MNI ANALYSIS: Trump China Visit May Be Key To Avoid Trade War

By Nerys Avery

     LONDON (MNI) - The November visit to China of U.S. President Donald Trump,

confirmed by the Chinese foreign ministry last week, may be the last chance for

President Xi Jinping to ward off a damaging trade war between the world's two

biggest economies.

     China's domestic calendar will be dominated over coming weeks by the 19th

Party Congress, which starts on Oct. 18. President Xi Jinping is expected to

consolidate his power there and set out the ruling Communist Party's vision for

political and economic development over the next five years.

     But behind the scenes, many officials will be working hard on defusing two

dangerous international problems -- Trump and North Korean leader Kim Jong-un.

Both have the potential to inflict more pain on the Middle Kingdom than they

have already, and they will test China's diplomatic and negotiating skills to

the limit over the next few months.

     President Trump has made it clear that he wants to link the U.S.

relationship with China to trade with North Korea. China, not surprisingly, is

desperate to keep the two separate. Events over the past year show that Beijing

has far less leverage over the Kim Jong-un regime than it had over the

governments of his father and grandfather.

     The Chinese leadership would probably be happy to see Kim eliminated, but

the prospect of the country's implosion in a military conflict with South Korea

or the U.S., the economic and geopolitical tremors that would cause, and the

possibility of millions of North Korean refugees flooding into China, make it

clear the costs far outweigh the benefits for Beijing.

     Nevertheless, China's inability or unwillingness to do the U.S.'s bidding

on North Korea, and Pyongyang's continued flouting of U.N. Security Council

resolutions, leave the world's second-largest economy exposed to any unilateral

sanctions the Trump administration may impose -- including a halt to trade with

any country that does business with Kim's regime.

     POLES APART

     The U.S. and China are poles apart on North Korea. Washington says China

can and should do more, while Beijing says the Americans should stop issuing

threats and find effective ways to resume dialogue and negotiations. Conflict

between North Korea and the U.S. is at the core of the problem, and the

responsibility is with those two countries to end it, China's foreign ministry

spokeswoman, Hua Chunying, said last week.

     The North Korea problem is exacerbating existing trade friction between the

U.S. and China. The tensions have waxed and waned since Trump became president.

His initial bellicose threats to impose trade tariffs of as much as 45% on

Chinese imports and to declare China a currency manipulator melted away within

weeks of his inauguration. President Xi's visit to Mar-a-Lago in April and an

agreement to hold 100 days of talks to resolve the U.S.'s large trade deficit

with China soothed the U.S. president further.

     In reality, however, those talks spawned only very modest concessions from

the Chinese that had long been promised, including the resumption of beef

imports from the U.S. and market access for U.S. credit rating agencies. They

were far from enough to satisfy Trump. Bilateral trade talks were held in the

U.S. in July, but they ended with a whimper, and two press conferences planned

at the close of the discussions were canceled, signaling little agreement had

been reached.

     In August, the U.S. announced an investigation into China's trade practices

-- a probe that could last for 12 months -- to decide whether U.S. economic

interests have been harmed by the theft of American companies' intellectual

property by Chinese companies and by Chinese laws and policies on intellectual

property rights, technology transfers and innovation.

     Last week, President Trump issued an order to halt a $1.3 billion takeover

of U.S. chip manufacturer Lattice Semiconductor by a Chinese-owned private

equity firm, citing national security concerns including the potential transfer

of intellectual property.

     At least U.S. threats to declare China a currency manipulator have

evaporated for now. With the yuan having jumped by more than 5% this year,

thanks ironically to the weakening dollar, the Trump administration would have

little justification for accusing China of keeping its currency artificially

low.

     CALCULATING CHINA

     Chinese officials -- in an effort to avoid throwing fuel on the fire, and

waiting for the storm to blow over -- have been relatively restrained in their

response to Trump's unpredictable outbursts. They have consistently tried to

tout the benefits of trade to both countries and emphasize that no one would win

in a trade war. There have been upbeat articles in state-owned media about how

much U.S. consumers benefit from Chinese-made goods. The official Xinhua News

Agency published a report in July titled "Why 'Made in China' Makes U.S. Better

Off." It cited data from the Ministry of Commerce showing that trade with China

helps each American family save $850 a year.

     That's not to say there has been no criticism of Trump's policies or

warnings of retaliatory action. The Ministry of Commerce said it had "grave

concerns" about the investigation into China's trade practices, and foreign

ministry spokeswoman Hua said that if the U.S. took measures inimical to

bilateral economic and trade relations, China would "take all appropriate

measures to resolutely safeguard its legitimate rights and interests." Xinhua

criticized Trump's decision to block the takeover of Lattice, saying that

national security reviews should not be used as tools of protectionism.

     But the U.S. is not alone in feeling troubled by Chinese acquisitions,

especially given the almost insurmountable hurdles facing foreign companies that

want to buy Chinese ones. The European Union is becoming increasingly concerned

about the relentless pursuit by Chinese enterprises of foreign companies with

advanced technology. Last week, Jean-Claude Juncker, the president of the

European Commission, issued a new policy for screening foreign takeovers of EU

companies, saying Europe must defend its strategic interests.

     There's no doubt that foreign investors have cooled on China: annual

surveys from the U.S. Chamber of Commerce and the European Union Chamber of

Commerce have both highlighted concerns about the increasing difficulty of doing

business in the country. Foreign investment into China has plateaued, and the

State Council, China's cabinet, is crafting policies and launching initiatives

to try and encourage more inflows -- especially into services industries and

advanced technology.

     China will be pulling out all the stops to fete and flatter Trump when he

makes his official visit to the country in November, hoping to soften the U.S.

president's hardline stance on trade and North Korea. In advance of the trip,

Chinese officials have been in Washington for talks with some of the president's

advisers. Top diplomat Yang Jiechi met with Jared Kushner (who has been

assiduously cultivated by the Chinese), National Security Adviser H.R. McMaster,

and Secretary of State Rex Tillerson. Commerce Secretary Wilbur Ross is due to

go to China later this month as part of the preparations.

     Given what's at stake, both sides will want positive outcomes from the

visit, and there's little doubt the Chinese will be preparing some concessions

to enable Trump to declare himself a winner. Based on history, the Chinese are

unlikely to offer any juicy deals, but make just enough promises to satisfy the

U.S. president and ward off more trade tensions for another few months. 

--MNI Beijing Bureau; +44 203-586-2244; email: nerys.avery@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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