Beware the red lines which threaten to entangle the United States and China in a new economic Cold War.

Finding a face-saving deal for two egocentric presidents might border on the impossible when Donald Trump and Xi Jinping hold their mini-summit later this week on the sidelines of the Group of 20 gathering.

In the Japanese city of Osaka, the specter of the year-long Sino-American trade conflict will loom large over the two-day talkfest between major global leaders. Words, not actions, will dominate the proceedings.

Still, the only discussion in town that will have a profound effect on the global economy will involve Xi and Trump. But will “compromise” be on the agenda?

Guo Shuqing, the chairman of the China Banking Regulatory Commission and one of Xi’s allies, appeared to rule that out at the end of last week when he vehemently denied that Beijing is involved in “unfair trading practices.”

“Exchanging technology for market access or market access for technology … is a widely accepted practice in market economies,” Guo, who is also the most senior Communist Party official at the People’s Bank of China, wrote in a commentary for the official CCP newspaper, the People’s Daily.

“China’s industrial policy and credit policy are guidelines, but the implementation of these policies firmly follows market and legal principles,” he added, referring to the country’s “state-run” capitalist model.

Guo then went even further when he repudiated suggestions that the Party holds sway over corporate China.

Domestic audience

“Facts have proven that the establishment of a modern enterprise system and adherence to the leadership of the Party are completely compatible,” he continued.

“Such a governance structure can form … effective checks and balances, which will better protect the interests of stakeholders; prevent … manipulation by large shareholders; and address … board members’ dereliction of duty,” Guo added.

While his comments were mainly for a domestic audience, they will be viewed by Washington as yet another example of Beijing’s hardening position and the lack of wriggle room between the world’s two largest economies.

All of a sudden the divide is becoming as wide as the Grand Canyon as this was hardly pre-summit rhetoric from an official spokesman at a minor ministry.

During the past 12 months, the US has consistently complained about how foreign firms face “unfair practices” when it comes to doing business in China. The European Union has voiced similar concerns.   

“Our position will continue to be [that] we want structural changes,” Larry Kudlow, the White House economic adviser, said last week. “We want structural changes on all the items … theft of IP [intellectual property], forced transfers of technology, cyber hacking … [and] of course trade barriers. We’ve got to have something that’s enforceable.”

Frustration has boiled over into anger after negotiations broke down last month with the White House doubling tariffs to 25% on Chinese imports worth US$200 billion.

In response, Xi’s administration increased duties on US products worth $60 billion. Trump immediately threatened to wheel out extra taxes on goods entering the States worth another $300 billion.

“Even when American companies thrived, their success would often have been even greater had the playing field been [level]. Over time, the failure of Chinese leaders to level this playing field has produced a sense of profound disappointment and frustration,” Elizabeth Economy, the director for Asia studies at the Council on Foreign Relations, said in a commentary, entitled Trade: Parade of Broken Promises, for ChinaFile.

“Most of the concerns highlighted by the Trump administration, such as market and non-market barriers to entry, IP [intellectual property] theft, subsidies, and coerced technology transfer have been sources of contention for decades … Overall, Xi’s policies have signaled a significant reversal rather than an acceleration in China’s economic reform effort,” she added.

Beijing does not see it that way. The hierarchy in the ruling Communist Party believes this is a ruse, a simple plan hatched in Washington to curtail the nation’s rise as an economic and military superpower.   

There is more than a grain of truth in that assessment. Along with other Western allies, the US has run out of “patience” with an authoritarian regime which has shown no signs of reforming, politically or economically, and is further clamping down on human rights.

‘Mutual respect’

“One thing happening is that the Americans have lost their patience,” Wang Jisi, the president of the Institute of International and Strategic Studies at Peking University in Beijing, told the foreign affairs website China-US Focus.

“When they thought about China 40 years ago, or 30 years ago, they thought that China would become more like the United States – achieving democratic, political pluralism, more diverse views, and a rising middle class that will change the political system of China. Their hopes are dashed and shattered. Some of them are complaining, complaining about themselves,” Wang added.

To solve a small part of this problem, Xi’s government is advocating “mutual respect” when the talks get underway in Japan. Already the groundwork has started, according to Chinese Vice-Commerce Minister Wang Shouwen, without going into details.

On Monday, he emphasized two key points at a G20 briefing in Beijing and ticked all the boxes for his bosses, “equality and mutual benefit.”

“Mutual respect means each side must respect the other’s sovereignty,” Wang said.

“Equality and mutual benefit mean the consultations have to happen on an equal basis, the agreement to be reached has to be beneficial for both sides,” he continued.

“Meeting each other halfway means both sides have to compromise and make concessions, not just one side,” Wang added without revealing what “compromises” Xi would be prepared to make.

For Washington, this will involve accepting a watered-down agreement or the possibility of a new economic Cold War. After all, saving face has its price.