Negotiating teams from the US and China are meeting in Beijing for the second day of talks on Tuesday to try to resolve one of the most important geopolitical stand-offs since the end of the cold war: a trade fight between the world’s two largest economies.
The working level talks follow a meeting between US president Donald Trump and Chinese president Xi Jinping at the G20 summit in Buenos Aires last month, where they agreed a 90-day truce.
Mr Trump is playing offence, using brinkmanship to try to upend years of Chinese economic policy including forced technology transfer and exports that compete with American companies. Mr Xi is defending a status quo that has brought China extraordinary economic growth and enriched many US businesses, too.
Both presidents are increasingly vulnerable at home. Mr Trump is battling a resurgent Democratic party and Mr Xi is struggling with slowing economic growth. Both are facing volatile markets. Analysts say these forces have brought the two sides closer to doing a deal but the gap remains wide.
As the two sides face off, here are some of their strengths and weaknesses.
The impact of US tariffs is crystal clear. Official statistics show China’s economy grew 6.7 per cent in the first three quarters of this year, leaving it on course to overtake the US in the long term. But it is hard to find anyone in Beijing who believes that number, with other data showing growth slowing sharply. Exports still account for a greater share of real economic activity than China would like and there are doubts over whether Beijing’s traditional response of debt-fuelled stimulus efforts will be as effective this time round.
The US looks rosier. There are warning signs of a cyclical downturn and pain in sectors hit by Chinese retaliatory levies. But in December, US jobs creation far exceeded expectations, bolstering Mr Trump’s belief that his trade policies have not damaged the US economy — and may even be helping.
To say Mr Xi does not face political pressure because China does not have elections is simplistic. Public perceptions, and especially the opinions of elite families, still influence decision making. Some of Mr Xi’s allies are uncomfortable with the threat to their personal interests from the trade war, according to people with knowledge of the situation. The broader public is troubled by the rift with the US, which comes amid political tightening at home.
Mr Trump faces far more immediate pressure. He kicks off a tough presidential re-election campaign for 2020 with low approval ratings and a stinging defeat in the November midterm elections, giving Democrats control of the House of Representatives. “Tough on China” was a leitmotif of his campaign, but he has consistently promised a deal with Mr Xi. That gives China negotiating leverage. Beijing hopes Mr Trump will accept an agreement that allows him to claim victory.
Stock markets of both countries are on the rocks. The Shanghai Composite index trades at levels last seen in 2014, while the Dow Jones Industrial Average has suffered a brutal correction. For both presidents, stock market performance is a visible referendum from financial markets on their policies.
Mr Trump is obsessed with the stock market. The first big sell-off in October led him to pick up the phone to set up the dinner in Buenos Aires that led to this week’s talks. Further declines could put him on the defensive.
Mr Xi, who is steeped in Marxist theory, has a more complicated relationship with market movements. When he first took office, he talked up a bull market. The subsequent crash discredited financial technocrats who might otherwise have opposed his dirigiste policies. The slowdown of the past several years and a shadow banking crash has wiped out many private companies, leaving China as a whole more dependent on the state apparatus.
As the US and China face off along many fronts, the two sides consult different analogies to show they are on the “right side of history”.
Mr Trump’s administration hearkens back to the Reagan era. Robert Lighthizer, the US trade representative, is a veteran of negotiations with bubble-era Japan in the 1980s and the mastermind of the tariffs. Others remember the collapse of the Soviet Union, which could not maintain its planned economy in the face of Reagan’s rising military spending.
Mr Xi is determined not to let the Chinese Communist party suffer the fate of the Soviet Union. He can take comfort in his family legacy: at the end of the second world war, when Mao Zedong’s communists looked weak, his father Xi Zhongxun co-ordinated an organised retreat from their capital Yan’an. Just as they appeared to have ceded Yan’an entirely, they launched a massive counter attack and won the civil war. The Chinese use of strategic weakness is one the Americans would do well not to ignore.