China Pulls Punches With Trump to Defend a Path for Trade Talks

(Bloomberg) --

As China looks to face down President Donald Trump, its leaders find themselves in a bind: How can they show him they won't be pushed around without wrecking hope for a deal?

Facing a slowing economy at home and Trump's unpredictability, Beijing has used state media to blast American policies and obliquely hint it could cut off the U.S.'s supply of rare earths. All the while, it's been careful not to provoke Trump further or risk worsening a rapidly deteriorating relationship.

“They are struggling to find sources of leverage that will hit that sweet spot of inflicting pain without rupturing ties,” said Bonnie Glaser, a China specialist at the Center for Strategic and International Studies in Washington. “‘Dou er bu po' is still the mantra," she said, citing a Chinese phrase which means “to fight without severing relations.”

As China feels out the right response to Trump, it must weigh the president's aims against the volatility of U.S. domestic politics, the financial markets and the strength of competing voices inside his administration. It must also decide what Trump means when he says he's “not ready” to make a deal with China, and whether his threshold for pain is shifting against the backdrop of a strong U.S. economy and signs of weakness in China.

In recent weeks, the Trump administration has hit Beijing with a steady stream of threats and provocations. On top of raising tariffs on $200 billion of Chinese goods to 25% from 10%, it has stepped up efforts to kneecap Huawei Technologies Co., moved to stymie other Chinese tech firms and -- perhaps worst of all in the eyes of Beijing -- expanded official ties with Taiwan.

In normal times, any one of these moves would have been met with enraged threats from Chinese leaders. After South Korea's Lotte Group agreed in 2017 to sell the Korean government land for a U.S. anti-missile system known as Thaad, Chinese authorities suspended operations at more than half of the company's stores in China for alleged fire safety violations.

But Beijing's response to Trump has been more cautious. State media has published a series of defiant editorials blaming the U.S. for the impasse and proclaiming Chinese strength, but falling short of naming Trump or other officials personally. It has issued veiled threats about cutting off the supply of rare earths to the U.S., but Chinese officials have stopped short of specifics.

“You can see that every step of action, every word of media protests, as well as official statements are always well-designed and under strict control,” said Wang Peng, an associate research fellow of the Chongyang Institute for Financial Studies at the Renmin University of China. Beijing's goal, he said, is to show that “China will never surrender but that the door to further negotiations will never close.”

As the odds of a protracted conflict shorten, Chinese officials continue to project confidence. Economic regulators have talked up their ability to withstand the impact of U.S. tariffs, while President Xi Jinping has called for cadres to prepare for a new “Long March.”

Trade War Fallout

But the country's economic indicators paint a less rosy picture: Even before Trump announced the latest tariff hikes, exports and industrial output fell in April and retail sales were weaker than expected.

Another limitation for Beijing is the global image China's leaders have sought to craft for themselves in the age of Trump. Strong countermeasures such as disrupting the operations of U.S. multinationals in China would probably prolong the trade war and undermine China's ability to present itself as a champion of free trade and the grown-up in the room. Just Thursday morning, Vice Minister of Foreign Affairs Zhang Hanhui used a briefing on Russia to describe deliberately provoking trade disputes as “economic terrorism” and “chauvinism.”

Ironically, one of Beijing's best points of leverage may be the unpopularity of Trump's China tariffs in the U.S. While in Washington both Republicans and Democrats are increasingly hawkish on China, polls show most Americans think they'll have to pay higher prices and don't believe Trump's claims that Beijing is bearing the cost. Surveys also show many Americans agree with economists that Trump's trade wars are hurting rather than helping the U.S. economy.

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In the U.S. capital, officials suspect Beijing is bluffing, according to people familiar with administration's thinking. One person dismissed the Chinese threat to leverage rare earths as mere talk, adding that Beijing is struggling to punish the U.S. and gain leverage. Another said that the U.S. had expected Beijing to make this threat for some time and has been gaming out potential consequences.

Chinese officials also know that Trump carries powerful weapons in the ongoing conflict. The administration is looking at options for cutting off Beijing's access to key technologies by placing at least five more Chinese companies on the same blacklist as Huawei. Administration hawks are also pushing for restrictions on exports related to technologies such as artificial intelligence, robotics and 3D printing.

Ultimately, as long as Beijing holds out hope of a deal, it will be difficult for them to meet Trump blow-for-blow.

“China does not want to see the decoupling of the U.S. and Chinese economies,” said Dennis Wilder, a professor at Georgetown University and former senior director for Asia on the National Security Council. “If they push too far, this could become a reality that is hard to roll back.”

--With assistance from Jenny Leonard.

To contact Bloomberg News staff for this story: Peter Martin in Beijing at pmartin138@bloomberg.net;Shawn Donnan in Washington at sdonnan@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Daniel Ten Kate

With assistance from Bloomberg