All Eyes on China: Watch President Trump’s “Art of the Deal” Go Big

Within two weeks, on March 2, all eyes will be on China.  Behind the scenes, a major trade conflict is being negotiated.  What is announced on that day will have an enormous effect on China’s economy, the US economy, and global trade.  The US stock market will either swoon or boom, probably within hours – generating consequences that ricochet beyond the market and last for weeks, if not months.

So what will happen?  That is a trillion dollar question.  If news is negative, expect an accelerated, ugly trade war with China.  US tariffs would jump from 10 to 25 percent on $200 billion in Chinese goods, reinforcing slow growth in China.  US companies would pull back, and we might see a wider net being cast by the US and allies for Chinese companies suspected of unfair trade and security violations. 

If the news on a trade deal is adverse, or not sufficiently positive, we could see other implications.  Among these, we might see ramped up bilateral actions penalizing Chinese companies operating outside China, even those without official ties to the government.  We could witness further erosion of cooperative sanctions against North Korea and Iran, diminished cooperation (such as it is) on human rights, less interaction on maritime law and space, reduced participation in multilateral organizations. 

In the event of a downward turn in relations, we might witness an uptick in arrests of Chinese officials across the West for security, espionage, and trade violations, such as when Canada arrested Huawei’s CFO for espionage last year.  In line with this, renewed focus on illegal Chinese digital activities, human rights violations, and presence in Africa and Latin America might spike.  Of course, Chinese retribution would also be foreseeable – possibly including detention of Westerners, as occurred with Canadian citizens after the Huawei CFO’s arrest.

But all need not go dark.  The truth is that, on dispassionate calculations, we may see the exact reverse – a renaissance in US-Chinese relations, beginning in March.  Here is that plus side, and why odds may favor the positive turn.  True, President Trump has turned a page with China – and good for him! 

He has forced them to answer for disproportionate trade imbalances, misuse of the World Trade Organization, compelling US companies to disgorge proprietary rights and intellectual property in order to do business in China, keeping their market closed, subsidizing their companies, using foreign soil to hide Chinese production and subvert global trading norms, as well as for weak enforcement of sanctions against North Korea, production of fentanyl killing Americans, and human rights violations. 

But there are strong motivators for China to come toward the US in a progressively more cooperative trading relationship, and even to cooperate on security issues – on earth and in space.  First, China’s growth is palpably slowing, and while objectively strong, it is slowing at a precipitous rate.  Any real trade war could cripple key sectors, from manufacturing to high technology. 

Second, China has a number of private as well as public companies that could suffer severe setbacks if a global crackdown on 5G and related technology companies and supply chains were to become viral.  That would also throw the brakes on Chinese growth. 

Third, China is the world’s second-largest economy, but it is also in substantial debt – and that debt will not be retired, inflated or satisfied any time soon.  If the growth level does not parallel recent emerging economy growth, which is admittedly a tall order, the impact could be making debt service – including dollar debt service – very expensive.  That is not a virtuous but vicious cycle.  In short, modest adverse trade impact could create major implications for a country in over its head.  Of course, a quick look in the mirror suggests motivations for US debt reduction, too.

On the security front, the truth is also clear:  Greater cooperation in space, in maritime and international security areas of common interest is likely to be far more valuable than a pitched battle for control over nominal assets, advantage and geographical dominance.  And then the whole imbroglio that is North Korea, with nuclear capabilities and ambitions, long and medium range missile launches, and the potential for a major conflict on China’s border would augur in favor of progress, not a backslide.

So, where is the smart money?  Truth is that no one knows how this trade negotiation will come out, but the stakes are high – both sides playing for real, with major new tariffs and law enforcement actions on one side, and opportunities for shared growth on the other. 

Here is an informed guess:  To get to perfect trade and security relations with Communist China is a pie-in-the-sky wish.  Even a long step toward further opening China’s markets, elevating and rebalancing trade relations, ending mutual suspicion on basic systems like cell towers and 5G build-out, together with ending China’s theft of intellectual property – and finding some way to enforce all this – is a long way off. 

But that is not to say the market will not pop in March, because the best outcomes often come when the stakes are high, outcomes really matter, and the world is watching.  If we are lucky, the intense dialogue – mostly behind closed doors – will produce a rock-solid “first step” toward a long term, mutually beneficial, and genuinely sustainable “new relationship” with China. 

Not since Richard Nixon and Henry Kissinger began the process of economic “opening” with China have the odds been as high.  My guess is that we are about to see good news out of this hard-headed negotiation with China, and President Trump will – yet again – have foiled his critics, adroitly plying his “art of the deal” to advantage America.  Keep your eyes on March 2 – as that is the day.