This story is part of an ongoing series on U.S.-China relations, jointly produced by the South China Morning Post and POLITICO.
The United States and China have just five weeks to come up with a deal that both nations can hail as “wins” in their closely watched trade war, and they’re each asking the other for major concessions heading into the next round of talks in Washington next week.
But what does “winning” actually look like for President Donald Trump and Chinese President Xi Jinping — assuming neither leader gets everything he wants?
For Trump to declare victory by the goals he set for himself, he needs China to further open its market to American exports, especially the agricultural goods hit hard in the trade war. He also is pushing to stop China from forcing U.S. companies to hand over valuable technology, but such moves would require drastic changes on the part of Beijing.
For his part, Xi mainly needs Trump to eliminate or sharply reduce the tariffs the United States has imposed on $250 billion worth of Chinese goods. Such moves would help restore badly shaken confidence in the U.S.-China trade relationship at a time when China’s economic fundamentals are deteriorating.
The United States also wants the agreement to include provisions to ensure that China honors its commitments. Depending on how far China is willing to go, that could be a point of compromise that paves the way for the U.S. to back off some of its more difficult demands.
Some say the most the two sides can achieve in the near term is a “mini-deal” that would keep current duties in place while negotiations continue.
“My baseline assumption is that very close to the deadline, we will come up with a deal that certainly will not be comprehensive, durable and long-lasting by any means but at least allows both sides some breathing room by de-escalating hostilities or at least a cessation of future hostilities,” Eswar Prasad, former China director at the International Monetary Fund, said last week in a speech in Washington.
Face-to-face trade talks between the world’s two largest economies will resume on Jan. 30, when Chinese Vice Premier Liu He is scheduled to go to Washington for two days of meetings with a team of U.S. officials led by Trade Representative Robert Lighthizer.
Whether the next set of talks will lead to a real deal is uncertain, in part because of Trump’s erratic personality and penchant for making unpredictable commentary via Twitter.
Stocks tumbled Tuesday after The Financial Times reported that the United States had rejected China’s offer of new, in-person, lower-level talks to be held this week because of a lack of progress on some of the main U.S. demands. But China watchers said such cancellations were normal, and face-to-face consultations were not necessary for Liu’s coming visit.
White House chief economic adviser Larry Kudlow, in an interview with CNBC on Tuesday, denied any meeting was ever scheduled for this week. He added the two countries remain in “constant communication” ahead of the Liu-Lighthizer meeting next week.
Kudlow also emphasized the United States still has big goals for the talks.
“I acknowledge the degree of difficulty, but it is a crucial point for the United States side,” Kudlow said. “We have got to deal with these vexing problems of [intellectual property] theft and the forced transfer of technology, the lack of American ownership of its own companies in China, cyber interference with various corporations, along with various tariff and non-tariff barriers.”
Looming economic worries
At the same time, both countries are staring down tough economic outlooks. Trump is in the grips of a monthlong government shutdown triggered by his demand for border wall funding that has diminished his approval ratings and risks causing long-term damage to the U.S. government and its economy.
Xi is overseeing a drastic slowdown in China’s economic growth, which adds pressure on him to find a quick end to the trade war. In the last quarter of 2018, China reported the slowest growth rate since its government began publishing quarterly figures in 1992.
The two sides are trying to reach a deal before March 2, when Trump says he’ll order his government to increase duties on $200 billion worth of Chinese goods to 25 percent, a sharp rise from 10 percent currently.
A simple win could involve commitments from China to purchase specified amounts of U.S. goods by certain target dates. On China’s side, anything that lifts some or all of the tariffs on its exports to the U.S. would be a victory.
Some analysts have speculated that Trump — faced with a jittery stock market and concerns that the government shutdown could help nudge the U.S. economy into recession — will settle for “a light deal” consisting mainly of Chinese purchases and vague promises.
In response, two influential business groups, the U.S. Chamber of Commerce and the American Chamber of Commerce in China, are urging Trump to stand by his pledge to press for meaningful reforms.
“While reducing the trade deficit and purchases of U.S. exports may be one aspect of the negotiations, we urge the U.S. government to prioritize outcomes that address structural challenges posed by China’s economic policies and practices,” the groups said in a report released this week.
Trump is soon going to focus his attention on his 2020 reelection campaign, and he will be motivated to rapidly shrink the U.S. trade deficit with China to fulfill a core promise he made during his 2016 campaign. That, however, is easier said than done.
The U.S. exported only $130 billion worth of goods to China in 2017. So either the U.S. has to exponentially grow its manufacturing capacity in a few short years, or China has to stop exporting as much to the U.S.
Final figures for 2018 are expected to show the U.S. deficit in goods trade with China set a new record of more than $400 billion.
In addition, simple export gains are not likely to go over well after Trump’s team laid out long-standing grievances that are rooted in how Beijing runs the nation’s economy.
Among the biggest issues the U.S. has raised is getting China to address allegations that it has aggressively supported investment by state-owned or state-directed companies in the United States to secure access to cutting-edge technology in sectors such as aviation, integrated circuits, information technology, biotechnology, industrial machinery, renewable energy and automobiles.
