Who will blink first in the US-China trade war?

As the trade war between Donald Trump and Xi Jinping continues to escalate, economists around the world are asking the same question: who blinks first? 

On Big Take podcast, Bloomberg’s John Liu and Jennifer Welch join host David Gura to discuss what it will take for both presidents to come to the negotiating table, how the current state of China’s economy impacts its positioning in the trade war and why hardball tactics are unlikely to work this time around.

Here is a lightly edited transcript of the conversation:

David Gura: The standoff between the US and China continues to escalate, which is leading to economic uncertainty worldwide.

BTV: Bloomberg News now reporting China is expanding the ongoing trade war… It does not seem like we’re getting any kind of state visit or detente any time soon, or even high-level talks…

Gura: In the last two weeks, the US has placed tariffs of 145% on Chinese exports, and China has retaliated with tariffs of 125% and export restrictions on critical rare earth minerals.

Trump: China wants to make a deal. They just don't know how quite to go about it. You know, it's one of those things they don't know quite — they're proud people. And the president, Xi’s a proud man.

Jennifer Welch: At the moment, it doesn't seem to be working out I think in the way in which President Trump may have anticipated or hoped that it would.

Gura: Jennifer Welch helped lead China policy at the National Security Council during the first Trump administration, and also under President Biden. Today, she’s Chief Geoeconomics Analyst for Bloomberg Economics.

Welch: I think President Trump's MO is to build pressure. There's a real contrast of approaches here. President Trump prides himself on his unpredictability as well as his hardball tactics, whereas Beijing, and particularly Chinese President Xi Jinping, is a very methodical player when it comes to negotiations.

They like structure.

They like having a clear idea of what the agenda's gonna be so that they can prepare for it. And I think President Trump's unpredictability really puts them on the back heel in a lot of ways.

Gura: For its part, China has signaled it’s open to talks. On Wednesday, Beijing appointed a point person for negotiations. But sources close to China’s government have told Bloomberg that President Xi wants to see the White House approach talks with more respect, and it wants the Trump administration to adopt a more consistent position on tariffs. It begs the question: With the world's two largest economies in a standoff, which leader, President Trump or President Xi, will blink first?

John Liu: China is not gonna engage in negotiations until it feels, the United States has shown some sincerity.

Gura: John Liu is Bloomberg’s Executive Editor for greater China. He’s based in Beijing.

Liu: I think the main concern for the Chinese side is that. They go into some sort of back and forth with Washington and that, whatever agreements they reach are either scuttled or the US goes back on them.

The US, the Trump administration does something to embarrass not only the Chinese government, but also Xi. And so, that I think is the number one concern for the Chinese side. And they wanna make sure that does not happen.

Gura: I’m David Gura and this is the Big Take from Bloomberg News. Today on the show, what it will take for Presidents Trump and Xi to come to the negotiating table, how the current state of China’s economy impacts its positioning in the trade war and why hardball tactics are unlikely to work this time around.

Gura: When President Trump announced sweeping tariffs on about 60 trading partners earlier this month, he made good on a big campaign promise.

Trump: On day one we will throw out Bidenomics, and we will reinstate Maganomics.

Trump: We will go right after China. We will not rely on them one bit.

Gura: And while China has long been a target of Trump’s ire, the size and scope of these tariffs caught Beijing by surprise. But Bloomberg’s John Liu says it shouldn’t have come as a shock

Liu: I was surprised that there was surprise because I think what Donald Trump did was exactly what he said he was gonna do, right?

He said on the campaign trail, he is gonna take tariffs on China to 60-some percent. After he took office, I think there was a bit of optimism here in China that that would not happen, but that's exactly what he did. The Chinese, for their part, made very clear that if tariffs came into effect, that they would hit back. And from what I can glean, the US was itself relatively surprised that the Chinese retaliated as proactively and aggressively as they did.

Gura: You know, here in the US this is all over the place in newspapers and on television. There in China, how much is this a subject of conversation? Is it everywhere as well?

Liu: It's everywhere. It is the thing everybody is talking about. There's an overwhelming country-wide consensus or sort of broad support for China to fight this. And so these tariffs have made, you know, Xi Jinping very popular for retaliating.

It's seen, I think, a broad swelling of patriotic sentiment, support for the government. And there is this feeling on the ground here amongst ordinary people, business owners, that China is being wronged by these tariffs. I think the additional thing here though is there is a sense of foreboding. I think there is a sense of what it means for China economically and could this get even worse?

Gura: John, on Wednesday, China's National Bureau of Statistics reported that the country's gross domestic product grew 5.4% in the first quarter from a year ago. That's more than was expected. How does China's economic position play into how it's approaching this trade war?

