Markets can breathe for a few months. US President Donald Trump and his Chinese counterpart, Xi Jinping, reached an agreement that averted a trade Armageddon. It may not be a real thaw, but it’s certainly at least a truce.
The two countries reached preliminary deals on a long list of issues. Still, the US basically gave up on high tariffs that could stem the tide of Chinese surplus into America, its main economic driver, and on tight controls on tech transfers to Beijing. China has sheathed the dagger of a rare earth element (REE) blockade, whose production is de facto monopolized in China.
The two are now in a competing race against time. China wants to differentiate its export markets and needs to prime domestic consumption to offset future losses from the US surplus. Moreover, it’s trying to develop its own technology without American transfers. America is trying to reach its own REE production. Who gets there first will have the upper hand against the other.
In the short term, China has a better instrument to leverage against the US. A threat to stop REEs’ exports immediately impacts markets and thus elections. Long term, it might be different, but it depends on many things.
Chinese pull
The agreement is allegedly to be reviewed annually, which puts its renewal dangerously close to the US midterm elections next year. It could give China a critical pull over the United States.
The race is on, but the starting points are different. They are made of short- and long-term elements. The two are not to be confused and must be carefully gauged. The game is long-term, which requires extensive preparation. But in the short term, it’s crucial to avoid mistakes that could sap precious long-term energy.
China is trying to leverage its own autocratic system, where it feels it can do best. Trump has the stock markets and the elections; Xi doesn’t have either. Some of Trump’s supporters may dream of doing without elections, but nobody wants to do without the market. Yet the two are very hard to separate.
Without a democratic atmosphere, markets could lose credibility and thus appeal. Conversely, China, without the free convertibility of its currency—the RMB—and with a vast country and population, can mobilize immense internal resources without international verification.
There are advantages and disadvantages to having or not having a free market and free elections; it depends on how they are utilized. An authoritarian regime controls social consensus and the investors.
It can therefore make short- and long-term decisions without courting the favor of the markets—which can rise and fall based on those decisions—or social consensus through elections. This allows for greater agility and ease in making long-term choices.
The disadvantage is that authoritarian regimes cannot easily mobilize voluntary financial resources nor guide widespread voluntary consensus. Resources are forcibly pulled in, and consensus is always a top-down move.
Liberal regimes have different characteristics. While they are subject to market laws and elections, if equipped with capable leaders, they can also mobilize market resources and widespread consensus more actively in support of a long-term policy. In theory, they can better sustain a long-term competition with short-term upkeep.
But all must be timely sorted out and organized, building a broad consensus like the one against the USSR, while recognizing that this time the competition with China is very different. China has set it up, considering its own advantages; the US seems unprepared.
If liberal systems forget long-term policies and focus only on very short-term ones, they become prey to the tactical advantages of authoritarian systems.
The double-edged sword of democracy
If democracy is used to divide the population rather than unite it, then, of course, democracy is a drag on a government’s feet. Therefore, during the first Cold War, the USSR sought to exploit fissures within democratic countries. These countries tried to fight hostile interferences without giving up on democracy, but rather by strengthening it.
During the Cold War, liberal governments managed to coordinate the best short- and long-term elements of their societies. Now they seem to have forgotten how to do it.
Still, something is shifting. Until recently, Hollywood brought world talents to California. Now, the new entertainment platform Netflix brings an American-led vision of imagination to the world — from the world and for the world — broadcasting locally produced content from every country.
It’s the most sophisticated cultural-political initiative so far. The USSR had global appeal for social justice and a truly international capacity to mobilize revolutionary talent worldwide. China doesn’t have either.
Still, things are very complicated. Americans can gloat that China’s economy is slumping. But the Chinese Communist Party (CPC) says (and Chinese people believe it today): “Look what’s happening — there’s a war in Europe over Ukraine, war in the Middle East because of Israel, chaos in America and worldwide because of Trump. All things considered, here in China, where the situation is stable, there’s no crime, no trouble with immigration, we’re much better off.”
Democracy and freedom were a confused but attractive dream the US relied on until recently, but now they’re much less so. Some in Europe and America don’t even want democracy anymore; they’re sliding toward authoritarianism that may work worse than in China, as it is new and untested. Then, China is better off than everyone else.
The Chinese narrative has changed and will continue to change and adapt. Its leaders are astute and capable. They are not passive.
It’s unclear what America will do in the future, and therefore what the Party’s future narrative will be. But if the US gives up on the idea of freedom and democracy, many things in its market and international appeal could begin to unravel in the short and long term.
Trump-Xi compromise
The Busan compromise seemed very detailed and choreographed. Trump came in first (as if he were the host), but Xi entered from the right and extended his hand (as if he were the host).
Busan, in South Korea, is a neutral place. Trump tried to ease the tension by starting small talk, but Xi didn’t respond and didn’t even smile. It was the first US-China summit in which America was not definitely first. It’s unclear whether the compromise will hold, and if it does, for how long.
But there is something else afoot. The US has agreed to help South Korea build nuclear submarines, ostensibly against North Korea, but implicitly against China and Russia.
Then, despite a recent spat, the US and India signed a 10-year defense agreement. US Defense Secretary Pete Hegseth said it is “a cornerstone of regional stability and deterrence.” But while hard weapons are crucial, they may not be everything.
This article first appeared on Appia Institute and is republished with permission.
