Xi calls Trump's bluff and wins, time and time again

Asia Times

13 hours ago

China's Xi Jinping and US President Donald Trump spoke over the phone Thursday (June 5), the first known formal contact of the Trump 2.0 era. Though signs of détente were few, the fact that the leaders of the world's two biggest economies are speaking at all marks progress.
Essentially, the two presidents talked about talking more down the line to lower the temperature on tariffs and access to rare earth minerals. The exchange fueled hope on Wall Street that a trade war truce might be in the cards.
'The US and China appear to have stepped back from their latest brink,' says analyst Bill Bishop, who writes the Sinocism newsletter. 'Trump and Xi finally had their call, the Geneva 'truce' may be back on track, and to listen to Trump, the [China] halt in exports of rare earth magnets may be ending.'
Trump told reporters that the 'very good' call 'straightened out any complexity, it's very complex stuff. I think we're in very good shape with China and the trade deal.' Yet the 'grand bargain' global markets hoped Trump would strike with China still risks becoming more like a grand flop.
The Chinese side, for example, seems far less impressed by the Thursday call, which officials suggested was perfunctory and vague. As Cornell University economist Eswar Prasad puts it, the 'asymmetry' in Beijing's and Washington's reporting of the call suggests that Xi held to a tough line and Trump 'didn't get much acquiescence' to his demands.
Odds are good that Xi will continue to drag things out, believing time is on China's side. By appearing above the fray, Xi continues to outmaneuver Trump, who often seems to be negotiating with himself. China is also having some success positioning itself as the adult in the room as Trump lurches from one trade stance to another, hour by hour.
'The overall objectives of the trade aggression, other than the display of raw power, are as muddled as ever,' says Arthur Kroeber, an analyst at Gavekal Research.
Kroeber adds that 'fresh hostilities between the US and China show that the many questions left hanging after the Geneva ceasefire in mid-May still have no satisfactory answers. It's not clear whether US trade policy is being run by Trump, his trade negotiators or his national security team.'
So far, Xi has taken a go-slow approach to trade deal negotiations. Efforts by US Treasury Scott Bessent and Trade Representative Jamieson Greer to convince markets that a pact was in the works, imminent even, haven't been reciprocated from the Chinese side.
China has reason to tread carefully. On April 10, Trump hiked China tariffs to a cartoonishly high 145%. Such a levy is 'effectively an embargo,' notes University of Michigan economist Justin Wolfers. It's also an action likely to turn off the other side, squandering any remaining goodwill between governments.
By the time Trump backed down, cutting the tax to 30% on May 12, it was too late. This likely explains why Team Xi came forward with zero concessions in the days that followed what Trump World called a 'truce' between the two biggest economies. On May 30, Trump declared that Beijing had 'totally violated its agreement with us.'
But then on June 4, Trump made it clear Xi's inscrutability is keeping him up at night. In a thirsty 2:17 a.m. social media rant, Trump declared: 'I like President XI of China, always have, and always will, but he is VERY TOUGH, AND EXTREMELY HARD TO MAKE A DEAL WITH!!!.'
Gita Gopinath, the International Monetary Fund's (IMF) first deputy managing director, warns that the shock from Trump's trade war is worse than Covid-19.
'This time the challenge is going to be greater for them compared to the pandemic,' Gopinath tells the Financial Times. 'During Covid, central banks were moving in the same direction… easing monetary policy very quickly.'
At this point, she adds, monetary authorities are 'steering through the fog' without coordination or a shared crisis playbook.
The Organization for Economic Cooperation and Development (OECD) thinks global growth will now slow to 2.9% in 2025 from 3.3% in 2024, the weakest pace of expansion since the pandemic. It sees US growth slowing to 1.6% from an earlier forecast of 2.8%.
'Weakened economic prospects will be felt around the world, with almost no exception,' says OECD chief economist Alvaro Pereira. 'Lower growth and less trade will hit incomes and slow job growth.'
In a report on Tuesday, OECD said that 'agreements to ease trade tensions and lower tariffs and other trade barriers will be instrumental to revive growth and investment and avoid rising prices. This is by far the most important policy priority.'
On the US economy, OECD Secretary General Mathias Cormann told reporters that 'the main headwinds are lower export growth as a result of retaliatory measures from trading partners, the impact of high policy uncertainty, and a marked slowdown in net immigration.'
Yet the uncertainty factor is just as bad as Trump's tariffs themselves. Particularly as one US court reverses Trump's taxes on the grounds that he lacks the authority to impose them and another keeps them in place.