Liu: I think the longer China can keep the economy ticking along, the longer China can hold out. And I think ultimately this is sort of a game of chicken, if you will, but also I think a game of endurance. And so, whether or not economically China can keep growth up, I think that'll be a determining factor in how this trade war unfolds. And, and you mentioned the GDP data was better than expected for the first quarter. I don't know that that is super telling of the actual economic conditions here on the ground. There was actually a lot of exports in the first quarter that were pulled ahead. That companies in the US buyers in the US actually moved their orders ahead and sort of built up their inventories in anticipation that there would be higher tariffs on Chinese goods. And so that might be actually hiding some of the underlying weakness in the Chinese economy. We've had a terrible property crisis that is yet to be resolved. We've had weak consumer sentiment, weak consumer spending. The government has promised and has already started to roll out lots of stimulus measures to try and get household spending again, get companies investing again. And I would expect that the government will do more of that. And at a greater magnitude as we go forward, as the impact of these tariffs are felt more broadly.

Gura: That is going to determine how negotiations between the US and China play out, but another factor will be personality. Bloomberg’s Jennifer Welch, who worked in the first Trump administration, thinks Trump’s longstanding emphasis on the “art of the deal” will play a huge role.

Welch: From his perspective, he is the deal maker, right? He plays hardball. He is very much empowered at home and I think he's trying to leverage that to bring a lot of confidence into these negotiations, as sort of coming in with a mandate from the American people and really trying to utilize the fullest extent of America's comprehensive national power here, and going further than most presidents have in the past to challenge the limits of that. That's how I think he is approaching not just China, but negotiations with all these partners.

Gura: What role does pride play in these conversations? You have two leaders here who are extremely proud individuals. I think it's fair to say, how does that affect or shape talks of this magnitude?

Welch: I think that's one of the main hurdles to talks really taking off in a serious way at this point in time. Obviously, there's a lot of pain on both sides. There's the potential for even deeper pain as these tariffs start to bite, and yet we're not really seeing a lot of progress in terms of negotiations and in fact, each side still seems to be saying that the ball is in the other side's court, and I think a main reason for that is because neither of them wants to look weak, right? President Trump, especially after pausing on reciprocal tariffs and then even on the electronics exemptions, has been pushing back in other ways to demonstrate he's still very strong on trade, and I think that's especially important for him when it comes to China because of the legacy of his campaign promises there and the legacy of his first term, of wanting to appear tough on Beijing. I think, likewise for President Xi Jinping, he feels as the leader of the second-largest economy in the world, they need to demonstrate that they can't be pushed around by the United States anymore. They took those prior tariff hikes on the chin. And have to demonstrate their willingness to stand up for China.

Gura: We’ve gotten familiar with the latest iteration of President Trump’s personality, but President Xi is more of an enigma for American audiences. John, could you paint a picture for us of President Xi as a leader? How has he responded and what does that tell us just about the way that he approaches leading this country?

Liu: I think he is a leader that projects stability, that projects forthrightness and, you know, standing his place, not making sudden turns in policy, but at the same time, I think, when push comes to shove, he will make dramatic changes. During Covid, China had this Covid Zero policy. It put a tremendous burden on the economy on the average citizen. And then at the end of 2022, we started seeing protests, people going on the street wanting the government to end the Covid Zero policy. And because of that, he did almost overnight, just did away with that policy. He is a man who is willing to make changes. But before that, I think he's shown that he's going to project strength and he's going to project stability and that he knows where he's going and it's the right direction forward.

Gura: Jennifer Welch says what President Trump may have been betting on is that China's economic situation — in particular, the size of its debt, along with the housing and youth unemployment crises John mentioned — would make Xi bend.

Welch: This is me reading the tea leaves a little bit. He may have not fully anticipated the extent to which Beijing was going to push back on this. So I think he engaged in kind of this tit-for-tat with Beijing to try and back them down by escalating to deescalating again. But the deescalation never happened and now we have these extremely high tariff rates on both sides.

Gura: After the break, where the US-China trade war goes from here and the weapons Beijing has at its disposal to counter additional tariffs.

Gura: Tensions between the US and China are fraught right now. And from the rhetoric coming out of the White House, you’d think the two have never been farther apart on trade. But Bloomberg Economics’s Jennifer Welch says Presidents Trump and Xi have brokered a deal before.

