TOKYO — This week, US President Donald Trump subjected Canadian Prime Minister Mark Carney to an Oval Office economics lesson. It did not go well.
There Trump was, telling a former central banker who studied at Harvard and Oxford that America’s annual trade deficit with Canada is really a “subsidy.”
That deeply confused — Say, what?!?!? — look on Carney’s face as Trump talked gibberish is all of us, but especially Chinese officials who are about to be subject to Team Trump in trade talks this weekend.
As discussions begin in Geneva, Switzerland on Saturday, Chinese Vice Premier He Lifeng will try to do his best Carney, keeping a straight face as Trump’s emissaries do their best to translate Trump’s rather baroque grasp of trade.
He is an interesting sparring partner for US Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer. A longtime political ally of President Xi Jinping, He even attended the Chinese leader’s 1987 wedding.
As a former deputy mayor of the port city of Xiamen, He innately understands the mechanics of China’s state-centric economic model — and what the US-China trade deficit is and what it isn’t.
Bloomberg reported on Friday that the US side may be willing to reduce tariffs, now set at a cartoonishly high 145%, to below 60% to de-escalate tensions and ease the economic pain both sides are beginning to feel. China’s tariffs on US goods are currently set at 125%.
The US side will also reportedly press China to ease export restrictions on rare earth minerals used in various sensitive industries. Trump said he believed the weekend talks might result in tangible progress, with China agreeing to make concessions.
Most analysts consider this weekend more of a “touch gloves moment” than a formal on-the-clock trade deliberation. Yet this negotiation on the negotiations to come — rules of the game, logistics, definitions, etc. — will be closely watched by markets.
The same goes for world leaders dreading their own moment in the Trumpian glare. Trump trade advisor Peter Navarro’s claim that the US would sign 90 trade deals in 90 days is now a punchline. Ditto for Trump’s farcical I-already-have-200-trade-deals-done claim and talk of “sub-deals.”
Sensitive to the level of global eye-rolling, Trump sought to rush one of these sub-deals to the altar – with the UK. This, too, did not go well. Anyone who thinks Trump just scored a notable increase in access to Britain’s economy hasn’t read the details, or lack thereof.
If Trump really got the better of British Prime Minister Keir Starmer, why is the American Automotive Policy Council already pushing back so hard?
Trump’s handiwork here “hurts American automakers, suppliers, and auto workers,” says the group’s president Matt Blunt. In fact, AAPC argues, Trump is getting bamboozled into giving UK vehicles “preferential access” to the US market, not vice versa.
Suffice to say, Bessent and Greer have quite a balancing act to pull off: translating Trump’s warped views on trade dynamics to a group of old-school policymakers who know better.
China, for example, has not shied away from publicly calling Trump out for misstatements about communications between Washington and Beijing. Trump claimed to receive phone calls from Xi that Beijing says didn’t happen. Bessent, under oath in a Congressional hearing, had to refute Trump’s claims that the US and China were already conducting negotiations.
It means that the first thing Trump conceded in these talks is basic trust. If you are the leaders of Japan, Singapore, South Korea or Taiwan, awaiting their turn in Carney’s shoes in the Oval Office, you’re going into US negotiations with great skepticism.
From Trump 1.0, world leaders learned that Trump trade talks aren’t negotiations so much as moments to extort allies and foes alike.
For Xi’s part, China will go in pledging to do what the Communist Party has been attempting for years: step up domestic consumption. The challenge for He is making the case that China shifting away from exports to a domestic demand-led model is a win-win for the global economy.
More Chinese demand for Apple’s phones, Nike’s shoes, Ford’s cars, Hasbro’s toys, General Electric’s appliances and Hollywood’s entertainment is great for the US economy.
But, as He must try to explain, Trump’s tariff actions will only reduce the wherewithal of 1.4 billion to buy overseas goods. The same goes for China’s ability to switch economic engines in mid-flight, a huge challenge even in the most stable of environments.
Chinese deflation also should have a prominent place on Bessent’s mental pros and cons list. In using tariffs to bring China to the table, Trump World risks tipping Asia’s biggest economy into a falling-price cycle.
Thankfully, China’s experience with deflation has been mild relative to Japan’s in the 1990s. But this weekend, as Bessent and He size each other up, Beijing is scheduled to release data showing factory-gate prices are now down 31 consecutive months. And that consumer prices fell for a third straight month.
Exacerbating China’s deflation risks in 2025 is not in America’s economic interest. Nor that of the broader Group of Seven nations. “If the US wants to resolve the issue through negotiation, it must face the serious negative impact of unilateral tariff measures on itself and the world,” warns China’s commerce ministry.
