The Trump-Xi summit and beyond

It would be comforting to believe that an agreement between the United States and China that deescalates the current trade war and resolves a number of key problems between the two would restore tranquility and mutual harmony. But history tells us that frictions and occasional disputes between a rising power with high aspirations and ambitions and an established power that has become accustomed to occupying a position of preeminence tend to be the norm.

There is reason to assume this will be the case for the United States and China—countries with very different political and economic systems, very different historic and cultural perspectives, but very similar aspirations for global and regional preeminence, or at least equality, in economic strength, technological advancement, and military capability. But these need not, and with skilled management by the leaders of both nations should not, lead to major political, economic, or military confrontations. That will be a decades-long responsibility of and challenge for both countries.

How the relationship between the United States and China is managed now and in the coming months and years will be the central international economic, political, and strategic issue of our era. It will shape the course of world history for many of our lifetimes. Resolving, or even deescalating, current trade and other economic issues would be an important part—but only one part—of what must be a broader and deeper process of constructive long-term management of this fundamentally pivotal relationship.

Resolving all the differences and numerous others that result from different systems and policy practices will not be accomplished in one negotiation, and almost certainly not over any short-term horizon, if at all—no matter how good the negotiators. The most probable outcome is to find agreement in some key areas that have been subjects of long-simmering disputes; this is imperative for reducing the current escalation and establishing a long-term process for resolving, narrowing, or at least managing differences that cannot be resolved in current negotiations.

There is actually substantial overlap of US and Chinese interests in some areas. For instance, many Chinese entrepreneurs want strong intellectual property protections because they themselves have been successful in developing their own intellectual property and want to protect it. There are also private sector companies in China that want to limit government subsidies, or provision of large amounts of bank credit, to state enterprises; they argue that these fund transfers involve considerable costs to the government, yield a diminishing rate of return, and draw funds that could be used by private companies that are capital constrained. And many companies and sectors in China still depend heavily on advanced technology inputs from the United States and other Western nations—and benefit greatly from integrated supply chains. They do not want to see these disrupted by extensive trade, investment, export restrictions, or import curbs.

For these reasons, and others, we need not think of current negotiations entirely as “us versus them” because these and other important groups in China have views about reform that mirror at least some of the measures the United States is pressing China to take. And some influential Chinese believe that their country’s economy actually will be stronger and more dynamic if at least some of the changes the United States is urging do take place. When Chinese Premier Zhu Rongji led the process of instituting reforms in China as part of China’s process of becoming a member of the World Trade Organization (WTO) in 2001, there were those in China who objected, but these changes led to dramatic improvements in China’s economy and international competitiveness.

And, lest it be forgotten in the United States, notwithstanding the negative comments being made by political leaders and commentators about China of late, that there are also numerous positive aspects of the relationship. Collaboration between the two countries in various areas of technology, medical research, energy, and other sectors has produced substantial and palpable benefits for large numbers of Americans. Joint research in laboratories between US, Chinese, and other foreign nationals has generated substantial innovation in medicine, physics, mathematics, and engineering.

From the farmers in the Midwest to the high-tech companies of Silicon Valley, the growing Chinese market has played a key role in boosting US exports, generating employment in numerous sectors in the United States, and enabling many US manufacturers and small businesses to be more competitive. Moreover, US consumers have reaped enormous gains from trade with China. So as US negotiators press China for needed changes, retaining the  considerable benefits of key aspects of the relationship and important ongoing areas of cooperation must also be on the agenda.

There are numerous areas in which there could be agreement between US and Chinese leaders, and indeed there has been genuine progress. Only two months ago, knowledgeable officials on both sides anticipated a substantial deal in May. It was rumored to have resolved a significant number of issues. But the deal was never consummated owning to a series of charges and counter charges about which side was responsible for derailing it. Now both countries have another chance with the meeting between US President Donald J. Trump and Chinese President Xi Jinping in Japan on June 29.

Even if a deal can be reached, however, it most likely cannot resolve all outstanding issues. And we should not brand it a failure if it does not. Realistically, the Chinese are not likely to change fundamental elements of their system. And realistically the United States is not likely to give up pushing for some changes that it cannot attain at this time. A significant narrowing of differences on, or resolution of, many issues that are not fully agreed upon in current talks will take more time. For some of these, we are only in the early innings.

