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Fasten your seatbelts, China has drawn its red lines against Trump

Beijing then proceeded to unleash an avalanche of nationalist rhetoric against the US
of a type I hadn’t seen in 30 years. America was now routinely described as a swaggering bully. The People’s Daily reminded its readers that the People’s Republic, less than 12 months after its founding, had fought the US to a stalemate in Korea.

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Xi Jinping then went south to Jiangxi, from where the Communist Party had set out on the Long March in 1934 and lost 90 per cent of its forces, before finally winning the war against the Nationalists 15 years later. Xi also happened to visit a rare-earths facility in Jiangxi, while not being so crass as to state publicly that America is ultimately dependent on Chinese rare earths for America’s own needs across multiple industry sectors.

The message to the domestic body politic was clear: the world has thrown a lot at China over the last 5000 years, but we Chinese have a long, long history of enduring pain, and we always prevail. Meanwhile, on the policy front, China has calculated that a full-blown trade war, if it comes to that, will cost its economy 1.4 per cent in growth per year. A full range of fiscal, monetary and infrastructure investment measures are already under way as part of a stimulus strategy to keep growth above 6 per cent. Other measures are in the pipeline.

Adding fuel to the fire, President Trump on May 15 announced that the Chinese telecom giant Huawei would become a “listed entity” under US law, meaning that no American firm could supply Huawei with components. China retaliated May 31 by announcing its own “unreliable entities list” on which it would list any international firm that took “ discriminatory actions” against Chinese firms, or actions hostile to China’s national security interests.

Foreign firms, it seems, are about to be caught in the cross-fire. Given all the above, what now are the prospects for a resolution? The bottom line is both sides still need a trade deal. If Trump wants to be re-elected, he has to sustain US economic growth through 2020 after what is already a very long growth cycle.

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To do that, he cannot allow negotiations to collapse because market confidence would collapse along with them. The real economy could then go into recession in a year he can least afford it.

As for Xi Jinping, there is a limit to how much China can continue to rely on economic stimulus to prop up growth. Chinese debt to GDP now runs at 248 per cent (although this is 99 per cent domestic). China’s private sector also performed badly in 2018 for reasons quite separate from the trade war.

Putting the trade war to bed is also important for China in restoring market confidence. Although not at any political price.

The likelihood of a deal now hovers around 50-50 – the ultimate contest between politics and economics. My prediction is that the Osaka G20 Summit will see a “reboot” to the negotiating process. And after Osaka, Trump will yield on the first two of China’s new red lines. And Xi will increase the quantum of the proposed Chinese purchasing agreement from China’s previous offer, although not by as much as Trump has demanded. That way, enough face will be saved all around.

Of course, raw politics may still derail the lot. Including Trump’s rolling calculus of what he needs to sell to his political base. As well as what deal he needs to wedge the Democrats who are currently seeking to outflank him to the right on China.

But while there may be a solution to the trade war, the technology war has barely begun. And on that score, we should all fasten our seatbelts for a more fundamental decoupling of the world’s two largest economies – in the internet, telecommunications, fintech, the emerging digital payments system and the whole new unchartered world of artificial intelligence.

Kevin Rudd, a former foreign minister and prime minister, is now president
of the Asia Society Policy Institute in New York.

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