Trump talks about making a deal with Xi at G20 while the trade war continues

President Trump said that he spoke with President Xi and added "we will make a deal with China, and I think it will be a very fair deal for everybody''. He told reporters that he had already instructed his aides to prepare drafting ideas for an agreement which he would take to   his meeting with President Xi at the forthcoming G20 meeting to be held in Buenos Aires at the end of this month. He aired a sense of optimism about the outcome of the proposed meeting and said, "getting closer to doing something''. His economic adviser Larry Kudlow, however, told the media that the President had not yet asked his cabinet to put together a draft trade deal.

Trump's basic strategy behind the façade of negotiating a deal is to  extract major concessions from China, or  else create very favourable conditions for pressing ahead with further trade war measures against China. More importantly, the main objective of the USA is to change the terms of engagement with China in a whole range of areas.

Meanwhile, the US trade war against China continues to escalate in all fronts - threatened further tariff escalations, bans on dealing with high-tech Chinese firms, the issuing of indictment against a number of Chinese for alleged theft of aircraft engine technology etc. The US Commerce Department has taken actions to restrict exports to the Chinese state-owned high-tech  firm Fujian Jinhua on the grounds of "national security''. The move against Fujian Jinhua is primarily directed to thwart the company's attempt to develop a world-class semi-conductor industry in China to lessen the country's dependence of import of foreign components. This is  also an integral part of the plan to develop high-tech companies as a part of the "Made in China 2025'' Programme which China views as a crucial part of its efforts to upgrade its core industries. This is an issue which will continue to remain non-negotiable for China as it is also the means to develop China. China now spends close to US$300 billion a year buying semi-conductors from the USA accounting for 90 per cent of its semi-conductor imports. The US is determined to keep that flow as it exists now. Now the US Justice Department has also charged Fujian for stealing trade secrets from Micron, a US semi-conductor manufacturer.

President Xi provided an overview of the situation when he addressed a trade fair in Shanghai. He emphasised that China has been sincere about boosting imports and stimulating domestic consumption by elevating its consumers' awareness of the benefits of global trade. He added "as globalisation deepens, the practice of the 'law of jungle' and the 'winner take all' are  narrowing the road that leads to a dead end''. He said China would support reforms to the World Trade Organisation (WTO) and further improve protection of intellectual property rights. These are also the two key US demands for reforming the global trading system. However, there was nothing in Xi's speech which indicated caving into the US threats to extract further concessions from China at the two leaders meeting on the sideline of G20 summit.

While Trump is talking about a deal with China, his Vice President Mike Pence is upping the ante. He set out a blueprint for the USA to confront China "across the board'' from interference in US politics, alleged theft of intellectual property, trade and investment policies, security  and a range of other issues with the aim to "reset America's  economic and strategic relationship with China''. He was very clear in his vision in outlining his China policy to "finally to put America first''. Such comments are clear indications of a new Cold War. As some commentators said that the leading indicator of the Cold War is economic sanctions and the US tariffs are sure signs of such economic sanctions.

The Trump administration has repeatedly labelled China's industrial Policy as encapsulated in "Made in China 2025'' as an  act of  "economic  aggression meant to undermine America's place in the global economy''. The US alleges that state subsidies are market distorting and wants China to strengthen intellectual property safeguards. Though the US does not have an official industrial policy, the government doles out billions of dollars of R&D (research and development) funds development to private companies for technology and product, which, in effect, are subsidies and serve the same purpose as industry policy. Why China cannot do the same, is rather very puzzling. What the US wants is that China remains a low-cost consumer goods producing country and as such subservient to US diktats like Japan and South Korea. But China has chalked out its own independent economic policy to catapult the country into a high-tech economy lifting up the value chain. The US considers such a policy an existential threat to its economy.

It is not surprising that China is unlikely to abandon or even weaken its stand on "Make in China 2025'' programme. Likewise, China will also not accept the US demands for dismantling the network of state-owned companies which play a very important role in the Chinese economy. However, China will positively respond to protecting intellectual property rights.

Strangely enough, as trade tensions rise with China, according to the US Commerce Department data, the US trade in goods gap with China has continued to rise amounting to US$301 billion in the first nine months of this year with a record gap of US$40.2 billion in September alone this year. Under such circumstances the US and China now have hit an impasse as Trump has always argued that there is a very high trade deficit which must be reduced by imposing tariffs. In fact, of late the US has fallen in love with tariffs and sanctions. No wonder the clear message coming from Trump administration  officials is that do not expect a breakthrough in negotiations when the two presidents meet at the G20 meeting at Buenos Aires late this month. The USA and China is now locked into a very prolonged trade war as bipartisan support for protectionism grows in the USA, with tariffs, sanctions or a combination of both imposed on an ever lengthening list of countries (with special attention given to China) with a strategy to inflict more economic pain on China with a view to extracting significant concessions from it. The strategy will be self-defeating as the International Monetary Fund (IMF) has already indicated the trade war could slow down economic growth of both the US and China by as much as 0.9 percentage  point in 2019.

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