Speculation that US Trade Representative hardliner Robert Lighthizer may take the lead on negotiations with China over the 90-day truce period just negotiated at the G20 summit should in no way be taken as a bearish signal for the chances for material progress over that period on some of the major issues put on the table at the dinner between Presidents Donald Trump and Xi Jinping on Saturday.
*** The issue was never the guest list or the negotiators on the sidelines — hardline Trade Adviser Peter Navarro was also at the Summit — but the commitment of the two leaders, Xi and Trump, to seek a rapport and positive result out of the highly anticipated meeting between the two in Buenos Aires. And here, the post-mortem from this weekend on both sides is that while still a little wary, both came away with positive expectations on the outcome to the negotiations after the turn of the year, as positive as all the signaling we had received in the weeks before, leading up to the summit (see SGH 11/16/18, “China: Negotiating a Truce with Trump”). ***
One Hundred Fifty Minutes of Cordiality
From what we understand, at the bilateral trade meeting on Friday the day before the Trump and Xi dinner, China’s lead negotiator Vice-Premier Liu He staked out Beijing’s position that Xi would not be able, at this juncture, to make further concessions than the ones already floated in the run-up to the summit.
At least not yet. Indeed, he was quick to also affirm that the Chinese side was ready to do all it could to avert a full-blown trade war, as long as it did not violate Beijing’s “core interests.”
This message to Treasury Secretary Steve Mnuchin was intended to be relayed to Trump, and to set a positive tone for the dinner the next evening.
At the 150-minute working dinner, according to Chinese sources, Xi directly tabled three issues of concern to the US, and two of concern to China.
Those were, for the US side, the protection of Intellectual Property Rights, allegations of forced technology transfers, and Beijing’s subsidies to state-owned enterprises (SOEs), and from the Chinese side, visa restrictions for Chinese students and academia, and the new US export controls on technology (see SGH 11/30/18, “China: Xi’s G-20 Proposals to Trump”).
Xi’s Asks, and His Offer
Xi went on to make Beijing’s case that the Chinese government did not force foreign companies to transfer their technologies to China, but that this was the result of the so-called “market share for technology transfer” arrangements companies entered into voluntarily with their domestic joint venture partners. In other words, this is an issue that remains to be hammered out.
Xi then asked Trump to reconsider the US’ upcoming new technology export controls, making the case (for what it is worth) that these would hurt the US economy, trade balance, and exporters, to the benefit of EU and Japanese suppliers. It is in this context that the offer to re-open the Qualcomm-NXPI merger was brought up.
But most materially, and to the point for markets, Xi conveyed to Trump that Beijing is committed to opening markets and deepening reforms in a process that would address many of the Trump administration’s bilateral economic and trade concerns with China.
Specifically, for example, the lifting of the “stake cap” would ensure that foreign institutions gain more market share in China, and Xi pointed to such measures in the banking and insurance sectors as great opportunities for US and foreign wealth management, investment banking, and asset management businesses.
After further discussions, including we believe on agricultural commodities, LNG, manufacturing and autos, at the conclusion of the dinner, Xi and Trump, as we had expected, agreed to stop imposing additional tariffs on each other, but not lift punitive measures already imposed – at least for now.
Furthermore, they agreed, as has been widely reported since, to impose a “moratorium,” that both sides will not escalate trade tensions for a period of ninety days starting January 1, after which Xi and Trump both agreed to instruct their respective economic teams to step up negotiations toward the removal of all additional tariffs, and towards a concrete agreement on trade.
And that Lighthizer is the lead negotiation through the first quarter of the upcoming negotiations is, we think, about as relevant a “bearish signal” as the last-minute hand wringing by analysts and the press that hardline White House Trade Adviser Navarro would also be attending the Buenos Aires summit and dinner.
Lighthizer is, indeed, a tough negotiator, but trade negotiations are, funny enough, the technical remit of the office of the Trade Representative. And lest memories fade so quickly, this is the same negotiator who, when finally given the nod by Trump, pulled out all the stops to conclude the USMCA deal with Mexico and Canada to replace NAFTA.