by Junhua Zhang

On June 15, 2019 President Xi Jinping celebrates his 66th birthday. Even if the date remains a state secret, many China watchers are asking themselves what kind of gift the Chinese leader is expecting. By that time, we could have a better idea of whether the trade dispute between the United States and China is headed for another escalation or an easing of tensions. The next direct meeting between the two sides is set for the G20 summit in Osaka on June 28-29, but it is already apparent that the room for maneuver to avoid a comprehensive trade war is diminishing.

Internal pressure

The reasons for Beijing’s abrupt turn in early May, when it stiffened its position after the 10th round of bilateral trade negotiations, are manifold. During early negotiating sessions, China’s team apparently tried to move toward President Donald Trump’s position: for example, by agreeing to bring China’s economy closer to internationally accepted economic rules.

However, President Xi was coming under intense internal pressure, especially from opponents and rivals within the Chinese Communist Party. He must necessarily fear any accusation of exposing the “core interests” of the ruling system to American interference. This could make him a “traitor to the nation.” Unlike Deng Xiaoping, Mr. Xi cannot shrug off these risks, because he does not yet enjoy full authority in the party. Even his leadership style is miles away from charisma.

This still-precarious position made China’s president cautious about handling the issues raised by his American counterpart. That is why Mr. Xi decided to drastically trim the draft agreement submitted by the Americans from 150 pages to 105 pages. Though he claimed sole responsibility for the cuts, President Xi’s nervousness was shown by his hasty summons of the entire Politburo on May 15 to “discuss” the revised document. Only when all 24 Politburo members decided unanimously in favor of the new draft could Mr. Xi comfortably present it as a consensus decision.

As trade tensions intensified in the days that followed, Xi Jinping showed a noticeable affinity for Mao Zedong. Like Mao, he tried to solve new problems with old methods borrowed from the revolutionary era. Terms like “class struggle,” “mass line” and “long march” were revived in an apparently deliberate echo of Mao’s old-time thinking and leadership style.

Xi’s calculations

It is true that the trade conflict with the U.S. could give liberal-minded officials like Deputy Premier Liu He a little extra leeway when it comes to reforming, but only in the economic sphere and only to a limited extent. What is equally plain is that President Xi is determined that there will be no further political opening to the West.

Another tactical consideration for the Chinese leadership is their calculation that a grueling trade war could lead to problems in the American economy, and thus turn voters against President Trump when he seeks reelection next year. In such a case, it could even be advantageous for China to prolong the trade talks.

That goes against a widespread view that the Americans wield a bigger stick in the trade dispute. This is undoubtedly true if only the material costs are calculated, bearing out the logic that Mr. Trump will have the last laugh. However, forecasting on this basis would almost certainly lead to the conclusion that China will give in soon – an improbable outcome.

Thanks to its authoritarian political system and the vast internal resources it can mobilize, China can sit out the adverse effects of an escalating trade war longer than the Trump administration. The pressure on President Trump to cut a deal with Beijing before his reelection campaign kicks off seems correspondingly high. If he does not succeed, plans for a second term may come to nothing.

The Chinese government’s newly published White Paper on the trade talks has corroborated this conclusion. On the one hand, Beijing is still striving for a deal compatible with its core interests; on the other, it will “never compromise on major issues or principle” and is “not afraid” to fight a trade war if necessary, even if it proves very costly for both sides.

In this context, President Xi’s visit to a rare earths production site last month was a significant gesture. His clear intention was to warn the U.S. that China will not hesitate to play the natural resources card, even if it means curbing American chip production. We also know that if the economic situation were to deteriorate noticeably for the Chinese population, Beijing is ready to impose news blackouts and censor the media even more rigorously. The authorities are more than capable of retaining control, at least for the time being. Nevertheless, in the long run, Mr. Xi risks losing credibility, especially in regard to realizing his “Chinese dream.”

Asymmetric approach

Sino-American tensions are not irredeemable. Both sides are still striving for an agreement, the only question is what it should look like.

There should be no illusions, however, that the Chinese leadership will alter its development strategy. Beijing remains wedded to its policy of building “national champions” like Huawei, which has brought it such international success. China will continue to seek “shortcuts,” especially through the (mostly covert) forced transfer or simple theft of technological know-how from foreign companies. It will not agree to eliminate subsidies, especially to state-owned enterprises.

The leadership in Beijing is convinced that only “asymmetric,” nonmarket-economy approaches will enable it to catch up with the developed industrial nations and even overtake them in the foreseeable future. This is the essence of President Xi’s grandiose “Made in China 2025” plan to upgrade the country’s industries. It is precisely this strategy that the Trump administration wants to break. A deal only seems possible if Washington moderates its demands on China and turns a blind eye to the implementation of new rules. At present, however, it is hard to expect this to happen.

Mercantilist spearhead

As far as Huawei is concerned, the conflict over the Chinese high-tech player has already gone beyond the scope of an orderly trade war. For Mr. Xi, Huawei is the spearhead of China’s global mercantilist expansion. Thanks to the sophisticated use of Western technologies and human resources, the company’s products are so highly developed and competitive that they have already partially fulfilled the dream of a new great China. Huawei’s 5G technologies are currently about two years ahead of its Western competitors.

All this helps explain why Beijing’s stake in Huawei is so high. No other administration in the history of the People’s Republic of China has so massively backed a single company. Think of the two Canadians who were arrested as “spies” in retaliation for Canada’s detention of a senior Huawei executive (and daughter of the company’s founder) in Vancouver, following an American request for extradition.

In some ways, the Huawei case is even more important than the trade war. Beijing is convinced that the future belongs to whoever controls 5G technology. Accordingly, despite U.S. sanctions, the Chinese government will support Huawei and the domestic semiconductor industry unflinchingly.

Nevertheless, Mr. Trump’s “executive order” against Huawei will have dire consequences for China’s telecommunications giant. Western suppliers, whose know-how is almost irreplaceable, are being forced to turn away: following Google’s example, the British chip manufacturer ARM Holdings has declared that it will no longer license new products for Huawei.

If such ostracism holds, Huawei will not have much of a chance to establish itself in the Western world with 5G. Certainly, it would retain China’s vast market and prospects for expansion in Asia, Africa and Latin America. If the Trump administration does not relent on Huawei, then very likely the global 5G market will separate into two spheres: Western and non-Western. The race between China and the West on politically sensitive future technologies has only just begun.

Changed environment

On the other hand, we know that Donald Trump likes to be disruptive. That means Beijing can always hope to be pleasantly surprised by a sudden reversal from Washington. Either way, the trade conflict could enter a new phase by the time the G20 convenes in Osaka later this month. Chances are, there will be an agreement or a severe deterioration in relations between the two great powers.

Even if an agreement is reached, Huawei cannot expect to be let back into Western markets for key 5G components. Not only the U.S. will be increasingly on guard against C