Summit is chance for China, US to push reset button

As global leaders prepare for the upcoming G20 summit in Buenos Aires, Argentina, two key issues that will dominate the meeting will be the current trade war between China and the US, and the need to address climate change. While both are critical issues, the current trade tension is just a tad more urgent.

Even before the meeting, things are already looking pessimistic and some members are already wondering if the group could even issue a significant communiqué to conclude the meeting, to close 2018 on a positive note.

The tension between China and the US is definitely escalating at an unprecedented level. The effect of their hostilities had even divided leaders at the recently concluded 33rd ASEAN Summit and also the APEC Papua New Guinea Summit 2018, where the latter could not issue a joint-communiqué to conclude the summit.

As smaller economies in ASEAN and APEC are starting to demand fairer and more equitable trade agreements to boost their fledgling economies, the narrative that “no deal is better than a bad deal” is gaining serious traction, thanks in part to Trump-nomics.

For ASEAN economies, this narrative is now underpinning their individual emphasis in calling for an increase in intra-trade within ASEAN so as to afford its members some relief as they search for a more viable option forward. Some ASEAN members are naturally open to considering any alternative trade option beyond China and the US, beyond ASEAN, if such an option addresses their socioeconomic needs and security concerns. It is worthwhile to note that “reformed” leaders of developing economies are more concerned about creating meaningful employment for their people.

The probability of ASEAN+6 signing the Chinese-backed Regional Comprehensive Economic Partnership (RCEP) in 2019 is looking to be an uphill task for the Chinese unless the valid concerns of the smaller economies are addressed in a more decisive and comprehensive manner, and greater incentives are afforded to sweeten the deal, especially for developing countries. China has missed too many opportunities and it cannot continue to undermine itself economically and strategically.

In the midst of all these trade-related escalations and divisions, the World Trade Organization (WTO) has been rather helpless and the call for reform is getting louder. But what exactly can the WTO set as its agenda for reform, so that it can be relevant within a new world order?

The economic transformation of China over the past 40 over years has been phenomenal. In a large part, the US & several other major trading partners of the Chinese had been supportive of China over the years and had afforded China much concessionary advantages and assistance, to foster economic development. Like in any collaboration, there is an expectation of some form of fair dividend payout at some point, or at least some leveling of the playing field now that all are economic equals.

Unfortunately, when China became a superpower and did not reciprocate this “goodwill” with fair dividends to its partners but instead advocated independently it’s ambitious Belt and Road Initiative and yet expects to maintain the status quo in continuing to protect its domestic market from its trading partners, all bets are off, at least for the US of President Donald Trump.

For the new generation of young Chinese, such goodwill is taken to be the norm and they largely concur with their national narrative that China has the sovereign right to develop its economic success beyond its border and with whom it prefers. They don’t seem to truly understand why the US is acting so hostile towards the Chinese.

Economic success is new to the Chinese and nobody in China would want to risk their newfound wealth by acting against their national narrative

Economic success is new to the Chinese and nobody in China would want to risk their newfound wealth by acting against their national narrative. Many Chinese cannot differentiate the underpinning facts from distracting rhetoric, and there is no incentive for them to pursue either.

For example, take the Universal Postal Union Treaty: Chinese online marketers are benefiting from online sales into the US as they are still paying a heavily subsidized rate, as compared to other developed economies such as the EU. This means that Chinese online marketers are able to offer literally free shipping and out-price their competitors. The Trump administration is already working to reduce such privileges, and Chinese online marketers have to brace themselves for real competition with their peers on an equal footing by 2019.

Trump has blamed America’s failure to balance its 2017 trade deficit with China of US$375 billion on the Chinese. When China flexes its military might in the South China Sea and the Indian Ocean, the Chinese literally gave Trump the very opportunity he needed to fuel his domestic politic agenda for his party’s mid-term election – the urgent need for the US to curb China’s meteoric economic rise and military dominance.

China’s former major trading partners are also starting to realize just how hard it is to level the playing field with the Chinese through the WTO. Economic success is addictive. Nevertheless, the Chinese central government is starting to accept this reality and is opening up its domestic market, albeit slowly, and also introducing new policy reforms to address other economic concerns raised by its major trading partners. Critics may accuse China of being slow to respond, but late is still better than never.