In another big salvo, Trump’s trade office has accused Beijing of conducting and supporting cyberattacks on U.S. company computers in order to acquire valuable intellectual property and other sensitive commercial information.
The U.S. stepped up its action against China on this front last year, when the Justice Department announced an initiative to “identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them and make sure that we bring them to an appropriate conclusion quickly and effectively.”
Last year, after an investigation into China’s practices, Trump initially imposed a 25 percent duty on $50 billion worth of Chinese exports, which the U.S. trade office judged to be “appropriate” given the level of damage done to the U.S. economy.
However, when China retaliated by imposing duties on $50 billion worth of U.S. exports, Trump upped the ante by imposing a 10 percent tariff on another $200 billion worth of Chinese goods. China has retaliated in kind, imposing tariffs on about 85 percent of all goods it imports from the U.S.
Seeking wholesale changes in China
A leaked document from a round of talks last May in Beijing showed the United States has a bigger agenda aimed at cutting the U.S. trade deficit with China in half by 2020. To achieve that, the Trump administration asked China to set “targets” for Chinese firms to buy hundreds of billions of dollars more of American goods.
While the deep-rooted issues could take years, perhaps even decades, for China to properly address, some trade experts theorize that there could be some partial wins to be had in the short time remaining before the March deadline.
Apart from Beijing’s pledges to purchase more American products, a deal could also include commitments to more quickly remove equity caps or joint venture requirements in some sectors in China.
The country could also easily beef up enforcement of intellectual property rights and make a “structured agreement to keep talking about more intractable issues such as technology transfer,” said Arthur Kroeber, head of research with China-focused Gavekal Dragonomics.
“USTR Robert Lighthizer and the trade and security hardliners could probably live with a restricted deal so long as it offered enough space for the U.S. to keep using investment restrictions, export controls and sanctions, and provided a window for more tariffs to be imposed if China fails to make what the U.S. defines as progress,” Kroeber said.
He added that Lighthizer would want to keep the existing tariffs in place and use the threat of additional levies as his bargaining chip. But China wouldn’t want to accept such a deal unless the U.S. gave up something — most likely a reduction of current tariffs.
China watchers also said the leadership in Beijing is very much concerned about keeping economic risks under control.
“China is interested in seeing the removal of tariffs on $200 billion of Chinese products, and it is trying to get the original tariffs on $50 billion removed as well, which would be a major win from the Chinese perspective,” one source briefed on the U.S. side of the negotiations said.
Given the extent of the reforms the United States is demanding, a second source following the talks from the Chinese side played down the likelihood of a final deal by the deadline.
“The best outcome for China is to suspend tariffs and have time and room to address other issues,” the source said. “The problem is not whether we have to change or not, but how and when.”
Those systemic changes will require a real commitment from “the top leadership,” the source noted.
Lu Xiang, a researcher on China-U.S. relations with the Chinese Academy of Social Sciences, expected any deal would be centered on addressing trade imbalance.
“China will respond to U.S. concerns, but it can’t be like a bottomless pit to satisfy U.S. demands, otherwise it would hurt China’s economy,” said Lu.
Discussions slog along
Earlier this month, the countries held talks in Beijing at the vice ministerial level. That meeting, originally scheduled for two days, stretched into a third, in what some saw as a sign the two sides were making progress toward a final agreement.
However, the sources close to the governments cautioned against an overly optimistic reading of the extension. Rather, the third day was added because China was moving slowly through the list of agenda issues and avoided difficult discussions on structural issues, such as market access and intellectual property, the source briefed on the U.S.-side of the negotiations said.
China “has offered very few commitments on structural changes, but continued to focus on buying American goods to reduce the deficit,” the source briefed on the negotiations said. “The U.S. told China this is not going to end with a positive negotiation outcome.”
Members of Congress, too, said they were informed that little progress had been made. Senate Finance Chairman Chuck Grassley conveyed to reporters that Lighthizer told him earlier this month no progress had been made on the structural overhaul the U.S. is seeking.
In addition, the United States is expected to insist that any agreement contain robust monitoring and enforcement that could reinstate any tariffs that are lifted as part of the deal.
While China might be willing to agree to an enforcement mechanism as part of the deal, they “probably don’t want the United States to be judge and jury” of whether they have faithfully implemented the pact, said Scott Kennedy, a China expert at the Center for Strategic and International Studies.
A more attractive alternative for Beijing would be for the agreement to be enforced through the World Trade Organization. But the United States might not be willing to accept that because the WTO dispute settlement process is notoriously slow.
Still, neither side has an incentive to wrap up the talks until shortly before the March deadline.
For the United States, there is benefit in holding on to the threat of increased tariffs as long as possible to maximize leverage. For China, there is an advantage in waiting to see if Trump’s price for reaching a deal goes down because of concern about his political future, Kennedy said.
“I think it’s nowhere near decided that the U.S. is going to settle for less. I still think the U.S. raising tariffs on March 2nd is the mostly likely outcome,” Kennedy said.
Article originally published on POLITICO Magazine
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The Article Was Written/Published By: Wendy Wu | South China Morning Post