Hoping for a trade war truce at G-20? Don’t hold your breath

The Group of 20 (G-20) Leaders’ Summit scheduled to convene on Nov. 30 in Buenos Aires will place President Donald Trump in the same room with President Xi Jinping of China.

While many topics will be discussed during the summit, all eyes will be focused on the leaders of the world’s two largest economies. Cast in the spotlight of the media glare, observers will watch carefully the interactions between Trump and Xi and whether or not signs of a breakthrough will occur in the current trade war that embroils both countries.

To unpack this, it may be good to draw a scorecard as to the impact on both the United States and China to date. China’s response to the imposition of import tariffs has been swift and targeted.

{mosads}A wide variety of American-made products have been hit with tariffs by China. Most notably, agricultural commodities, like soybeans, and energy products, like liquified natural gas (LNG), have borne the brunt of China’s retaliatory response.

In the American farm belt, mountains of unsold soybeans lie in storage, waiting for a buyer. Banks that lend to the farm economy are signaling non-performing loans are on the rise, a sign that stress levels in the farm economy are rising.

The over-supply of soybeans on global markets is compounded by the large-scale expansion of capacity in Brazil, where a landmass equivalent to the size of Texas has been converted to farmland over the past 10 years.

In the U.S. oil patch, the LNG gas sector has taken a hit as Chinese energy firms have stopped purchasing American LNG gas and ramped up their LNG purchases from Qatar.

The impact of the trade war on China’s economy is also starting to take hold. China’s overall economy is slowing down. The closely watched Purchasing Managers’ Index (PMI) has been trending downward since the start of 2018. A downward-sloping PMI suggests a slowdown in manufacturing activity.

China’s banking sector is also signaling growing non-performing loans, an indicator of stress in the banking sector. Policy mandates emanating from Beijing all signal retrenchment and belt-tightening as China prepares for further impact of the ongoing trade war.

Specifically, President Xi has directed the injection of more liquidity into the banking system to shore up deteriorating conditions, and he’s urged banks to increase their lending to small- and medium-sized enterprises that are particularly exposed to the impact of U.S. tariffs.

China has also put currency controls in place, making it hard for individuals and companies to convert yuan to dollars and move those dollars out of China.

Large Chinese companies such as HNA and Dalian Wanda have been told to liquidate assets, as both companies went on buying sprees, snapping up foreign assets and companies with reckless abandon over the past 10 years.

Consumer spending in China has also been trending down, signaling caution on the part of Chinese consumers as they brace for further fallout from the ensuing trade war.

Given this backdrop, the stage is now set for the meeting of Xi and Trump at the upcoming G-20 summit. Neither the United States nor China has escaped the impact of the trade dispute.

China’s leaders have carefully watched the U.S. midterm elections to gauge American sentiment toward President Trump and his policies. While Democrats have much to celebrate, it appears the farm belt held steady and did not abandon Trump as a matter of course.

What to expect 

For those expecting a miraculous breakthrough during the G-20 summit, they may wind up disappointed. The Trump re-election effort starts now, and Republicans are aware that 2020 will not be a slam dunk.

Cutting a deal with China now offers Trump no political benefit. Cutting a deal closer to the 2020 presidential election offers much more in the way of political gain.

To borrow a refrain from the Broadway musical, “Hamilton,” Trump is “not going to throw away his shot.” Trump will need to look heroic as the 2020 election draws near, and a deal with China will enable him to do just that. 

For President Xi, the Chinese side will also hang tight. The Chinese have a long history of being patient and savvy negotiators. The health of China’s economy is Xi’s No. 1 priority.

{mossecondads}In as much as he has masterfully engineered lifetime tenure for himself, Xi is also vulnerable to the winds of political change. If China’s economy continues to deteriorate, one-man rule means there is only one person to blame, and Xi will bear the brunt of the criticism.

There is no denying the United States remains the world’s single largest, deepest and richest consumer economy. While China is actively looking to broaden its trade base and trading partners, there is no substitute for the United States.

This reality is a fitting reminder to China that if it wants continued access to the U.S. market, it will have to make some changes if it wants to stay in the game.

If Trump and Xi demonstrate some of the previous expressions of personal warmth and bonhomie, that will be seen as a good sign, and we can expect financial markets to respond positively.

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.