McLARTY FIRST TAKE: Possible outcomes of Trump-Xi G20 summit

June 28, 2019

KEY POINTS

The June 29 summit between Presidents Trump and Xi at the G20 in Osaka will provide an opportunity for the two sides to restart the trade talks.
Both Trump and Xi are motivated to get the negotiation train back on track, but dramatic breakthroughs at this summit appear unlikely.
Xi’s recent state visit to North Korea will add geostrategic context to the meeting and Xi is expected to push for an updated understanding of principles to guide US-China relations.

Presidents Trump and Xi will meet on the sidelines of the G20 in Osaka. For quite different reasons it is impossible to know what will be on the minds of the two leaders when they meet, or how they will calculate what room for maneuver their domestic constituencies may allow them. However, it is fairly certain that neither Trump nor Xi could be pleased with the status quo, and that both have some incentive for compromise in order to, at a minimum, prevent further deterioration in bilateral relations.

The summit is currently scheduled to begin at 10:30pm EDT Friday (11:30am local time June 29) and end prior to a Trump bilat with Turkish president Erdogan 95 minutes later. On Monday, USTR Lighthizer and Chinese Vice Premier Liu He “exchanged views on economic and trade issues by phone and agreed to maintain communications.” They will meet in Osaka to prepare the ground for their presidents’ meeting. Referring to a Trump-Xi phone call on June 18, China’s Vice Minister of Commerce Wang Shouwen stated that the two sides were “seeking to consolidate the important consensus reached between the two leaders,” Meanwhile, a speech by Vice President Pence about China slated for June 24 was postponed again to avoid poisoning the atmosphere for the summit.

These positive developments came after the two governments had engaged in a war of words for over a month and follow the inclusion of Huawei to the US Commerce Department’s Entity List. Huawei will encounter severe disruption to its supply chains if this move is enforced on August 19, 2019, as currently planned. China responded with plans to establish an “Unreliable Entities List” system and launch its own export control regime.

But even with the Trump-Xi summit in sight, tension in bilateral relations continued. On June 21 the US Commerce Department added five more Chinese entities, including Sugon and the National University of Defense Technology (NUDT), to the Entity List. China’s official CCTV said the US moves were aimed at gaining leverage in trade talks and such “science and technology bullyism would not succeed.”

Treasury Secretary Steven Mnuchin expressed optimism on Wednesday that a deal could be reached by year end and the two sides “were about 90% of the way there.” However, President Trump suggested in his interview with Fox News that additional US tariffs could still be imposed if the summit with Xi doesn’t result in any progress on a trade deal. “My plan B’s may be my plan A, my plan B is that if we don’t make a deal I will tariff, and maybe not at 25%, but maybe at 10%,” Trump said.

Key issues to watch at the Trump-Xi summit include:

1) Will the trade talks be restarted and if so on what terms and timeline?

2) Will the planned $300 billion tariff tranche be suspended and if so for how long?

3) In turn, will China delay issuance of its Unreliable Entities List and other trade related actions? and

4) Will Trump delay or lift some restrictions on Huawei in response to a Xi request?

5) What new framework consensus, if any, would be reached between the two leaders and what would that mean for bilateral relations?

Scenario 1: Negotiations to Resume; New Tariff Truce (High Likelihood)

Lighthizer and Liu He will be instructed by their principals to resume negotiations. If a deadline for a deal is set it is unlikely to be later than the end of 2019 and could well be earlier. Both parties will commit to not to impose any further tariffs or trade related actions as long as the negotiations are progressing in good faith. Both presidents will let it be known that failure to reach a deal will trigger actions that hurt the other party.

Some understandings may be reached on the principal sticking points in the negotiations, surrounding tariffs, purchases, and legislation, but may not immediately be made public.

No joint statement will be issued, allowing the US and China to separately characterize the meeting according to their own political needs but with some coordination between them. Trump agrees to a review and possibly adjustments of its actions vis-à-vis Huawei.

Our base scenario is one that has been foreshadowed by unattributed insider comments, and by soundings that we have made with officials in both governments. As often happens when a relationship is in doubt, the Chinese side will insist that the two presidents agree on some basic principles that might constitute a framework within which key issues can be addressed. The US side is practiced at this, and it is likely that Trump will be amenable.

Scenario 2: Major Breakthrough (Low Likelihood)

Under this scenario, Presidents Trump and Xi would arrive at a consensus on how to resolve the thorniest points in the US-China trade negotiations surrounding tariffs, purchases and legislation. The two presidents would issue a joint statement announcing that they have reached agreement in principle on the key remaining issues, and instructing Lighthizer and Liu He to finalize the text of the agreement in a matter of weeks. As part of this deal, all tariff hikes except those on the initial $50 billion of Chinese imports (and corresponding Chinese tariffs valued at $50 billion) would be lifted once the text was finalized and signed.

The two leaders would make substantial compromises. Xi would agree to structural reforms with concrete steps and timetables; major purchases of American goods and services; and an enforcement mechanism that is strong and credible. In addition to agreeing to remove all but $50 billion and the Section 232 tariff increases, Trump would ease US policy against Huawei, allowing Huawei CFO Meng to return to China in exchange for a fine paid by the company and China’s release of the Canadians Kovrig and Spavor.

Scenario 3: Impasse Continues: Next Tariff Increases to Follow (Low Likelihood)

The United States and China would separately issue statements that efforts to break the trade impasse were unsuccessful and the US would indicate its plans to impose the $300 billion tariff hikes within a month unless China moved on key issues. Either party or both will take new unilateral actions against the other. The US would institute new tariffs on the remaining Chinese goods, and China will take several actions that 1) target US companies in China; 2) restrict rare earth exports to the US; and 3) create asymmetric geopolitical headaches for the US.

Failure to make progress would be poorly received in markets worldwide and may lead the global economy into recession. Trump would face strong criticism from some Congressmen and industries such as agriculture that would be hurt most by high tariffs, while Xi would be accused of mismanaging the US relationship. What additional deleterious effects result would depend on the severity of the summit failure.

Wild Card Again: Huawei

It is unlikely that a complete solution to the Huawei issues could be a prerequisite to the conclusion of a trade deal, though there is little doubt that this will be Xi Jinping’s opening position. It is extremely unlikely that the US will back down from its claims that Huawei’s 5G systems pose unacceptable security risks, and Beijing must know that there is no “Get Out of Jail” card for the company. Perhaps, though, there is a compromise to be had that would take some pressure off the company. Stay tuned!