Trump Meets Xi: Goldman Previews This Week's Main Event
With Trump set for his most important meeting with a foreign leader tomorrow,, when he will meet China’s president Xi Jinping at Mar-A-Lago, Goldman’s Alec Philips lays out the agenda for what to expect and key deliverables from tomorrow’s meeting.
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Markets are focused on the meeting this Thursday and Friday between US President Trump and Chinese President Xi, which stands as a key event in a vital global bilateral relationship–between the two countries that represent the world’s two largest economies and two largest militaries. The meeting will mark the start of a new US-China dialogue but, in our view, the probability of significant breakthroughs seems low in light of the still-evolving nature of the Trump Administration’s policy toward China and the limited amount of interaction to date. Indeed, comments from senior officials at a White House press briefing held yesterday described it as an “introductory meeting” and an opportunity to “set a framework for discussions on trade and investment”, and indicated that “President Trump really views this meeting as a first step”.
President Trump has signaled a desire to fundamentally shift aspects of the relationship, particularly regarding economic and trade-related issues. Chinese policy has become increasingly assertive, both economically and geopolitically, but in light of upcoming leadership changes ahead of this autumn’s 19th Party Congress, President Xi is apt to be keen to preserve aspects of the status quo and avoid disruptive changes.
This meeting is also notable for its timing, as it comes much earlier than comparable US-China meetings in new administrations, which have tended to occur in the fall of the inaugural year; in the last three US administrations, the initial meetings occurred in November 1993, October 2001, and November 2009, for example. Unlike some of these prior meetings, at this early stage the Trump Administration’s policy approach on China is not entirely clear, and some important officials, like the US Ambassador to China Terry Branstad and US Trade Representative Robert Lighthizer, still await Senate confirmation. (From the Chinese perspective this may be an attraction of the early meeting date, giving President Xi and his team the chance to influence the new administration’s policy before its direction is fully set.) Nevertheless, the White House has opted to hold this “very difficult” meeting, as President Trump described it, and has held out the possibility that “something dramatic” could be achieved.
To date, the interactions of senior Trump Administration officials with China have consisted of a February 9 phone call with President Xi, in which President Trump reaffirmed the Administration’s continuation of the “One China policy”, despite publicly calling it into question earlier, and conversations among Secretary of State Tillerson, Treasury Secretary Mnuchin, and Secretary of Defense Mattis with Chinese officials. Secretary Tillerson met with President Xi in Beijing on March 19, and reiterated the Chinese desire for a relationship based on “non-conflict, non-confrontation, mutual respect, and win-win cooperation”. Chinese State Councillor Yang Jiechi, Foreign Minister Wang Yi, and Ambassador to the US Cui Tiankai have met with various White House and cabinet officials (with Councillor Yang briefly meeting President Trump about a month ago). In addition to a discussion of the economic relationship, strategic issues were reportedly an important focus in many of these meetings, particularly China’s potential role in containing North Korea’s nuclear ambitions.
From the US side, President Trump seems likely to raise China’s foreign exchange policy, given that in the past he has said “they’re grand champions at manipulation of currency”. Still, it would seem counterproductive to make this a central aspect of the discussion given that China has been intervening to support the RMB. Our expectation at the moment is that the Administration will avoid naming China a currency manipulator soon after this meeting, while noting that the administration has concerns about China’s policy.
President Trump could also raise issues of market access for US firms and intellectual property protection, among other perennial irritants to the US-China trade relationship. On these issues, we believe it’s quite unlikely that any significant decisions will be announced, but it does seem likely that these preliminary talks could set the stage for more important discussions later this year or next. While we do not expect many “deliverables” on trade policy to emerge from this week’s meeting, it would not surprise us to see the announcement of new investment by Chinese companies in the US.
More generally, this week’s meeting looks likely to be an early test of the Trump Administration’s view, reiterated in its recent report to Congress on the President’s 2017 Trade Agenda, that the US should not allow geopolitical strategic considerations to outweigh economic considerations in international relationships. The Trump Administration appears particularly focused on the need for Sino-US cooperation on the increasingly important situation in North Korea. However, when asked what incentive the US had to offer China for its help, President Trump replied: “Trade is the incentive. It is all about trade.” This line of thinking appears to be more consistent with maintaining the linkage between strategic and economic issues than President Trump’s broader comments on trade might suggest.