China’s major trading partners expect it to reciprocate such goodwill to other developing economies that it is courting with its BRI, and not use its investment as a debt-trap against these weaker economies by developing large-scale legacy projects that have little economic value or employment opportunities for the locals. As more developing economies become cautious towards China, it will have to work harder and also address their sovereign and security concerns if it hopes to build up its external trade beyond its borders. China needs to help other developing economies just as it has been helped by others.

In a nutshell, this frames the economic tension between the US and China, less the distracting military-posturing, rhetoric and side issues such as domestic politics. The current trade tension is not sustainable and is hurting everyone, not just the Chinese or the US. The IMF blames the 0.8% decline in global GDP on this tension.

The million-dollar question is whether the leaders in the upcoming G20 meeting will be able to find the will to resolve this conflict now that the Chinese are showing an inclination to negotiate?

The Chinese off-balance-sheet borrowing under its local government financing vehicles (LGFVs) has risen tremendously. Last month, S&P Global Ratings put this amount to be as high as 40 trillion yuan (US$7.95 trillion). It appropriates the Chinese government’s debt at an alarming 60% ratio to its 2017 GDP. This partly explains why the Chinese are stepping up their promotion of FDIs and also its BRI to developing countries – it has to create new economic growth to compensate for the fallout from the rift with the US.

The Trump administration’s latest call for the US and its allies to boycott Huawei products, the promotion of its Indo-Pacific trade alternative to China’s RCEP, agenda-free investment to counter China’s BRI, revising the Postal Treaty, and the new rise in tariff against China, which is to take effect from January 2019, are making it very hard for the Chinese. It is driving businesses and FDIs out of China. A derailed China will seriously impact the US and Trump-nomics must be calibrated if we are to avoid a global collapse.

The US is also suffering from this fallout, but to a much lesser extent than China since it is the US that is buying more from the Chinese. Besides its companies based in China, its local automaking, agriculture, dairy and commercial aircraft sectors are all feeling the pinch. More devastating for the US will be the risk of losing its trade and security allies around the world. Trump-nomic is driving these allies away from the US and that could upset global security, to the detriment of the US’s own future as the global leader.

Both the US and China have to call for a ceasefire as the cost of this protracted tension is just too costly for everyone. WTO members and global leaders must act decisively and help facilitate negotiations. Such collective resolve may be the catalyst needed to transform the WTO, and it may just be in sight at the upcoming G20 summit.

The Chinese need to understand that it is not just up against the US but also many others. These major economic powers include Japan, the EU, Canada and Australia, and they are all actively at work, drawing smaller economies with strategic importance towards them. With a BREXIT deal almost in hand, the UK may just surprise everyone with its forging of a new future outside of the EU, and Asia is definitely high on its list. Both the US and China may want to seriously re-engage the UK as it still has many strong value propositions across Asia to offer either party.

With too many missed opportunities, China must step up and seriously enhance its trade offers and also address the security concerns of its immediate ASEAN neighbors, which are involved in territorial disputes over China’s Nine-Dash Line. Its insistence on a strictly bilateral approach is not really helping as some of these countries may prefer to discuss such concerns on a tripartite basis due to historical and overlapping interests. This is still much easier for China to conclude than the comprehensive RCEP or the ASEAN-based Code of Conduct.

China must clearly show that it’s foreign and trade policies are vastly different from its internal policies

China also needs more credible success stories to substantiate its official narrative – that it is seeking peaceful and fair expansion of its economic and military power. It cannot afford to blunder yet again and must engage more credible leaders in the region. China must clearly show that it’s foreign and trade policies are vastly different from its internal policies so that smaller developing economies will distinguish them from its engagement with Hong Kong, Macau or Taiwan.

President Xi Jinping will have to dig deep into his network and try his best to convince the other G20 leaders to help China enter into a constructive dialogue with the US at the upcoming G20 meeting. It may be wise for China to rethink its strategy and show sincerity towards the US and find a way to foster a peaceful outcome for the sake of global peace and prosperity.

In an interesting way, if Trump-nomics can be calibrated at the G20 meeting, global leaders may have a golden opportunity to bring 2018 to a positive end. Much sideline diplomacy will still be needed to foster a new consensus and if some form of ceasefire can be reached, the world may have to rethink Trump-nomics. Indeed, the world may consider the possibility that it can be used to serve the greater good after all.