CEO Daily: Saturday, 15th April

We aim in this new edition of CEO Daily to pay particular attention to the business aspects of China’s emergence as a global power. But this week, yet again, the business story has been derailed by politics and foreign policy.

As the weekend dawns, there is high drama on the Korean peninsula. New satellite images suggest North Korea is preparing to conduct an underground nuclear detonation, possibly it’s most powerful nuclear test yet.

The U.S. and China remain on alert. Admiral Harry B. Harris Jr., commander of US forces in the Pacific, sent the aircraft carrier Carl Vinson, along with a wing of fighter jets and three guided-missile destroyers and cruisers, steaming towards Korea. China moved 120,000 troops and medical supplies to its border with the country.

In Washington, President Trump hailed the naval strike force, redirected from scheduled exercises in Australia, as an American “armada.” The U.S. redeployment came despite an unusually blunt warning from China’s foreign minister Wang Yi, who on Friday condemned the US, South Korea and North Korea for “engaging in a tit for tat, with swords drawn and bows bent.” Wang spoke ominously of “storm clouds gathering” over the peninsula. If war breaks out, he declared, the three nations “must shoulder that historical culpability and pay the corresponding price.”

In Pyongyang, the state media decried the approach of the U.S. flotilla as creating “a dangerous situation in which a thermo-nuclear war could break out any moment.” In an interview with the Associated Press, North Korea’s vice minister of foreign affairs vowed Pyongyang was ready for war if that’s what Trump wants. Meanwhile, North Korean dictator Kim Jong-un, nattily clad in a striped black business suit and silver tie, spent Saturday reviewing a military parade in Pyongyang, part of festivities to commemorate the 105th anniversary of the birth of his grandfather, North Korean state founder Kim Il Sung. Experts said the procession appeared to showcase new intercontinental ballistic missiles Pyongyang hasn’t revealed before.

As I write this (Saturday night Beijing time), there’s still no word of any North Korean nuclear test. But tensions remain high. Experts on all sides of the Pacific are scrambling to understand the implications of an extraordinary week in which President Trump seemed to revamp or abandon the most fundamental components of his China policy.

Trump campaigned on a pledge to get tough with China. But last weekend, after meeting Xi Jinping for talks at Mar-a-Lago, he had nothing but praise for the Chinese leader. And as the week unfolded, Trump’s descriptions of that meeting grew more effusive. Trump told Fox News anchor Maria Bartiromo he had developed a “great chemistry” with Xi, adding that the two men had celebrated their newfound friendship over “the most beautiful piece of chocolate cake” just moments after Trump told Xi that he had ordered an airstrike against Syria.

On Wednesday, Trump went further, telling the Wall Street Journal Xi had convinced him he was wrong in assuming China could strong-arm North Korea into abandoning its nuclear plans. “After listening for 10 minutes, I realized it’s not so easy,” Trump said. “I felt pretty strongly that they had a tremendous power [over North Korea]. But it’s not what you would think.”

Trump also announced he’d decided not to brand China a currency manipulator, something he’d promised on the stump to do from “Day One” if elected. Even more surprising: he revealed that he has offered Xi an astonishing quid pro quo. If China will press Pyongyang to back off on nuclear testing, Trump said, the US will grant China more favorable terms on trade.

Trump said he told Xi: “‘You want to make a great deal? Solve the problem in North Korea.’ That’s worth having deficits. And that’s worth having not as good a trade deal as I would normally be able to make.”

In last week’s post, I noted that the Chinese generally hate surprises. I cited this analysis by Foreign Policy editor James Palmer, who says that last week’s chaotic summit and Trump’s abrupt policy reversals won’t strengthen Trump’s leverage with China. Rather, Palmer argues, Xi is more likely than not to see Trump’s behavior as evidence of indiscipline and lack of resolve.

But other experts think Trump’s new tactics just might work. My old Washington Post colleague John Pomfret, one of the West’s savviest China-watchers, argues in this essay that Trump’s rhetorical challenges to long-standing pillars of U.S. China policy, combined with the show of force in Syria, “appear to have concentrated Chinese minds. [China’s] strategy of backing North Korea no matter what is bumping up against the risk of an unpredictable man in the White House.”

In Washington, the new narrative is that Trump’s volte face on China is part of a broader evolution from pitchfork-brandishing candidate to responsible national leader. By that reckoning, Trump’s new regard for Xi, and his willingness to wheel and deal with China on trade to solve a dire global security issue reflects the triumph of moderate, mature voices like chief of staff Gary Cohn or son-in-law Jared Kushner over conservative firebrands like Steven Bannon, Stephen Miller, trade advisor Peter Navarro and former national security advisor Michael Flynn.

