Trump and Xi meet at G-20: High stakes for global economy

By Robert HormatsOpinionFOXBusiness

Efforts to avoid an escalation of tariffs with China

Former Under Secretary of State Robert Hormats on mounting U.S. trade tensions with China.

The meeting between U.S. President Trump and Chinese President Xi Jinping in Buenos Aires rises to a level of importance to the global economy – and to both nations -- that few, if any, such meetings have risen to in recent memory.  The uncertainty about the outcome is considerably higher than most summits, the conclusions of which are normally foreshadowed by agreements worked out through weeks or months of negotiations among high-level officials and experts of both countries.  And some broad agreement on converging principles for cooperation. Not so this time.

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The stakes are extremely high for both countries and the world.  Further escalation of tariffs would slow growth in both countries – and there would be collateral damage to other nations who trade with them.  Moreover, the global trading system, already suffering from growing economic nationalism as well as the risk of a further reduction in the authority of the WTO and possibility of its demise, would be further weakened.  That conjures up recollections of the devastating trade disruption of the 1920s.

World leaders gather for a group photo at the start of the G20 Leader's Summit at the Costa Salguero Center in Buenos Aires, Argentina, Friday, Nov. 30, 2018. (AP Photo/Ricardo Mazalan)

Predicting the outcome of the Trump-Xi summit in Buenos Aires is a virtual impossibility.  I just returned from 10 days of very thoughtful conversations with senior government and business leaders in China – and representatives of numerous American companies there.  And I have kept up a running dialogue with friends and former colleagues in Washington policy circles.  I am still searching to come up with a prediction for this summit I feel fully confident in.  So I will offer a few thoughts on outcomes I think are: 1) probably not possible, 2) possible and useful, and 3) possible but harmful.

In the probably-not-possible category would be fundamental breakthroughs on issues such as intellectual property, trade secrets, subsidies, practices regarding joint ventures, technology transfer issues or WTO-rule enforcement.  Significant deals involving specifics in such areas would be dramatic progress, but forging such deals normally takes months of preliminary work by experts on both sides and high-level acceptance of common principles and norms in advance of a summit.  We have not seen much evidence that such prior progress has been made.

In the category of the possible and useful would be agreement by the leaders that senior-level negotiations would be initiated promptly in some of the above mentionedareas, with the requirement that a report to the leaders on progress made within, say, six months.  The leaders might also spell out as clearly as possible a few agreed principles that would guide negotiators.

U.S. President Donald Trump and China's President Xi Jinping arrive for a state dinner at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Jonathan Ernst

The reason I think this “process-focused” kind of agreement is possible, and could be productive, is that, there are actually some zones of plausible convergence.  For instance, in the area of intellectual property, China is now developing a lot of intellectual property (IP) on its own.  I gave a keynote address at the Shenzhen Hi-Tech Fair two weeks ago and saw a considerable amount of indigenously developed Chinese technology.  And this is growing. Numerous Chinese entrepreneurs and business leaders expressed to me the view that they themselves wanted more protection for their IP and business secrets in China and around the world as well.  So they have a lot in common with American companies and entrepreneurs.  Both would benefit from working out common rules and norms.  So there is an expanding constituency in China for substantial progress in this area.

Agreement on such an approach on this and other subjects in Buenos Aires is, admittedly, a long-shot given recent tensions and differences.  But if reached, it could be sufficient to put a halt to further tariff escalation, which would give tensions time to subside and stabilize financial markets in both countries.  As noted below, a number of differences might still exist, but this could be a start toward better management and resolution of some of them.

Also in the possible-and-useful category would be agreement by China to make large purchases of American farm products, energy and some manufactured goods. Chinese officials have indicated a willingness to do this in the past. This might also make it easier for Trump to accept a “process-focused” approach to other subjects noted above and reinforce the case for a halt in tariff-escalation -- and perhaps even produce a rollback in some earlier-imposed tariffs.

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In the last category, a failure to agree on anything meaningful runs the risk of a further escalation of tariffs and growing tensions that will exacerbate strains between the two countries, rattle already jittery markets and disrupt growth in both nations.  And it is not at all clear this would get China to accede to the Trump administration’s major negotiating objectives.  Besides, higher tariffs on intermediate goods coming into the U.S. would, while hurting Chinese companies, also raise costs for a lot of American companies, squeezing profits and/or forcing them to pass the higher cost to U.S. consumers.  And adding a batch of new products to the U.S. higher-tariff list would directly affect millions of American consumers.  Most of the products on the Administration’s list so far have been intermediate products.  New additions would be mostly consumer goods, with the new duties directly affecting the pocketbooks of millions of working Americans.

In the final analysis, however, we should not expect one meeting to solve all problems. The meeting between Xi and Trump is likely to find it difficult to resolve many important economic differences between the two countries – although it could be an important start.  In the years ahead, as today, there will inevitably be frictions of varying degrees of intensity between the economic policies and practices of the U.S. market-oriented system and China’s state-led system.  And there will likely be frictions and conflicts – again of varying degrees of intensity -- between a country that has become used to being the world’s leader in advanced technologies and a country that is making major efforts to be the leader, or at least a vigorous and energetic contender, in many of those technologies; this dynamic has profound implications for each country’s future economic growth and its national security as well. Is there room for compromises and for “win-win” solutions?  In some areas, as noted above, there is.  And the more the better.  But in someareas there may not be.  And there the challenge for both nations will be to manage differences in a way that avoids confrontation, sustains a constructive bilateral relationship in areas where there is mutual agreement and contributes to a stable global order in which both countries and other economic partners in the world all have an interest and for which they all have a responsibility.

Robert Hormats is Vice Chairman of Kissinger Associates.  He served as Undersecretary of State for Economic Growth, Energy and the Environment from 2009 to 2013.  Prior, Hormats was the Vice Chairman of Goldman Sachs (International).