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How Trump's trade war with China could backfire
01:35 - Source: CNN Business
Washington CNN  — 

The telephone lines of Washington’s premiere hotels have been ringing since Commerce Secretary Wilbur Ross announced plans to host high-level trade negotiations with his Chinese counterparts before the end of the month.

Details of the high-stakes trade talks between the world’s two economic superpowers are so thin that Washington trade advocacy groups have resorted to calling around town to ask whether blocs of rooms have been reserved for the Chinese delegation, which may include Chinese Vice Premier Liu He.

Such time-consuming efforts to glean any information on an expected third round of bilateral talks underscores the widespread uncertainty surrounding efforts to lay the groundwork for a trade deal between President Donald Trump and Chinese President Xi Jinping during their expected meeting at the G20 summit in Argentina at the end of November.

With a January 1 deadline to ratchet up US tariffs to 25% on more than $200 billion in Chinese imports approaching, players in Washington are increasingly desperate for any sign of de-escalation, according to interviews with more than a half a dozen business executives, Wall Street analysts, lobbyists and industry groups, including some with close ties to the Trump administration.

“As any administration doubles down, particularly before a meeting like this, and when there are important issues at stake, everyone in town is trying to find out as much as they can,” said Wendy Cutler, a managing director for the Asia Society and a former diplomat and negotiator for the Office of the US Trade Representative under President Barack Obama. “What happened on that phone call? Where’s the paper? Do you have the paper? If you can’t give me the paper, what’s in the paper? And if you can’t tell me, can you tell me if this is in or out?”

On Friday, the American President offered a hint over how back-channel communications between the two economic superpowers are progressing, confirming reports that the Chinese had sent a preliminary offer – which so far remains tightly held.

Trump described it as a “very complete list” of 142 concessions on a variety of issues Washington has put to Beijing.

“It’s a lot of the things we’ve asked,” Trump told reporters in the Oval Office. “But there are four or five things left off.”

He optimistically added, “We’ll probably get them, too.”

Trump also revived his threat of imposing a third round of tariffs on $267 billion of goods, if necessary, but suggested he probably wouldn’t need to take such a step, because “China would like to make a deal.”

Xi offered a reply in remarks at the Asia-Pacific Economic Cooperation conference in Papua New Guinea on Saturday, where he spoke of the need for global cooperation and international trade and said there was no issue that countries couldn’t work out “through consultation.”

“History has shown that confrontation, whether in the form of a cold war, a hot war or a trade war, will produce no winners,” Xi said to applause.

But US Vice President Mike Pence, speaking after the Chinese leader, said while they had “great respect for President Xi” and China, there would be no backing down on the trade war with Beijing until it “changes its ways.”

“China has taken advantage of the United States for many, many years and those days are over,” Pence said.

The upcoming Argentina meeting is the only scheduled opportunity for a direct tête-à-tête between Trump and Xi, though the two leaders exchanged direct visits in 2017 – with Trump welcoming Xi at his Mar-a-Lago resort in Florida with a lavish banquet and a singing performance in Mandarin by his granddaughter Arabella.

But whatever is announced in Buenos Aires will invert the usual progress of trade negotiations, where leaders meet to formalize agreements already hashed out among lower-level aides. In the end, it’s likely to amount to a pledge by both presidents to end a tense year of damaging tit-for-tat tariffs between the world’s two largest trading partners.

“Any reduction in trade tensions would be welcomed, but we see it as a short-term truce,” Michael Gapen, chief US economist at Barclays Investment Bank wrote in a note to clients.

Casting a long shadow over the on-and-off negotiations between the two countries has been a shortage of trust by Chinese negotiators, who have wrestled with conflicting signals from the Trump administration on its trade policy and who to work with, and grappling with the reality that any deal with Trump isn’t real until the President says it himself.

“They are more than a little gun-shy,” said Craig Allen, president of the US-China Business Council, pointing to two previous failed attempts to broker a trade truce between the two countries.

China’s Liu met Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross twice earlier this year, including last May, when Beijing’s delegation left the room with the belief the two sides had reached a tentative pact, only to have Trump veto the deal.

“The Chinese thought they had an agreement with a Cabinet member, who was empowered and had authority from the President,” said Allen. “They found out, ‘No, they didn’t.’”

The Trump administration has been divided between free traders – including those with Wall Street backgrounds like Mnuchin and White House economic adviser Larry Kudlow – and hardliners like US Trade Representative Robert Lighthizer and White House trade adviser Peter Navarro, a former academic who has publicly broken with his colleagues on the China issue.

Navarro last week gave a speech at a Washington think tank in which he warned that “Wall Street” was trying to meddle with Trump’s China crackdown. That prompted a retort from Kudlow, who in remarks to reporters on the White House driveway called Navarro’s comments “unauthorized.”

For those who closely follow the political theater within the White House, Navarro’s comments and Kudlow’s quick rebuttal were an indication that a deal might actually be in the offing, especially after a phone call last week between Liu and Mnuchin.

But the President on Friday revived the threat of a third tranche of tariffs, which would effectively impose a penalty on nearly every item that American consumers buy, raising the stakes even higher of brokering a cease-fire. That doesn’t even account for any retaliatory action Beijing could unilaterally take against the US.

A trade war would likely result in a faster rise in inflation and force the Federal Reserve to hike rates even more quickly to stamp out any signs of overheating.

“We have to take him seriously,” said Allen. “But if you do take him seriously, and I think it’s imperative that we do so, then the implications of that on US inflation are significant, particularly at the consumer price level. It would force Jay Powell to increase interest rates faster and higher.”

More than 100 S&P companies have already pre-emptively telegraphed during the third quarter earnings calls the damage further tariffs would impose on the US economy. Some companies like Walmart, the country’s biggest retailer, have warned that prices on everyday goods like shampoo, detergents and paper goods like napkins will get more expensive for consumers.

On a recent call, Black and Decker Chief Executive James Lorree cautioned investors, “I want to make it very clear that it’s not a doom-and-gloom story right now, and we don’t expect it to be in the fourth quarter, because the bulk of the tariff increases really don’t hit until January 1.”

While so far much of the attention on the undo harm of the existing tariffs has fallen on China, political scientists and economists also warn there could be deeper ramifications for American corporations, if the Chinese opt to restrict American investment. Buick, a subsidiary of car maker General Motors Corp., would likely have to file for bankruptcy without the Chinese market, say experts.

Other industries could be vulnerable, too. For example, China could decide to boycott purchases of aircraft from Boeing Co. in lieu of Airbus planes or raise security concerns over Microsoft’s technology or Apple Inc.’s cell phones.

With all that’s at stake, the best outcome for both sides when the two leaders meet in Argentina would be to agree to a cease-fire and halt any further economic penalties, analysts say. The White House has previously agreed to that strategy with other trading partners without lifting already imposed tariffs on a number of countries, including Canada, Mexico, Japan and the European Union.

And in the past few weeks, Beijing has tried to send soft signals over its willingness to open its economy.

Last Friday, American Express became the first US credit card company to get the greenlight to start building its own payments network in China. Tesla struck a $140 million factory deal last month to produce electric cars in Shanghai’s Lingang area – the first facility outside of the US. Also in October it allowed German automaker BMW to pay $4.2 billion to control its business in China after Beijing moved earlier this year to relax ownership restrictions.

“We make a mistake just looking at the trade relationship and looking at our strengths and weaknesses there,” Robert Ross, a political science professor at Boston College and a member of the Council on Foreign Relations. “This is not simply a trade war, this is an economic war.”

CNN’s Ben Westcott contributed to this report.