There’s an argument, too, that Trump needs a trade deal more than Xi. Arguably, the only way Trump can live down anger among American households over tariffs — to have even a fleeting chance to argue the end justifies the means – is striking a China deal. Xi’s party, meanwhile, doesn’t have to contest mid-term elections in late 2026.
Trump also blinked first, remember. He backtracked on “reciprocal” tariffs with most countries rather quickly. Trump has offered carve-outs for more companies, including Apple, and industries than economists can count.
Greer, himself, has warned that a trade deal that gets watered down can be “Swiss cheese in action” and “undermine” the impact. Trump 2.0 is doing just that in real time.
Also, Chinese trade data released Friday could give He something of a spring in his step arriving in Geneva. Though exports to the US dropped a precipitous 21% in April year on year, overall shipments managed to rise a greater-than-expected 8.1%. It was a clear sign that Chinese companies are succeeding in efforts to increase sales in other markets to compensate for falling US sales.
Bessent’s team at the US Treasury is also paying very close attention to Beijing’s currency reserve holdings. Last week, Japan’s Finance Minister Katsunobu Kato made waves in markets by saying Tokyo’s US$1.1 trillion of US Treasury holdings “does exist as a card” to play in trade talks.
This has US officials worried China might be even more inclined to use its own US$760 billion as leverage versus Trump World. The shockwaves that any move to dump Treasuries would cause everywhere have Asia on edge.
“We suspect these dollar hoardings by Asian exporters and institutional investors may be extremely large – possibly on the order of $2.5 trillion or so – and pose sharp downside risks to the dollar vis-à-vis these Asian currencies,” Eurizon SLJ Capital economists Stephen Jen and Joana Freire write in a note.
Only Xi knows if Beijing would take things that far. But the ways in which Trump has conducted himself vis-à-vis China have enabled Xi to rally the support of many average Chinese. “We believe Beijing views these US trade actions as nothing short of a declaration of economic war,” BCA Research analysts argue in a note.
That could buy Xi a lot of goodwill with the Chinese masses. Yet, wildcards abound. Over the last six months, the Freedom House’s China Dissent Monitor has detected statistically significant increases in in-person protest activity. Grievances, often over unpaid wages, are reportedly bubbling up in factories around the nation.
Nomura Holdings economists warn that Trump’s tariffs could erase as many as 15.8 million mainland jobs. Goldman Sachs says makers of apparel, communications equipment and chemical products are uniquely vulnerable. Goldman says that as many as 20 million mainland jobs are directly dependent on US-bound shipments.
The market chaos is hitting developing economies everywhere. “Portfolio flows to emerging markets came to a standstill in April, with the first month of the second quarter marked by the sharpest regime shift in trade policy in over a decade,” says Jonathan Fortun, economist at the Institute of International Economics.
Total non-resident flows registered a marginal net outflow of $200 million, a dramatic reversal from the US$37.5 billion in net inflows recorded in March. The data, Fortun says, “underline the significance” of the Trump administration’s April 2 “Liberation Day” tariff announcement, “which triggered a meaningful repricing of global risk and a sharp increase in flow volatility across emerging-market assets.”
Given the turmoil in global markets, the People’s Bank of China got out ahead of this week’s trade talks with rate cuts. Other authorities, including the National Financial Regulatory Administration and China Securities Regulatory Commission, announced 21 different support measures targeting the property sector, stock market, technology sector, exporters and domestic consumption.
In addition to cutting official rates, PBOC added liquidity by reducing the reserve requirement ratio for big banks by 50 basis points to 9%. That, says Carlos Casanova, senior Asia economist at Union Bancaire Privee, released roughly one trillion yuan ($237 billion) of fresh liquidity, equivalent to about 0.7% of GDP, into the economy.
“While the market expected support from the PBOC, including dual interest and RRR cuts, the proactive timing and detailed nature of the measures were surprising,” Casanova says. “Overall, this move is promising, indicating the government’s readiness to deploy stimulus even before definitive data confirms a growth slowdown.”
Others think the PBOC might have to act more aggressively to dispel deflation fears. Research firm Capital Economics called Wednesday’s rate cuts “positive but modest.”
Some worry that China’s April data might provide a false sense of confidence that its 5.4% growth in the first quarter is sustainable without additional support efforts. “The damage of the US tariffs has not shown up in the trade data in April,” says economist Zhiwei Zhang, president of Pinpoint Asset Management.
Yet Trump’s trade war has been a comedy of errors — and not just him telling an economist in the Oval Office that up is down and black is white. The fact that the US contracted in the first quarter while China beat growth expectations suggests Trump has got his economics wrong.
Just another reason why China may very well run circles around Trump World in the talks about talks and negotiations to come.
Follow William Pesek on X at @WilliamPesek
