G20: Hamburg

Resolving trade and investment conflicts gets tougher for Donald Trump and Xi Jinping amid North Korea threat

Tackling conflicts on the sidelines of G20 is now a daunting task for the two presidents after North Korea’s successful launch of an ICBM

PUBLISHED : Friday, 07 July, 2017, 2:07am
UPDATED : Wednesday, 12 July, 2017, 3:08pm

US President Donald Trump and his Chinese counterpart, Xi Jinping, have several trade- and investment-related conflicts to address in their second face-to-face meeting at G20 in Germany, a job made more daunting now that they’re caught up in a barrage of militaristic threats tied to North Korea’s recent test of an intercontinental ballistic missile.

Trump was ready for a more aggressive stance even before the latest provocation from Pyongyang. Indeed, trade with China had been simmering much longer as a political issue in the US and accusations that Beijing’s trade and investment policies have gutted employment in the US helped to buoy Trump’s winning presidential campaign.

The Trump administration’s strategy of “being very nice and seeking to have the most positive personal relationship as possible” has ended, Arthur Waldron, an original member of the US-China Economic and Security Review Commission, said in an interview with the South China Morning Post.

That commission’s most recent report to the Committee on Foreign Investment in the United States (CFIUS) recommended tighter restrictions on state-owned Chinese companies looking to buy US technology, potentially blocking Chinese companies from US assets they’re most inclined to acquire.

US Senate Majority Whip John Cornyn and Senate Minority Leader Chuck Schumer are writing legislation to strengthen the authority of CFIUS, a body led by the US Treasury, which can recommend that the president block foreign deals on national security grounds.

Xi, Trump agree on trade, military talks but appear at odds over North Korea

In December, before Trump took power, then-US President Barack Obama blocked a Chinese investor’s proposed acquisition of the US unit of Aixtron SE, a German maker of semiconductor manufacturing equipment, in response to a CFIUS recommendation.

Tightening CFIUS addresses two issues that cut across party lines in the US: national security and reciprocity, the latter being the argument that if certain sectors are open to Chinese investment in the US, then those same sectors should be open to American investment in China. Beijing all but bans foreign companies from owning Chinese telecommunications, media, and many high-tech companies.

“Reciprocity is a major issue with regard to market access between the US and China,” said Joel Backaler, a managing director at Frontier Strategy Group and author of China Goes West, a book about Chinese companies going global.

“Both sides have their reasons for protecting key industries, especially Chinese acquisitions of American high-tech firms in fast-growing areas like robotics, artificial intelligence and autonomous vehicles.”

US Treasury Secretary Steven Mnuchin said publicly that Congress should pass legislation to make “technical changes” to the CFIUS statute.

Trump minds his manners for a smiling Xi at Florida retreat

Whereas Trump toned down his Beijing bashing ahead of the two leaders’ first meeting in April, when he and Xi strolled through the grounds of the US president’s Mar-a-Lago resort, he dialled up the rancour just days before the two will meet on the sidelines of the G20 Summit in Germany.

“Because the administration was new in office and President Trump did not have a fully formed view of the world, it is quite possible that early signals which it gave would not in fact be sustained,” Lester Ross, head of the policy committee at the American Chamber of Commerce in China, said in an interview.

“There may be a sense of satisfaction and success in China [in dealing with Trump], but we may see some tough times ahead unless China can make changes.”

Trump already had a pretext to take a tougher line with Beijing on trade and investment, even without North Korea’s latest military provocation.

China’s trade surplus with the US was pegged at US$107 billion in the first four months of 2017, according to US Census Bureau data. That puts the surplus on course for a full-year 2017 imbalance on par with the US$347 billion recorded in 2016, which Trump used to back up his anti-China rhetoric before taking office in January.

“Rumours continue to percolate that Trump is preparing for more aggressive trade action,” Arthur Kroeber, founding partner and managing director at Gavekal Dragonomics, said in a recent report.

“The basic deal Trump thought he offered Xi at the Mar-a-Lago summit – a light touch on trade in exchange for more cooperation on North Korea – was absurdly unrealistic, given China’s obvious unwillingness to change its North Korea policy.”

With reports due from the US Commerce Department on steel and aluminium trade and calls for more scrutiny of Chinese investments in the domestic tech sector, Trump has another card to play in Germany.

Beijing, US reach trade deal to boost American imports to China in wake of Xi-Trump summit

Trump will be more inclined to negotiate with sticks instead of carrots when he meets Xi again because he’s lost the “illusion” many US officials have that showing good faith and accommodation will prompt China to do the same, said Waldron, who is a University of Pennsylvania professor of international relations. “In China, [accommodation] is seen as a sign of weakness.”

Trump may not have much to lose by taking a more aggressive stance in Germany because the extent to which Chinese investment supports the US economy doesn’t live up to the hype around China’s appetite for US investments.

“There is surprisingly little direct investment between the United States and China – surprising given that these are the two largest economies in the world and the two largest worldwide recipients of foreign direct investment,” said David Dollar, a senior fellow at the Washington-based Brookings Institution.

Only about eight per cent of the stock of China’s foreign investments are in the US, while China represents “little more than one per cent” of US investments abroad, Dollar said.

As for the reports on steel and aluminium, US Commerce Secretary Wilbur Ross was expected to issue a report on steel dumping last week, followed by a similar one on aluminium trade. China struggles with an overcapacity in both commodities because of the government’s drive to keep large state-owned enterprises running, making these companies subject to anti-dumping investigations.

Trump, who’s expected to take punitive action against the sources of dumped steel once the reports are out, might be keeping the reports “in his back pocket” as a bargaining chip with Xi, Waldron said.

The Trump administration appears confident that it would have international backing for such action.

“There has been consensus among our G7 allies that there is overcapacity and there’s dumping in steel,” Trump’s National Economic Council Director Gary Cohn told reporters in Washington this week. “I think there’s uniform consensus among all of our G7 allies that we do need to deal with the steel problem specifically.”

Additional reporting by Wendy Wu