This set of negotiations is but one facet of a wider range of talks that are needed on differences and frictions on a broader series of subjects. The key will be to find ways for both countries to cooperate on critical areas where that cooperation is essential to both and to compete in others in a stable framework of institutions, principles, and mutual trust. Creating such a framework will be a stretch at this point given the current tensions, but aiming to build one can be a first step in enabling the United States and China, with their mutual desires to enhance their regional and global economic, technological, and strategic capabilities, to reduce tensions and solve a series of acrimonious problems between them. They need also to engage with a multitude of other nations. The future global order—or even the regional order in Asia—cannot be the product of only a G-2, even though the two major world powers will play a critical role in creating it and making it work.

Then there is the question of how this agreement is embodied and implemented in Chinese law, regulations, and policy statements. The Chinese vividly recall a period that included much of the  19th century and the first half of the 20th century, in which their country was weak and internally divided. Foreign powers took advantage of this situation and imposed what were known as “unequal treaties” on China. If recent press reports are accurate, the notion that the United States would have a role in determining what is written in Chinese law to ensure implementation of these negotiations goes right to the core of these raw memories. Hence China’s lead trade negotiator Liu He has emphasized that any deal must be “premised on equality and dignity.”

Again assuming press reports are accurate, the United States has sought to retain some of the current tariffs for a time after a deal has been reached to ensure Chinese compliance, and further wants to have the right to reimpose tariffs unilaterally if Washington finds that Beijing is not complying, with China agreeing not to retaliate.

As  senior Chinese leaders came to understand and digest these US pressures, there were serious concerns as to how they would be received by public opinion and especially by opinion within the Communist Party. Even influential Chinese who are enthusiastically reform-minded may have found these types of concessions objectionable. And if such concessions trigger nationalistic feelings that China’s leaders cannot ignore, a deal will be difficult if not impossible to conclude.

For Trump there are also domestic considerations. He appears to find high tariffs attractive, and touts them as a large source of revenue to the Treasury paid by China. There are those in his base who support the idea of protracted high tariffs, additional import, export and investment restrictions, and decoupling. And there are a wider group of Americans who for the moment might see all the impact of the trade war on them as an acceptable price to pay if it is short term and leads to long-term benefits, which, of course, remains to be seen.

However, a new round of large tariff increases would slow an already weakening US economy and cause a reaction in the stock market. Moreover, the last round of tariffs mostly affected intermediate goods. New tariffs that Trump has threatened to impose on more than $300 billion of additional Chinese products, would heavily and more directly impact US consumers.

A weakening economy due in part to prolongation and escalation of higher tariffs and various forms of retaliation could have adverse political consequences for Trump and for many of his supporters in Congress. However, the president also might be wary that making major, or premature, concessions could leave him vulnerable to criticism from Republicans and Democrats alike, that he did not hold out for a tough enough deal, a consideration also likely to weigh on his mind as the country moves toward an election.

Assuming that Trump and Xi both want a deal, albeit for different reasons, each will have to figure out how to make concessions acceptable to strong domestic political constituencies.

Each leader will need to be able to say that he got as much as he could and gave as little as he could. Each will want to ensure that there are verification and enforcement procedures that are seen to be balanced and equitable. If the personal relationship that both Trump and Xi so greatly value is to be sustained, neither can afford to tout the outcome as a one-sided triumph that would cause the other to lose face or domestic support at home.

But to satisfy critics who say that the deal did not produce enough or achieve the correct balance of benefits and concessions, each also will want to be in a position to say that there will be a follow-up process that will aim to make progress on unresolved issues. The need for a sustained, high-level follow-up also squares with the hard reality that many issues will not be resolved in the current negotiations. There will be a need to set up a credible process for dealing, in an agreed framework, on matters that are not resolved at this point, and a wide range of other potential frictions and differences, spelled out in greater detail in my earlier pieces.

How these two leading 21st century global economic and military powers cooperate in the many areas where working together is critical to their interests and to the world, while also competing assertively in the numerous areas in which they are vying for preeminence or at least equal status, will in many ways define the course of the first half of this century and shape the future world order for much of the rest of all of our lives.

Robert Hormats is an Atlantic Council board member, vice chairman of Kissinger Associates Inc., and a former US undersecretary of state for economic, energy and environmental affairs.

This is final part of a series of blog posts on the US-China trade relationship.

Image: Chinese President Xi Jinping hosted a welcome ceremony for US President Donald J. Trump at the Great Hall of the People in Beijing, China, on November 9, 2017. The two presidents will meet in Japan on June 29. (Reuters/Jonathan Ernst)