Trump has begun to argue that economic security is national security. That's his warning to Beijing - that righting the wrongs in US-Chinese trade and investment relations is his highest priority. His first moves will include announcements of trade enforcement actions and restrictions on Chinese investment in coming weeks. There will be continued discussion between Congress and the White House on how best to reform the process by which the US Government approves proposals for foreign investment. Trump will also push Beijing to change rules that force US firms to transfer intellectual property (IP) to gain access to Chinese markets and to end IP theft.
With these changes, Trump hopes to impose enough pain on China and Chinese companies to force Beijing to take US commercial complaints more seriously. He'll begin with announcements of new tariffs and other restrictions on Chinese products entering the US. Only if these moves fail to win concessions will he threaten to make it more difficult for Chinese companies to operate and invest in the US. These carefully calibrated measures are designed less to punish China than to push its negotiators to the bargaining table.
China will respond first with criticism and defiance, but both will be limited to avoid unnecessary provocation. President Xi Jinping will cast his Government as a global leader in cross-border trade and investment and warn that Washington is headed down a dangerous protectionist path. China will certainly challenge US actions at the World Trade Organisation.
He will also test the US pain threshold. US companies in many sectors will face new formal restrictions, but also audits, inspections, and other forms of bureaucratic assault that might move the US business community to pressure Trump to tread more lightly. In particular, each government will target the other side's tech companies.
Both sides have good reason to compromise. Xi will resist changes that prevent China's Government from providing subsidies for Chinese firms that can help build a modern, technologically dynamic Chinese economy. But nor will he try to weaken the Chinese currency for tactical advantage or order a sharp slowdown in the purchase of US Treasury bonds to up the ante. Both actions would be self-defeating. Instead, Xi will probably appeal to Trump directly with pledges to give US companies expanded access to Chinese markets without forcing them to share IP and technology.
Trump, too, has reason to compromise. He wants to win enough concessions from China to declare victory without jeopardising the strong economic numbers that he believes can bolster his popularity.
Here's the problem, each side believes the other is more vulnerable. Trump officials believe China needs continuous access to US markets to avoid a sharp economic slowdown that might provoke a political crisis. Chinese officials believe their President is much less vulnerable to pressure than Trump, who must listen to continuous complaints from US business leaders and face voters again soon enough.
The risk of conflict rises when each side believes it holds the stronger hand.
Don't expect a quick resolution. Neither side wants to look weak, at home or abroad. US-China frictions will likely last through 2018. Given the importance of relations between the world's most important rising and established powers - for China, the US, and the entire global economy - let's hope that Trump and Xi can find common ground with enough space for both to stand proudly.
