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As Kim Visits China, Xi Flaunts Bargaining Chip in Trade Dispute

Kim Jong Un (right) walking with Xi Jinping in Beijing in an undated photo released 20 June 2018. (Photo via Reuters)

By Bloomberg News

As if on cue, Kim Jong Un returned to Beijing on Tuesday in an illustration of how President Donald Trump’s tariff threats against China could spiral into a broader conflict between the world’s two largest economies.

The North Korean leader was expected to spend two days in China — his third such visit since March — presumably to confer with President Xi Jinping about the results of his summit with Trump last week in Singapore. His presence in the Chinese capital shows how Xi’s leverage in the trade dispute with Trump extends far beyond soybean imports and Boeing Co. jet contracts.

Besides being the U.S.’s largest trading partner, China is arguably the most important player in Trump’s “maximum pressure” campaign to force Kim to give up his nuclear arsenal. After an April 2017 meeting at the president’s Mar-a-Lago home, Xi supported successive rounds of United Nations sanctions and clamped down on border trade with North Korea.

Now, as Trump targets another $200 billion of Chinese goods with potential tariffs, North Korea remains a key bargaining chip for China’s most powerful leader in decades. And using it becomes more tempting as U.S. policy shifts on everything from trade to Taiwan fuel suspicion in Beijing that Trump really wants to halt Xi’s plan to turn China into a leading global power.

“We have two nationalistic leaders who are in some ways mirroring each other, who are lining up policies that make conflict between the two more likely not less likely,” said Scott Kennedy, deputy director of China studies at the Center for Strategic and International Studies in Washington. “The style of leadership and the policy goals of the two are making conflict more likely.”

‘Strategic Competitor’

Trump’s trade disputes help satisfy growing calls in Washington — and among U.S. multinationals operating in China — for more decisive action to counter Chinese influence. In recent months, the Pentagon has branded China a “ strategic competitor” and the administration has demanded that Xi roll back his “Made-in-China 2025” program to dominate advanced industries such as semiconductors to aerospace development.

While China has called for the U.S. to abandon the “ cold war mentality” and urged negotiations, officials have promised to answer U.S. trade measures dollar for dollar. Since abolishing presidential term limits, Xi has strengthened his control over the levers of power and money in China. Weakness in a trade war with Trump could make him look weak at home.

Pang Zhongying, a senior fellow at the Pangoal Institution, a Beijing-based think tank, said that some Chinese officials were “concerned that the deterioration in China-U.S. relations may spark a domestic crisis in China, because the two are so intertwined in economic and trade.”

Trump has used those economic bonds to his advantage with North Korea, tempering his trade attacks on China when he needed sanctions help and ratcheting them up after Kim moved toward dialogue. After his summit with Kim last week, Trump acknowledged that his trade disputes could discourage Xi’s cooperation during disarmament talks with Kim.

“We’re having very tough talks on trade and I think that probably affects China somewhat,” Trump said in a news briefing after his meeting with Kim. “I think over the last two months, the border is more open than it was when we first started, but that is what it is. We have to do it. We had a — we have a tremendous, tremendous deficit in trade.”

Chinese Foreign Ministry spokesman Geng Shuang on Tuesday called U.S. trade criticisms “groundless” cover for protectionist policies. The Chinese Commerce Ministry vowed “comprehensive quantitative and qualitative measures” to counter “extreme pressure and blackmail.”

In his meeting Tuesday with Kim, Xi said he hoped that North Korea and the U.S. could implement the summit outcome, and relevant parties could work together to advance the peace process, according to state-run China Central Television. China would continue to play a constructive role, Xi said.

Carrots and Sticks

Xi holds a unique combination of carrots and sticks that could make or break talks between Trump and Kim. China supplies more than 80 percent of North Korea’s imports and its contribution of the Air China Ltd. jet that carried Kim to Singapore highlighted the country’s role in assuring his security.

During Kim’s first trip to China in March, Xi told him that China had made a “ strategic choice” to have friendly ties with North Korea, and that they would “remain unchanged under any circumstances.” That meeting in Beijing came just as Trump started following through on the more confrontational trade stance he campaigned on.

In the intervening weeks, the two sides exchanged several offers and counteroffers — with China pledging to buy tens of billions of dollars of U.S. energy and agricultural products each year — only for the threats and retaliation to resume. Trump’s latest tariff threats come after Treasury Secretary Steven Mnuchin declared the trade war “ on hold” and Trump granted a personal appeal from Xi to spare Chinese telecommunications equipment maker ZTE Corp. from ruin.

At the same time, the two powers have sparred over China’s military expansion into vital South China Sea shipping lanes and U.S. efforts to expand ties with Taiwan, the democratically controlled island that Beijing considers a province. Reports of American pilots injured by lasers near a Chinese military base and a mysterious illness afflicting U.S. diplomats in China have also fed mistrust.

China has so far avoided publicly conflating the disputes over trade and North Korea. The government has said only that the UN Security Council — where China and the U.S. both wield vetoes — should revisit sanctions after Kim’s commitment to “complete denuclearization” with Trump last week.

“The Chinese side will be very cautious in using the DPRK issue as a bargaining chip,” said Chucheng Feng, co-founder of GRisk, a political risk analytics firm, referring to North Korea. “China will try to use the DPRK issue as an ultimate weapon for the China-U.S. relationship.”

With assistance from Dandan Li and Keith Zhai. To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net. To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net. Ruth Pollard

© 2018 Bloomberg L.P