But it’s far easier to interpret maneuverings inside the White House than it is to parse what’s going on within the Chinese leadership compound in Zhongnanhai. Will Xi accept Trump’s new overture? How would that fit into Xi’s bid to consolidate his position as China’s “core leader”? And how will events on the Korean Peninsula play out in days to come? Stay tuned.

Enjoy your weekend!

More U.S.-China-Korea news

• Trump dispatches Pence to Asia: U.S. Vice President Mike Pence will fly to Seoul Sunday as a sign of U.S. commitment to South Korea in the face of the rising nuclear threat in North Korea. Pence is scheduled to spent ten days in Asia, with stops in Tokyo, Jakarta and Sydney. He'll celebrate Easter with U.S. and Korean troops on Sunday before holding talks Monday with acting President Hwang Kyo-ahn. Reuters

• Can Trump count on support from South Korea's next president? While Trump and Xi reconsider their options for curbing North Korea's nuclear ambitions, South Korea is in the midst of its own political transition. The country is preparing for elections on May 9, following the impeachment last month of Park Gun-hye. The current front-runner in the presidential contest is Moon Jae-in, a civil rights lawyer and leader of the left-leaning Democratic Party. Korea's Democrats have have traditionally taken a softer approach to dealing with North Korea than conservatives from Ms. Park's party. Moon has said South Korea should play a great role in trying to finding a resolve the nuclear issue rather than passively following the U.S. lead. In a book published in January, Moon argued South Korea must learn to "say no to the Americans." He has said he would review Park's decision to allow the U.S. to deploy a missile shield, called the Terminal High Altitude Area Defense system (THAAD) in South Korea over China's objections. Moon's main rival, People's Party leader Awn Cheol-soo, is a former software mogul turned politician. He has has pushed for a firm stance in dealing withe North Korea and expressed support for the deployment of THAAD. A recent Gallup poll found the two candidates neck and neck, with Moon claiming support of 40% among Korean voters surveyed to Ahn's from 37%. But support for Ahn has surged over the past month. New York Times

• As tensions with the North escalate, South Koreans remain unfazed. After decades of provocations from the North, South Koreans have learned to live under the constant shadow of war. Many say they don't follow political news. Other say they feel there's no point in worrying since they can't do anything about to change things. South China Morning Post

Business and Economics

• Are Trump's China trade ambitions shrinking? At Mar-a-Lago, the U.S. and China agreed to set a 100 day timetable for addressing differences in the U.S. - China economic relationship. Chinese overcapacity in steel and aluminum are likely to be focal point for those discussions. An early report in the Financial Times suggested China hopes to defuse trade tensions by offering better access to its own market for financial sector investments and US beef exports. But those concessions would be relatively painless for Beijing and were unlikely to help Trump shore up support among his electoral base in states hard hit by the disappearance of manufacturing jobs. Former deputy U.S. Trade Representative Wendy Cutler offers some smart advice to U.S. trade negotiators here. Among her suggestions: the discussions should focus not just on short term measures to reduce the deficit, but also seek to head off trade conflicts just over the horizon such as autos and next generation vehicles.

• Will Trump's focus on North Korea undercut U.S. businesses' push for China market access?  Some prominent U.S. business executives have expressed dismay at Trump's offer to grant China better terms on a trade deal to defuse a nuclear crises in North Korea. James Zimmerman, a Beijing-based lawyer and former chairman of the American Chamber of Commerce in China, says U.S business interests shouldn't be used as "bargaining chip" and called Trump's decision to link trade and security issues "amaoturerish, ill-logical horse-trading." Business Insider

• The Pearl River Delta: A glimpse of China's future. As Trump and Xi convened in Mar-a-Lago last weekend, the Economist magazine released an excellent Special Report examining the dynamism of China's most innovative region, the Pearl River Delta, which encompasses the southern Chinese cities of Guangzhou, Shenzhen, Hong Kong and Macau. The PRD was at the vanguard of Deng Xiaoping's economic effort to open China to the global economy. The Economist notes that, despite the impressive cityscapes of Shanghai or Beijing or the more recent fame of Alibaba's hometown, Hangzhou, the Pearl River Delta still boasts China's most nimble, resilient firms. It also points out that "new infrastructure including high-speed rail links and the world's largest sea bridge, is helping to stitch the region ever more closely together." At Fortune, we couldn't agree more--which is why we're bringing the Fortune Global Forum to Guangzhou this December. Economist