Xi and Trump - Getting to know you . . .

BREAKING the ice. U.S. President Donald Trump describes his first phone call with China’s President Xi as a “very, very good conversation”, and that they are in the process of ‘getting along very well” . . . 

WHILE the previous status quo has yet to return to Sino-US relations, the worst may have been averted – for now at least.

 The risk of a trade skirmish that could spill over to the global economy may be dissipating, although one cannot be 100% certain, given what is still a very uncertain environment as the new Trump Administration continues to find its way.

 The long-awaited get-to-know-you phone call from Trump to his Chinese counterpart, Xi Jinping, was apparently civil enough that, when asked to comment Trump responded that  he had a “very, very good conversation”.

 He said: “We are in the process of getting along very well,” adding that his Administration has had conversations with various representatives of China. “ I believe that that will all work out very well for everybody — China, Japan, the United States, and everybody in the region,” he said.

 Nevertheless, unease continues as several issues, mainly trade, are yet to be clarified.

 Trump has criticised China for unfair trading practices during electioneering, and, since his election, he has notably appointed anti-China figures to key trade and commerce roles, notably Peter Navarro (head of the National Trade Council Economic Committee) and Ross Wilbur (Secretary of Commerce).

A counterweight to Navarro and Wilbur may be key members of Trump’s corporate advisory committee, including the Chairman of Blackstone Group, Stephen Schwarzman.

 Schwarzman is deeply committed to China, and has put US$100 million of his own money towards a US$300-million scholarship programme for foreign students at China’s Tsinghua University, alma mater of senior Chinese officials, including President Xi Jinping.

 In turn, Xi seems to attach considerable importance to his relationship with the U.S. investment banker. It is said that he lunched with Schwarzman in Davos when he was there to make a keynote speech in praise of globalisation. Schwarzman assured his audience that China will be patient in dealing with the new U.S. Administration.

 Andy Xie, an independent Chinese economist based in Shanghai, says China’s diplomatic channel to Washington is through the elites — Wall Street and multinationals.

 Trump has now created just that kind of entity as his own channel —  business leaders who obviously are known to the Chinese leadership through their business interests in China. 

Schwarzman chairs the newly-established President’s Strategic and Policy Forum, made up of the Chief Executives and Chairmen of some of the largest U.S. multinationals.

 Members of the Forum will be charged with providing their individual views to the President — informed by their unique vantage points in the private sector — on how U.S. Government policy impacts economic growth, job creation, and productivity.

 The Forum is designed to provide direct input to the President from many of the best and brightest in the business world in a frank, non-bureaucratic, and non-partisan manner.

 Members of the forum include Jack Welch, formerly of  GE; Doug McMillion, of Walmart Stores; Mary Barra, of General Motors; and Bob Iger, of Walt Disney Company.

 In a recent note on possible trade sanctions in his regular Sinology report, China expert Andy Rothman, now Head of Strategy with Matthews Asia, wrote: “… I imagine that many U.S. CEOs have been calling Trump to advise him of the negative consequences of such a move on their firms.

 “Those CEOs might be pointing out that, since China joined the WTO in 2001, U.S. exports to China are up by more than 600%, while U.S. exports to the rest of the world are up by only 80%, and that China is now the third-largest market for U.S. goods exports.”

 With each passing week, Trump himself seems to tone down his rhetoric when it comes to China.

During campaigning, Trump spoke of imposing an across-the-board 45% import duty on Chinese products. China is the largest supplier of imported goods into the U.S., and it is said that as much as 70% of the merchandise in Walmart, the large U.S. retailer, comes from China.

Few believe that Trump will actually impose a 45% blanket tariff on Chinese imports. They say his private sector advisers will soon make him realise that import tariffs will hurt U.S. consumers and U.S. companies — just as much, if not more, than China.

 Rothman says U.S law. permits the President to make only an emergency declaration of 15% tariffs for up to five months.

 Many American jobs and corporate profits would be lost should China retaliate against new tariffs, and there would be losses in the Republican-leaning farm-belt, because China is the second-largest market for American agricultural exports, led by soybeans.

 Rothman says China could opt to buy Airbus instead of Boeings, and soya beans from Argentina or Brazil .

 And it will be hard for the U.S. to replace China as the source of its laptops, cell phones and electronics. Apple iPhones, for example, are assembled in China with components from many places, including the U.S.

 Others, like Francis Cheung, Head China strategist with CLSA, believes that, rather than a blanket tariff on all Chinese products, Trump may select some high profile items — like steel, glass and alumina.

 Cheung says China’s traditional weapon is to deny access to its huge growing market and to withhold investment. Chinese outbound direct investment has become increasingly important to many economies in the world.

 In a worst case scenario, should the US impose widespread trade sanctions, Cheung says the drag effect on the rest of the Chinese economy would be a cut of 1.3% in GDP growth.

 China can, of course, bring trade disputes to the World Trade Organisation, and has done so increasingly. There have been several cases involving the U.S. Again, whether the Trump Administration would take heed of the WTO’s Dispute Settlement Body is another matter.

 The U.S. represents 18% of China’s total exports, and is China’s second-largest market. Its top market, the European Union, and third-largest market, Japan, are not likely to be able to absorb the slack from China’s U.S. trade.

 China could try to ramp up exports to other emerging markets, but these are already reeling under softer commodity prices and weak currencies, says Andy Xie.

 Even if China can speed up negotiation with its Asia-Pacific neighbours, including Australia, New Zealand and India, on its Regional Comprehensive Economic Partnership (RCEP), this .would not offer an immediate lift in exports to these countries.

 RCEP has its own issues — which is why it has been unable to meet its implementation deadline, originally supposed to be end of 2015.

 China is clearly adopting a wait-and-see approach to Washington.

 So far, analysts say Beijing realises that, the less said, the less trouble. They say China will not over-react and is being restrained in its response to the U.S., and will watch as issues concerning economic matters and trade emerge in coming weeks, months and over the next four years.

 While it is too much to hope for the status quo, the Trump Administration may soften its stance towards China as it realises what is at stake, according to China-watchers.

 As Iris Pang, Senior Economist with global asset manager Natixis, notes, so far, China has benefitted from Trump’s policy. The killing of the Trans Pacific Partnership trade pact is a boon to China.

 China will likely move quickly to fill the void left by the U.S. and to work towards a regional trade pact with fair less onerous standards on investment, labour standards and State-owned enterprises than the TPP envisaged.

 Ultimately, however, CLSA’s Francis Cheung says trade is not China’s top priority.  Its priorities involve geopolitics — the South China Sea and the one-China policy. Trump has defused tensions over the latter, but the South China Sea looms large as a key issue.