'I'm operating under the assumption that some major elements of Trump's tariff policies will remain intact in one form or another,' says Stephen Roach, economist at Yale University.
'Hopefully, they won't be as severe as threatened earlier, but they will nonetheless impose meaningful taxes on most US imports, with an especially steep penalty on those coming from China.'
Roach adds that 'I still suspect that tariffs surviving the current legal skirmishes are likely to be onerous enough to have negative impacts on global trade, with especially adverse implications for the US and China.'
Trouble is, Roach says, 'in this climate, companies have no idea how to scale and source inputs for their multinational production platforms. The planning exercise has become an oxymoron, with serious consequences for the real economy.'
The bottom line, Roach notes, is that a 'protracted period of policy uncertainty essentially freezes business decision-making on capital spending and hiring, with negative repercussions for income generation and consumer demand; consumer purchasing power should be further constrained by tariff-related price shocks. Uncertainty remains the enemy of decision making.'
As Xi slow-walks Trump's desire for a big, splashy trade deal, the odds of this fragile truce holding are dwindling even after Thursday's call.
For one thing, headlines about Trump's having caved on tariffs as Wall Street stocks plunged are grating on the president and his inner circle. So is the #TACO narrative — the idea that Trump Always Chickens Out on import taxes.
Beijing 'successfully called Trump's bluff,' notes Mark Williams, economist at Capital Economics. Eurasia Group founder Ian Bremmer notes that Trump's talk of a 'total reset' with China is really his 'biggest climbdown to date.'
Since the 1980s, Trump observers have known that nothing angers him more than being perceived as the 'loser' in any negotiation. This partly explains why he signed — and loudly touted — a trade agreement with the UK, an economy with which Washington has a trade surplus. It betrayed a desperation to highlight a trade deal of any kind, no matter how minor.
Japan is proving to be in no hurry to negotiate a bilateral pact, just six years after the last one with Trump 1.0. Prime Minister Shigeru Ishiba has made it clear Tokyo will negotiate at its own pace — not in haste.
Over in Seoul, South Korea's new president, Lee Jae-myung, says he has no intention of rushing to the negotiating table. He's far more liberal than his predecessor Yoon Suk Yeol.
Pundits call him Korea's answer to US Senator Bernie Sanders. As such, Lee is unlikely to make quick concessions at the expense of workers' rights in a nation where labor unions wield real power.
At the same time, Xi's strategy of playing the long game and not flinching is offering the rest of Asia a playbook for fending off Trump's negotiating team. His tactical retreat sends a message that plunging markets will change Trump's mind in an instant.
First, it was swooning stocks that had Trump delaying his 'reciprocal' tariffs. Then, the chaotic surge in US Treasury yields forced Trump to step back from the brink once again.
Yet tensions are almost certain to flare up anew once Trump realizes that Beijing isn't coming forward with the concessions Trump thinks he deserves for cutting his China tariff by 79%.
From Beijing's perspective, Trump backed off because he'd overreacted in the first place. As JPMorgan Chase CEO Jamie Dimon puts it, the tariffs were 'too large, too big and too aggressive' for the US economy's own good.
Trouble is, Trump has a 40-plus-year track record of arguing that tariffs are the answer to virtually every economic problem imaginable.
Trump's most consistent economic view through the decades is that Asia is exploiting the US and only import taxes can save the day. He's called tariffs 'beautiful' and claimed they will 'supercharge' the US economy. Yet as economists know, sizable tariffs can also be stagflationary.
Team Xi appears to be following a blueprint provided by former Japanese Prime Minister Shinzo Abe. In 2018 and 2019, Abe slow-walked negotiations with Trump 1.0. No doubt, Team Xi is busily strategizing on their own Abe-like dodge, minus the aggressive flattery.
Xi's Communist Party, of course, does not have to contest mid-term elections 18 months from now. And Xi knows it. As such, Beijing is in no hurry to sign a 'Phase Two' trade agreement with a US leader sure to demand a 'Phase Three' round of talks a year from now.
At the same time, US officials are learning that Trump's chaotic Phase One process prompted China to pivot to other markets. Today, China's top trading partner is the 10 Association of Southeast Asian Nations, followed by the European Union.
Also, China is actively growing its market share among the BRICS – Brazil, Russia, India, China, South Africa – and the Global South. Xi's 'Made in China 2025' strategy has been quietly making the nation more self-sufficient.
All of which means Trump's hopes of pulling off a massive, world-changing trade deal are slipping away, even after his declaration after Thursday's call that such a deal is on the horizon. And if he's wondering who's to blame, all Trump needs to do is look in the mirror.
Follow William Pesek on X at @WilliamPesek