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Trump and Xi are destined to divorce

President Donald Trump and Chinese President Xi Jinping,

President Donald Trump and Chinese President Xi Jinping, seen here on Nov. 9, 2017. Credit: AP / Andrew Harnik

In their own individual ways, the leaders of the U.S. and China are products of a moment when free-market capitalism imploded and Chinese-style “state capitalism” shored up the global economy. The 2008 financial crisis helped make both Donald Trump and Xi Jinping. What observers don’t yet seem to appreciate is how difficult that makes it for them to resolve their spiraling trade war.

Financial markets wobble every time Trump imposes new tariffs on China, such as the 10 percent levy on $200 billion in imports he announced earlier this week, and then perk up on hopes of talks, as though this was a classic tit-for-tat trade war. It’s far from that. White House complaints about lopsided trade and Chinese theft of intellectual property are the pretext for a wider struggle. What we’re seeing are the opening stages of a strategic competition spurred by a sense of vulnerability in the U.S. and, in China, of national destiny.

This roots of this confrontation lie in the 2008 collapse. The crisis shaped the nationalist impulses of both Trump and Xi, while energizing their respective bases. The U.S. response - the emergency decision to bail out Wall Street and leave workers to fend for themselves - pretty much ensured that median wages wouldn’t budge for a decade. Post-crisis salary gains have disproportionately accrued to the top 1 percent on Wall Street and in Silicon Valley.

Trump deftly exploited the distress this caused blue-collar and middle-class Americans to pave his way to the White House. “Make America Great Again” was born of defeat.

For his part, Xi manipulated, with equal finesse, the sense of self-assuredness that came over China after it witnessed first the humbling of Western capitalism, then liberal democracy buckling to the forces of populism and nativism. Xi’s signature “China Dream” gave expression to this triumphant nationalism. From the vantage point of Communist Party headquarters, there was no longer any need for caution in dealing with a West suspicious of Chinese intentions; Deng Xiaoping’s prudent advice to “bide our time and hide our capabilities” could be safely discarded. China’s moment had arrived.

Confidence morphed into assertiveness, and then into recklessness. Did Xi and his advisers really imagine that they’d face no pushback to the “Made in China 2025” industrial policy that has, as its explicit goal, the mercantilist objective of taking over swaths of advanced technology through subsidies and other incentives to state champions? Or that smaller neighbors would be so grateful for infrastructure supplied under Xi’s trillion-dollar Belt and Road Initiative they’d indefinitely overlook some of its more predatory terms and conditions? It took Malaysian Prime Minister Mahathir Mohamad, beyond caring about diplomatic niceties at the age of 93, to warn about a “new version of colonialism” on a visit to Beijing.

Some of Xi’s aides are trying to recalibrate - for instance, by soft-pedaling Made in China 2025 in the state-run media. But this is optics. Neither Trump nor Xi can afford to back down substantively.

The link between stagnating incomes and protectionism was clear enough even before the 2008 crisis, a calamity for millions of working-class Americans that turned their frustrations into a full-scale revolt against globalization. Trump channels that anger, and in the absence of measures to rebuild the ladder of prosperity - proposals include massive investment in childhood education and worker reskilling - China has become a useful whipping boy. Under Trump, China has gone from economic threat to “strategic competitor.” Trade is the leading edge of resistance.

For their part, Chinese leaders have lost hope of a quick trade deal from a U.S. president they pegged, wrongly, as a pragmatic businessman. Instead, they now interpret his moves as “containment” - and they’re not far off the mark. Though this is not exactly a replay of the Cold War - for one, the two economies are deeply entwined - trade hostilities infect just about every area of the relationship, from the military and security realms to scientific and technological collaboration.

Xi himself views “state capitalism” as a perfectly credible path and he won’t dismantle the system on Trump’s orders. As Harvard economist Dani Rodrik argues, China has succeeded all these years precisely because it has ignored Western economic prescriptions. Moreover, the advent of artificial intelligence, machine learning and other transformative technologies powered by data - which China has in super-abundance - has convinced Chinese leaders that their country’s fortunes are about to rise further even if the trade war slows growth in the short term.

World-shaking upheavals such as these often take decades to play out. It’s too early to say whether the U.S. and other Western countries can reinvigorate free markets and liberal democracy by forging a new social contract between capital and labor. Nor can anyone predict with confidence whether China will become the first major economy to break into the ranks of rich nations without first adopting liberal economics and pluralistic politics.

The best the U.S. and China can probably hope for in the meantime is some form of peaceful-if-awkward coexistence. A Cold War-style relationship would imply at least a limited decoupling of the world’s two biggest economies, with the U.S. and China agreeing to cooperate where possible on commercial matters and to limit the scope of their strategic competition. If they can’t work out a managed separation of this kind, the legacy of 2008 may well be a hard split, with Trump and Xi ripping apart the global economy.

Andrew Browne is the editorial director of the Bloomberg New Economy Forum. Prior to joining Bloomberg, he was China editor, senior correspondent and columnist for the Wall Street Journal.