is indeed a compromise, as Trump would rarely admit as much while claiming total victory.

In taking a much more adversarial attitude toward China, there is a strategic objective that makes the bargaining tactic even more aggressive: the immediate demand by Washington is to reduce the trade imbalance, but the longer-term demand may be to radically change Beijing’s industrial policy. In short, trade rebalancing may turn out to be a negotiating tool rather than the ultimate goal.

The positive note from Buenos Aires is that there was a final communique – something the last G7 in Canada six months ago was unable to produce. Yet, on the basis of first-hand accounts of the G20 meetings, the communique was watered down (especially on free trade) and over-informed (especially on climate change policies), precisely to accommodate the specific requests of Washington and Beijing. A Wall Street Journal article quoted an EU official who attended some of the meetings, as saying that there are now two taboos: for Washington it is multilateralism; for Beijing it is unfair trade practices. It is indeed a troubling combination, with the rest of the world caught somewhere between the two.

The other G20 members, understandably worried by a possible new Cold War, were so keen to have an agreed final statement that they just lowered the bar. Politics is the art of the possible, but the twin qualifications in the document still reflect strong pressures from the two superpowers that leave the prospect of a functioning multilateral global system hanging in the balance.

There are both technical and political reasons to be concerned about the next steps. It should not be forgotten that tariffs are by nature a distortion, one that favors governments (after all, they are a tax, so they create a revenue) and producers, while damaging consumers (and to some extent businesses along the production chain). In a climate characterized by widespread citizen discontent with current economic policies across the advanced economies, this does not look like a great recipe. In fact, it might well feed into a cycle of recrimination that will hardly facilitate international compromise.

Furthermore, some economists have noted that tariffs generally have a non-linear effect on exchanges: they tend to cause much bigger (exponential) distortions as they grow – say, from the 10% already imposed by Washington on hundreds of Chinese products to the 25% Trump has threatened to impose if the “ceasefire” does not produce results. In other words, there is a very tangible escalation risk that resembles that of a military arms race, including the growing pressure on third parties to take sides or run for cover somewhere in search of forms of neutrality.

In trying to capture the dynamic of a retreating power (Trump’s US) and a rising power (Xi’s China), Financial Times columnist Philip Stephens has rightly argued that “Every time the US takes a step back, China will try to take half a step forward. And Europe will face an unwanted choice.” This concept can be applied much more broadly, as the whole world is now staring this ugly choice in the face.