Welch: It was inked in January 2020. It's called the phase one trade deal, and that was meant to be the starting point for what were called phase two negotiations that were supposed to deal with much more contentious issues around structural reforms in China that never really took off in part because of the pandemic and in part because of deepening US-China tensions. The question now is, are the negotiations that may emerge out of this current round of tensions geared towards a phase one redux — where it's going to be addressing the kind of current trade imbalance and through purchase agreements — or is it going to be trying to attack what those phase two talks that never started were geared towards, these larger structural issues? And I think different members of the administration probably have different perspectives on that. And the key question is going to be: What's President Trump's view, right? And some of this may depend a little bit on the timeline to be frank, right? I think one of the major incentives for him on the phase one deal was that it was inked in an election year and he probably wanted to put the US China trade war to the side and get that resolved before heading into a presidential election.

Gura: Jennifer says it’s important to remember that, while President Trump isn’t up for re-election, and doesn’t seem too worried about the fallout from a trade war, many of his allies in Congress are. And the midterms are right around the corner.

Welch: That could be an incentive for him where maybe the ambition, so to speak, is lowered to something more like a phase one redux deal. But I think that's a million dollar question at this point. And it's also another reason why talks probably haven't progressed all that far.

Gura: As the stalemate continues, both the US and China are eyeing other trade partners. The Trump administration has been lining up potential deals with some of China’s biggest economic rivals. Some of the president’s economic advisors met with leaders from Japan yesterday, and the administration has talks scheduled with South Korea and India in the coming weeks. For his part, President Xi has made trips to Vietnam, Cambodia and Malaysia, and John Liu says Xi is looking to improve China’s trade relationship with the EU.

Liu: Not only has Trump put these tariffs on China, but he's also put them on lots of American allies: Europe, many Southeast Asian countries. And so, that gives China an opportunity to step in and to have itself be seen as a stabilizing force in the global economy as opposed to Washington DC, which Beijing will project as being unpredictableand as being not so caring about the rest of the world and concerned mostly about itself. Xi Jinping is in Southeast Asia this week. He's visiting Vietnam. He's visiting Malaysia. In Vietnam, he called on the Vietnamese to partner with China to resist the unilateral bullying that's happening in the world, which is of course a veiled reference to the United States. There's been reports that we're going to get many European leaders visiting Beijing later this year for a summit that would suggest another opportunity for China to enhance its relationship with Europe. Whether or not other countries wholeheartedly embrace China, I think is a different question. In Asia, for example, you have places like Japan, India, the Philippines, other Southeast Asian countries that have territorial disputes with China. And so they're not gonna be embracing China that quickly. There's going to be suspicion in those relationships. Same with Europe. China has supported Russia and its war invasion of Ukraine, diplomatically, rhetorically, economically. And so that has put many European countries off. And so there's gonna be suspicion as China tries to strengthen these relationships.

Gura: You characterised this as a game of chicken, and I'm wondering sort of how long China has here, how long the runway is for President Xi to hold out on negotiating before the situation becomes difficult for China, economically. Any sense of that at this point?

Liu: I would say the runway for Xi, in terms of that game of chicken, is very long. Without a doubt, there is broad public support for China to fight back, and I think that means people are willing to take a little bit more pain if it means that that's what they need to do to contribute to the fight against the United States. And the other thing I would say is the Chinese government has a history of enduring difficult periods where they've placed additional burdens on local companies, local households. Covid is a great example of that. You know, I don't know of many countries where the government could have imposed lockdowns like they did here in China. And so, I do think those points suggest that they can play this game for quite a while.

Gura: Meaning, President Trump might not get that phone call anytime soon.

Liu: And the reason for that is there's a very different cultural dynamic at work where the Chinese believe very strongly that at a working level that Xi will appoint somebody, that Trump will appoint somebody, and those two individuals will go back and forth and back and forth and back and forth and work out all the details of a deal. And only after that deal has been finalized and everybody's happy with it, only then will Xi Jinping appear to shake hands and sign something. President Trump really just wants to get Xi on the phone and try and work something out, person-to-person, one-on-one. And it's just not the way the Chinese system works. It's not the way that Xi Jinping works.

Gura: So, back to that big question: Who’s going to blink first? I put it to both Jennifer Welch in Washington, and John Liu in Beijing.

Liu: The first person to blink is going to immediately get a quick response from the other side. So if President Trump blinks first, you're going to get something affirmative from the Chinese side because they want out of this just as badly. If the Chinese blink, I think you probably will hear this great sigh of relief from Washington DC.

Welch: My bet would be that it is going to be neither side overtly, obviously blinking. I think conversations are going to start in a quieter way at more working levels to set the stage eventually for a leader-level conversation because of their mutual interest in guarding their respective prides. So that's my prediction. We will see what ends up actually occurring.