The leaders shared steak in Florida, but the stakes in trade talks are much higher for China, which would struggle to find a better export market
Cartoon of Xi shaking hands with Trump, who is carrying a large stars-and-stripes hammer behind his back marked 'tariffs'.
Speak softly and … Illustration: David Simonds/Observer
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Sunday 9 April 2017 07.00 BST Last modified on Sunday 9 April 2017 11.39 BST
Forget the warm handshake. Take with a pinch of salt Donald Trump’s talk of his “very, very, great relationship” with Xi Jinping. The idea that Washington has ceased to harbour deep suspicions of Beijing just because the presidents of the world’s two biggest economies shared pleasantries over steak in Florida is fanciful.
Xi will certainly be hoping Trump’s cordial welcome was for real, because China has much more to lose economically from a trade war than America does. This might sound counter-intuitive given that Beijing can deploy the economic nuclear option if Trump makes good on his campaign pledge to slap whopping tariffs on Chinese imports. The US owes China more than $1 trillion and Xi could send America’s economy into a tailspin by sanctioning a dumping of US Treasury bonds.
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Donald Trump threatens to put tariffs on Chinese products
But the problem with nuclear missiles is that they are never really intended to be fired, and if they are, there are no winners. Sure, China could cause enormous damage to the US, but only by damaging itself.
Indeed, the US-China relationship is a classic example of the old saw: if you owe the bank a thousand dollars, you have a problem; if you owe the bank a trillion dollars, the bank has a problem. Trump holds the important cards and it is simply a case of whether he wants to play them.
As Brian Davidson of the US’s Fathom consultancy has pointed out, the Chinese leadership is keen to avoid the social and political unrest a trade war with the US would inevitably bring. Beijing’s willingness to pump the economy full of credit to finance unprofitable investment demonstrates its determination to avoid a sharp rise in unemployment.
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China depends on the US in a way the US does not depend on China. Nearly 4% of China’s GDP comes directly from exports to the US, while the equivalent figure for the US is less than 1%. There are several other countries that could provide the US with the manufactured goods it gets from China, but China would have real trouble finding an alternative to the US as an export market.
Trump has expressed in blunt, often bellicose, terms his unhappiness with the way China conducts its trade, but according to Davidson he has a point. “The US position in these trade negotiations is strengthened by international trade law, and by China’s systematic violation of obligations under World Trade Organisation rules. The US has scope to open, and win, lawsuits against China at the WTO, a point not lost on both leaders.”
Xi clearly hopes that Trump can be talked down from the aggressively anti-Beijing stance he adopted on the campaign trail, and arrived for his talks armed with a few vague promises about future Chinese investment in the US. This is not going to be enough to satisfy Trump, who has made action on America’s $350bn a year trade deficit with China a touchstone of his presidency. It was a coincidence that the Florida tête-à-tête took place on the night the White House launched airstrikes on Syria, but the message will not have been lost on the Chinese president: Trump’s impetuosity makes him hard to read.
Beijing has been left guessing about what it will actually take to stop Trump slapping a 45% tariff on all Chinese exports. The answer is that it will probably require Xi to remove the barriers that make it hard for hi-tech US companies to export to China. Even then, there is likely to be some US protectionism in sectors – such as steel – that are politically sensitive in the rust-belt states that carried Trump to victory.
There will be less talk in the months ahead of China “raping” the US, but that simply means the current occupant of 1600 Pennsylvania Avenue has learned from one of his predecessors, Teddy Roosevelt, to speak softly and carry a big stick.
Unilever is safe. But it won’t forget its own naivety
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Unilever, the maker of Magnum, Dove and Persil, has unveiled its strategic overhaul after fighting off a hostile takeover bid from Kraft Heinz worth $143bn (£115bn).
The consumer goods group is to sell or spin off its margarine business – which includes Flora – accelerate its cost-cutting plans, spend €5bn (£4.3bn) buying back its own shares and review its Anglo-Dutch structure. This last point could have political ramifications, given the review is being conducted against a backdrop of Brexit: it could eventually lead to Unilever leaving its UK tax base and moving jobs, although company insiders insist that is not on the table at the moment.
Unilever’s announcement, however, was reactionary. The big question for chief executive Paul Polman and the board is why these changes have come after an aggressive takeover approach that they ridiculed and picked apart.
Polman has not been shy about promoting the importance of a long-term strategy and major companies contributing positively to the world. But he now looks to have been naive about the environment in which he was operating.
To be fair, Polman has been frank about the bid being a “near death” experience from which the company has learned. Furthermore, he has been decisive in making changes. The bid from Kraft Heinz was revealed on 17 February, and withdrawn two days later. But less than seven weeks after that, Unilever had announced the review and completed it.
The changes also look sensible. The sale of the underperforming margarine division has been under consideration for some time, while the proposed cost-cutting and share buybacks are small relative to the size of the company.
Together, the measures send a message that Unilever will never be an easy takeover target for the likes of Kraft Heinz or anyone else considering a debt-laden, slash-and-burn strategy. Nonetheless, the aura surrounding Polman and his team has been greatly reduced by this saga.
Investors and MPs try to corral runaway pay at last
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Could it be that we are finally reaching peak executive pay? The business select committee has just recommended that long-term incentive plans – the schemes behind so many egregious pay awards – be axed. It is LTIPs that produce the worst excesses – like the lion’s share of the £210m handed to WPP’s Sir Martin Sorrell since 2012. They dish out an average of £1.5m to each FTSE 100 boss a year, often reward pedestrian performance and can produce huge payouts as result of nothing more than luck – like a rise in commodities prices.
Other loud voices are also demanding change, finally recognising that runaway executive pay is eroding trust in business. BlackRock, the world’s biggest fund manager, wants an end to directors’ pay that grows faster than ordinary employees’. On Friday the world’s biggest sovereign wealth fund – Norway’s $910bn oil fund – also demanded an end to LTIPs.
Remuneration committees must, surely, start to take note.
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