Amid the sharpest deterioration in their diplomatic relationship in decades, China and the United States are aligning representatives to talk trade with each other on Saturday. By videoconference, of course.
It is a reminder that the two economies are intertwined in a way that the United States and Soviet Union were not. So although there's plenty of discussion that Sino-U.S. relations are now in a "Cold War," it's lukewarm at most.
The world's top two economies can't function without each other. They have to learn to do business at the same time that they take diplomatic potshots at each other and engage in military posturing.
Both sides are expected to re-commit to the Phase 1 trade deal signed in January. Like renewing marital vows. U.S. President Donald Trump even told the Davos crowd that he and Chinese President Xi Jinping "love each other," one week after the trade-deal ink was dry. Trump said then they would "very shortly" start talks on Phase 2.
I don't think Trump will be renewing that vow anytime soon. By July, the U.S. president was sounding positively like a jilted lover. The trade deal "means much less to me," Trump said in a White House briefing last month. "I'm not interested right now in talking to China," he then told CBS News about prospects of Phase 2. "We made a great trade deal. But as soon as the deal was done, the ink wasn't even dry, and they hit us with the plague."
But all along, his end goal has been to do more business with China. Other forces within his administration would like to drive a wedge between the two nations. But I believe Trump still wants to sell more soybeans to Xiamen, Shanghai and Shenzhen.
The U.S. team say they believe China wants to move ahead with the deal.
"They have said they intend to implement the plan and we are engaged with them," White House economic adviser Larry Kudlow says. "We have big differences with China on other matters, but regarding the Phase 1 trade deal, we are engaging."
Despite the closure of the Chinese consulate in Houston and its U.S. counterpart in Chengdu; despite sanctions on 11 Hong Kong and Chinese officials over rights violations in Hong Kong and the return sanctions on 11 U.S. politicians and rights campaigners; despite sanctions on other Chinese officials and companies over concentration camps in Xinjiang; despite restrictions on or expulsions of journalists in both nations; despite a U.S. effort to clamp down on military-linked researchers from China studying in the United States; despite right-of-passage aircraft carrier drive-bys in the South China Sea by the United States and military exercises by China near Taiwan; despite U.S. Treasury Secretary Steve Mnuchin announcing a plan to delist Chinese stocks from U.S. markets by the end of 2021 if they don't follow accounting standards; and despite the prospective forced sale of TikTok and action against WeChat, the two sides are still talking.
Phew. The action against China by the Trump administration has come thick and fast. Some observers suggest the China hawks within his administration want to do so much damage that it cannot be undone even if Trump loses the November election. That sounds about right.
But Trump's trade deal with China is supposed to be one of his signature achievements. To abandon it now would appear weak and provide ammunition for Democratic challenger Joe Biden. It would also likely knock the stock market at an inopportune time, election-wise. And if Phase 1 fails, you would have to wonder what the series of punitive tariffs placed on Chinese goods, ultimately largely paid by U.S. consumers, was about.
The headline figure for Phase 1 was that China agreed within the next two years to buy an additional $200 billion in U.S. manufactured goods, energy, services and agricultural products, above 2017 levels. But it is falling far short of that. Chinese purchases of agriculture this year are below the 2017 baseline used to set the pact, let alone the 50% increase they were supposed to show. Beijing has bought just 5% of the energy it pledged to buy.
There were significant doubts whether China would live up to the deal in the first place. But missing the targets now is understandable, with the world in its deepest recession in modern history.
Remember January? It was the era BC-19. Before Covid.
I wrote a story about the pending trade deal on January 15. My first story about a "mystery virus" afflicting China was on January 21.
Trump told reporters this week that his priorities have changed. "We did a Phase 1 deal and it was a wonderful deal, and all of a sudden, it means very little in the overall import of things," he said.
In 1990, China's GDP first crossed the $1 trillion barrier. It has now risen to $14.4 trillion, two-thirds the size of the United States.
Between January 15 and 21, China reported that its economy grew 6.1% in 2019. China will be among the lucky nations that are able to eke out growth of any sort this year. An estimated 1.7% advance would still be the worst on record, based on forecasts from Nomura. But any of us would take the worst growth since 1990 now.
Its numbers are normally massaged to look good and fit with Communist policy. They love their five-year plans.
Needless to say, Covid-19 wasn't in the current five-year plan. Chinese economic growth is projected by Nomura rebound to 8.8% in 2021. But recent data casts doubt on the sunnier predictions.
Electricity consumption is commonly used as a proxy for China's true economic progress. Power usage slowed dramatically to 2.3% in July, from a strong 6.1% in June. It suggests the rebound in industrial production is tempering, with domestic pent-up demand now released and overseas orders poor.
Those growth headwinds mean "uncertainty has been rising quickly," Nomura's China economists state in their analysis. As a result, "markets may be a bit too confident about the year-on-year growth recovery in H2."
Saturday's talks will be led by U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He. The Phase deal 1 took almost two years of contentious talks to strike. It seems likely they will do everything they can to ensure they don't throw that away.