From the Chinese perspective, we believe protecting China’s core strategic interests—particularly the maintenance of the “One China” status quo with respect to Taiwan—will come first. It might seem that the Taiwan issue should be “off the table” at this point given President Trump’s public acceptance of the status quo in the February 9 call. However, US officials have publicly mooted the possibility of a large arms sale to Taiwan in the near future, and Chinese officials will presumably do their best to discourage this.
Another hot-button security issue for China is the ongoing US installation of an antimissile battery in South Korea (the Terminal High Altitude Air Defense, or THAAD, system) to counter potential attacks from the North. Although defensive in nature, some publicly cited figures suggest the range of the THAAD radar would overlap Chinese territory, perhaps significantly. Chinese policymakers have made their displeasure public, and Korean firms have faced numerous retaliatory actions including a dropoff of group tours to Korea, boycotts of Korean imports including music and television programs, and a sudden spree of closures of Lotte department stores in China for fire safety and other reasons (Lotte being the conglomerate that sold the land used for the THAAD battery). We expect the impact to be material for Korea’s tourism receipts and current account this year, and the THAAD installation to be a topic of the Trump-Xi conversations.
Beyond these immediate concerns, Chinese policymakers may seek US validation of—or perhaps more realistically, lack of active opposition to–their global ambitions in other areas such as multilateral cooperation on climate change, formal acknowledgment of China’s “great power” status, continuation of a non-confrontational stance of the US in the South China Sea, among other issues.
On the economic front, in our view, China’s most critical objective will be to avoid a protectionist broadside. The imposition of a large across-the-board tariff from the United States—a possibility that President Trump raised during the campaign—could have a significant impact on export growth and the overall economy, potentially jeopardizing China’s GDP growth target this year or next. Assuming this can be avoided for now, we expect Chinese policymakers will have several positive items on their agenda as well. For example, they are likely to advocate for recognition of China as a “market economy” for WTO purposes (although an official at the aforementioned White House briefing indicated that the Trump Administration views it as “very important that they continue to be designated as a nonmarket economy”), and attempt to secure less stringent security reviews of Chinese investments in US firms.
China can offer several things to the US in return, including:
- Improved market access for US exports… In interviews, Commerce Secretary Wilbur Ross has indicated his goal to see greater US exports to China, in part via lowered Chinese tariff barriers and quotas. President Xi and other Chinese leaders might be willing to commit to additional purchases of US goods, particularly to the extent the volume could easily be diverted from other suppliers to China (for example, agricultural commodities and LNG have been noted in media reports).
- …and investment. Foreign firms have become disenchanted with Chinese investment, according to recent surveys by the US and European Chambers of Commerce in China, with many viewing the playing field as not level. Past negotiations towards a Bilateral Investment Treaty between the US and China might provide a template for areas of agreement in the service sector in particular.
- Infrastructure and other investment in the US. Despite being the second-largest economy in the world, China is far down the list in terms of cumulative inbound direct investment in the United States. Top-level cooperation could potentially facilitate Chinese investment or “public-private partnerships” in non-sensitive infrastructure, though it is unclear whether and in what form the Trump Administration might welcome this.
- Continued FX management. The Trump Administration might seek assurances that China would avoid significant devaluation vis-à-vis the US dollar. In our view, Chinese authorities have been supporting the currency out of their own self-interest in an effort to dissuade potentially destabilizing capital outflows. So it’s entirely possible they would agree as a “concession” to a policy that they would likely pursue regardless.
- Geopolitical cooperation. North Korea is the most obvious place, though far from the only one, where China’s support would be extremely helpful to US objectives. As the dominant trading partner of North Korea, China has substantial policy leverage (e.g., the ability to effectively suspend oil supply), though it clearly has no desire to see chaos in the North.
In conclusion, the Mar-a-Lago discussions will be the first of many meetings and an opportunity to “set the table” for the future, but the talks are more likely to be important in terms of the rapport and discussion framework established by the two leaders than in terms of substantive negotiating breakthroughs.