G2 won’t be music to India’s ears

THE recent meeting between US President Donald Trump and his Chinese counterpart Xi Jinping in South Korea has been judged as a draw/ceasefire/truce in the long-term competition between the two world powers. From a situation suggesting decoupling, the relationship seems to have taken a 180-degree pivot. This seems to be a consequence of China besting the US in its trade negotiations.

Trump termed the outcome of the meeting as scoring a hyperbolic 12 out of 10. US Secretary of War Pete Hegseth, who was in Kuala Lumpur for the ASEAN Defence Ministers’ Meeting Plus, tweeted after he met his Chinese counterpart Admiral Dong Jun, “I just spoke to President Trump and we agree — the relationship between the US and China has never been better”.

Having spoken to Admiral Dong twice in a day to restore ties between the US and Chinese militaries, he declared that the tone had been set by Trump’s “historic G2 meeting” and ended by noting “God bless both China and the USA!”

He was echoing Trump’s tweet posted hours earlier: “My G2 meeting with President Xi of China was a great one for both our countries. The meeting will lead to everlasting peace and success. God bless both China and the USA!”

Both sides have pulled back from some of their more dire threats and actions. Effectively, they have kicked the can down the road by making their decisions valid for just the coming year. At another level, they seem to be trying to work out the framework in which G2, or a global US-China condominium, can operate.

In his official tweet on the Dong Jun meeting, Hegseth noted the importance of maintaining a balance of power in the Indo-Pacific and US concerns about Chinese activities in the South China Sea and Taiwan.

In the Phase I trade deal that China signed with the US during Trump’s first term in 2020, Beijing was forced to make unilateral commitments to buy American products. But the current deal is all about give and take.

The US backed off from its new Entity List export restrictions in exchange for China doing so with its rare earths rules. The Entity List rule was unveiled on September 29, barring Chinese firms at least 50 per cent owned by previously sanctioned Chinese companies from receiving restricted US tech exports using subsidiaries. What it did was to effectively increase the number of Chinese firms on the Entity List from 1,400 to a massive 20,000.

This had led China to use its brahmastra of rare earths on the eve of the Xi-Trump meeting. Under this rule, export controls would kick in even if 0.1 per cent of the product used Chinese rare earth processing technologies anywhere in the world. This virtually covered almost all smartphones, hard drives, TVs, motors and medical devices in the world.

The Chinese also agreed to resume soyabean purchase, much to the relief of Trump, whose farmer support base was becoming increasingly restless over the Chinese decision not to buy American soyabean. The US suspended the implementation of measures under its Section 301 investigation targeting China’s maritime logistic and shipbuilding industries for a year.

The US will now drop its overall tariff rate for China to 47 per cent. This is, in effect, where it was before Liberation Day, April 2. If we take the 20.7 per cent tariff that existed before Trump assumed office and add 10 per cent of the reduced fentanyl tariff, we are left with just 10 per cent additional tariff which was the baseline figure applicable to all.

Both sides have agreed to cooperate on the fentanyl issue, but there are other matters that need to be resolved, such as Chinese access to Nvidia chips and the ownership of TikTok. The Taiwan issue seems to have been sidestepped for the present.

A major reason for China’s success has been tactics. While Beijing systematically prepared for a possible clash in the last few years, Trump led Washington to hit out recklessly on the tariff issue. Instead of targeting China alone, as it had done in 2020, the US sharply escalated the fight with China and hit the whole world with its Liberation Day tariffs, alienating friends and allies.

To an extent, this was also an underestimation of Chinese developments in recent years. There was a belief that the American economy, with the help of artificial intelligence (AI), had gained a decisive edge, while Covid-19 travails, economic slowdown, unemployment and military purges had weakened China.

The détente, which now seems to be verging on an entente, has brought a sense of relief around the world. A US-China implosion would have had consequences for the entire global economy. But the developments should not generate a false sense of security. Despite Trump’s and Hegseth’s effusive take on the China relationship, the reality is that there have been too many recent ups and downs to predict a stable future.

One thing is clear: the threatened decoupling of the Western and Chinese economies is not around the corner. The race now is for global leadership amidst some shaky guardrails between the G2. Here, while the US has been seeking ephemeral gains through tariffs, the Chinese are preparing for another future. Their latest five-year plan focuses on quantum technology, bio-manufacturing, hydrogen energy and nuclear fusion. China already leads in some of these fields, but the US remains ahead overall and has placed its current bets on AI.

The economic and geopolitical consequences of competitive US-China relations in these areas are hard to forecast. But they cannot be particularly comforting for countries like India that had counted on the US to maintain geopolitical heft against China.