The dinner in Argentina that could shape the world's economic destiny
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The dinner in Argentina that could shape the world's economic destiny

This weekend shapes up as a critical moment in the simmering trade conflict between the United States and China, one that could shape the paths of, not just those two economies – the world's two largest – but the global economy and financial markets.

Donald Trump and Xi Jinping are scheduled to dine together on Saturday at the end of the G20 meeting in Buenos Aires, probably the last opportunity to avert an escalation of trade hostilities that are slowing China’s economy and starting to have repercussions in the US as well.

Donald Trump and Xi Jinping will dine together in Buenos Aires on Saturday; a dinner that could determine the future of their trade war.

Donald Trump and Xi Jinping will dine together in Buenos Aires on Saturday; a dinner that could determine the future of their trade war.Credit:AP

Absent some agreement, the rate of the existing tariffs on $US200 billion ($276 billion) of China’s exports to the US will rise from 10 per cent to 25 per cent from January 1. Trump has also foreshadowed imposing tariffs on the remaining $US267 billion of China’s exports to the US.

There are mixed signals coming out of the White House.

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Earlier this week Trump gave an interview to the Wall Street Journal in which he said it was highly unlikely he would delay the increase in the rate of the existing tariffs and, if there were no deal struck in Buenos Aires, he would impose tariffs on the remaining imports at a rate of either 10 per cent or 25 per cent.

"The only deal that would really be acceptable to me, other than obviously we have to do something on the theft of intellectual property rights, the only deal would be China has to open up their country to competition from the United States," he said.

I happen to be a tariff person because I’m a smart person, OK?

Donald Trump in his interview with the Wall Street Journal

The US stockmarket shivered and fell when the Trump interview was published but recovered some ground on Tuesday after National Economic Council director, Larry Kudlow, while expressing some scepticism that the meeting would produce an agreement, said Trump remained open to a breakthrough and believed a deal could be made.

China, while it has imposed retaliatory tariffs of its own on more than $US100 billion of US imports, has made some concessions by opening segments of its economy to greater foreign investment and promising wider liberalisation.

It also, however, sees the trade confrontation as a US attempt to repress China’s economic and geopolitical ambitions and protect the dominance of the US economy and, in particular, its leadership in technology.

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While others in the administration are also clearly concerned about China’s growing geopolitical influence and see its "One Belt, One Road" initiative as inimical to US interests, Trump’s perspective is narrower and more parochial.

"I happen to be a tariff person because I’m a smart person, OK?" he told the Wall Street Journal.

"We have been ripped off badly by people coming in a stealing our wealth," he said.

Later he described what he said was the "bottom line" in the dealings with China.

"We’re going to make a great deal with China and everybody hopefully will be very happy, including China. But we’re going to make a deal with China that’s going to be representative of the United States the way it used to be."

If the objective is to restore the US economy to what it "used to be", then it won’t only be China that will be adversely affected.

Trump thinks his tariffs are paid by exporters, referring to the money "pouring into our treasury right now". They are, of course, ultimately a tax on US consumers and shareholders.

The tariffs are having an impact in the US. This week General Motors announced it would close five of its North American plants, costing of nearly 15,000 jobs.

While the announcement sparked an immediate backlash from Trump – a threat to remove tax credits for GM’s electric vehicles – the tariffs on imported steel and aluminium have almost certainly been a factor in the decision. Both GM and Ford have said the rise in raw material costs generated by the tariffs will cost each company about $US1 billion of earnings.

With Trump declaring that the European Union is "almost as bad as China," and that he’d impose tariffs on European cars "in about 12 minutes" if the EU doesn’t agree a "fair" deal with the US, the prospect of the trade wars flaring on other fronts and further damaging global growth is real.

It doesn’t help that neither Trump nor his trade or economic advisers are prepared to acknowledge (if, indeed, they recognise it) that a trade conflict harms the US along with those it targets, or that a country that issues the world’s reserve currency is inevitably going to run structural current account deficits.

Given that Trump doesn’t appear to understand the issues, and China isn’t going to surrender its aspirations, there is little reason to be optimistic about the outcome of the Trump dinner with Xi Jinping.

The best hope for an unexpectedly positive outcome is that the Chinese could come up with something that appeals to the Trump ego by appearing to give him a victory without China actually making meaningful concessions.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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