How much will Xi Jinping’s G20 steak dinner with Trump cost China? Possibly US$300 billion a year

Chinese President Xi Jinping may have eaten the most expensive steak in his life at the working dinner with US President Donald Trump in Buenos Aires. In this much-anticipated meeting, a 90-day trade truce was declared.

According to the statement issued by the White House, China has agreed to purchase a “very substantial” amount of US goods to reduce the bilateral trade imbalance, and agricultural goods are at the top of the list. This is an obvious breakthrough in trade negotiations, offering hope that a comprehensive trade deal will be reached by the end of the 90 days.

As China runs an annual trade surplus of about US$300 billion with the US – it was US$276 billion in 2017 – a hefty bill looms for Xi. But Beijing is probably willing to pay this price to ease trade tensions and buy more time for further economic development and reforms. In fact, the fourth plenary session of the Communist Party’s Central Committee has been postponed for more than a month, due to the uncertain external environment.

A de-escalation of the trade war gives the Chinese government a breather, so it may turn its attention to domestic issues. It is putting together a large-scale tax reduction package to boost weakening domestic demand, which requires much detailed work. The ceasefire has come at the right time.

In financial markets, the knee-jerk reaction to the trade truce was a broad risk-on rally. Trump also fuelled investor enthusiasm with a tweet that hinted at a possible trade deal. He said China had agreed to “reduce and remove” tariffs on car imports, which are now at 40 per cent. If so, General Motors may no longer need to undergo aggressive restructuring.

However, it is too optimistic to predict that the dispute between the US and China will be resolved soon, even though Beijing is willing to pay the price. There are still unresolved issues between the two countries. For example, the US takes a dim view of China’s implicit subsidies to its state-owned enterprises, which Washington sees as unfair advantages.

However, given the importance of the SOEs to social stability, it is difficult to imagine the Chinese government tweaking its policy any time soon.

Meanwhile, China would want the US to lift its restrictions on hi-tech exports, thereby touching a raw nerve in China hawks such as Peter Navarro, Trump’s trade adviser. From their perspective, China would steal technology from the products, gradually eroding the US’ leading position in the field.

The US-China trade war: from first shots to a truce

In fact, the wish list from the US is very demanding. According to the White House, negotiations will start immediately “on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture”.

The Americans have also imposed a deadline: if the parties are unable to reach an agreement at the end of 90 days, the US will raise the 10 per cent tariffs on US$200 billion in Chinese products to 25 per cent. Hence, the negotiations will undoubtedly be difficult, and the market is bound to remain volatile.

Because of all the unaddressed issues, the two sides did not issue a joint statement after the high-level meeting. Certainly, this gives both leaders some leeway as to how they communicate the truce to key stakeholders, but it also makes apparent the divergence between the two countries.

China censors US embassy’s WeChat post on trade war truce

And even if a deal could be made in 90 days, the competition between China and the US may well be even fiercer in the foreseeable future. For the time being, China needs to rethink its growth strategy and corporate America needs to gain access to the vast Chinese market. Needless to say, both sides could pull out of their trade commitments, just as Trump has in the past couple of years.

Indeed, a US-China trade deal is like half a bottle of water. You could call it half full or half empty. Take a look at the Brexit deal, and you will get what I mean. So, the market could experience a rush of relief during the upcoming Christmas season, but the fallout from the trade war could still be immense.

Hao Zhou is senior emerging markets economist at Commerzbank