China: A Wary Eye on May 15

Published on May 9, 2018

In the wake of the high-level US trade delegation’s visit last week to Beijing the press reported that China’s powerful Vice Premier Liu He would reciprocate with a visit to Washington this week.

That timeline for Liu’s visit was subsequently clarified by White House Press Secretary Sarah Huckabee Sanders as “next week,” and by Commerce Secretary Wilbur Ross as “in the next couple of weeks.”

*** The reason for the adjustments in the initial reporting of that timeline is Beijing. On Monday evening, (Beijing time), US Treasury Secretary Steven Mnuchin called Liu He to invite the Vice Premier to talks in Washington as soon as possible. Liu, from what we understand, agreed to a visit in mid-May, but has deliberately timed his visit to come after a May 15 US Trade Representative public hearing on Section 301 tariffs. ***

*** Chinese officials see Mnuchin’s invitation as a positive sign, and evidence that Trump himself wants to avoid a trade war. However, they continue to insist China will not make any concessions to the US on what they see as the core interests of China’s national development – the “Made in China 2025” strategy. And that is exactly what the May 15 Section 301 hearing will address – a $50 billion list of goods and around 1,300 tariff lines targeting imports that bolster China’s 2025 strategy, and the forced transfer of valuable technology and intellectual property to Chinese firms. ***

*** The USTR has not set a date for a final Section 301 decision yet, but it has set May 22 as a final date for the public comment process on its proposals. Chinese officials expect the May 15 hearing to be hostile in tone, but expect – or hope – the administration will delay any imposition of tariffs on the $50 billion of goods targeted if negotiations are to proceed smoothly. If that is not the case, they have prepared retaliatory countermeasures of equal weight, as well as a response to what they expect will be an announcement by US Treasury later this month of restrictions on Chinese investments in the US. ***

In the meantime, while balking at the extremely aggressive positions that were laid out by the US delegation last week, Beijing has also begun to float concessions they hope will bring the US into what will surely still be a bumpy, and prolonged, negotiated solution.

A Testy Visit to Beijing

While refusing to back down in substance from any positions to date, Beijing and Washington have gone out of their way to call for a change in tone, for mutual efforts to avert a “trade war,” and for a joint commitment to resolving relevant trade and economic issues through dialogue and consultation.  Last week’s trip to Beijing, however, was, if anything, a testy affair (see SGH 5/4/18, “China: A Tough Trade Round with the US”).

Chinese officials maintain that Mnuchin, who they see as representing the most dovish faction within the Trump Administration, last week failed to convince his more hawkish colleagues to sign a short agreement he was seeking with the Chinese side for after the talks.

From what we understand, were the two sides to reach even a basic agreement, original arrangements called for the two sides to then release a joint statement, for Vice President Wang Qishan to meet with the US delegation, and even for President Xi to pop in on the delegation on Friday afternoon.

But the Chinese side felt clearly that the unwieldy US delegation was split in three factions, and spoke in three voices: Mnuchin, backed by National Economic Council Director Larry Kudlow, who was ready to compromise, USTR Ambassador Robert Lighthizer and Special Adviser Peter Navarro, who refused to compromise, and Commerce Secretary Wilbur Ross, in between the two groups, but leaning to the more hawkish side as well, if anything.

At the conclusion of the talks, China flatly rejected US conditions, just as the US rejected China’s. Not only did the meetings with Wang and Xi fail to materialize, but when the US delegation left Beijing, no senior Chinese official accompanied them to the airport.

A Tentative Start to Negotiations

Senior Chinese officials nevertheless see Mnuchin’s quick follow up call and invitation to Liu He as a positive sign, and, most importantly, interpret it as a signal that Trump himself is keen to avoid a trade war.

With a cautious eye still on the May 15 USTR hearing, they believe US and China trade negotiations will go through many rounds. But they have, at least tentatively, begun.

For starters, Chinese officials stress they will never agree to the following three clauses, that:

  • “China immediately … cease providing market-distorting subsidies and other types of [distortionary] government support that can contribute to … industries targeted by the Made in China 2025 industrial plan;
  • “China … not oppose, challenge, or otherwise retaliate against the US in position of restrictions on investments from China in sensitive US technology sectors … and;
  • “China … withdraw its WTO complaints regarding designations of China as a non-market economy by the US and EU and will refrain from challenging the treatment of China as a non-market economy under the DSU [Dispute Settlement Understanding] in the future.”

On the last point, however, the Chinese side it appears has held out that by July 1, 2018, China could withdraw its request for WTO consultations with the US if the US were to abandon the USTR Section 301 plans to impose tariffs on $50 billion worth of Chinese imports.

The Chinese side has also indicated it will agree to lower tariffs on cars and “other products,” import large, but as of yet unspecified, amounts of US products and services, implement the already announced financial and manufacturing liberalization measures, and “substantially ease” market access.

China’s Counterdemands

China’s demands, in return, cover areas both broad and narrowly focused.

Those include demands the US lift the “Tiananmen Square sanctions” and substantially relax (hi-tech) export controls to China, pledge fair treatment towards Chinese IT products and services, allow US government agencies to purchase and use Chinese IT products and services, and support the opening of the market for civil aviation security checks in both countries, approving civil aviation safety inspection equipment submitted by Chinese suppliers by August 2018.

China has also asked the US to pledge to treat Chinese investment and investors on an equal basis with other countries, including the suspension of any new restrictions on these. It has also asked the US to welcome Chinese enterprises to participate in infrastructure construction in the US, and to allow Chinese companies to provide electronic payment services to the US.

In return, Beijing will agree to push for revisions to domestic laws and regulations such as the Patent Law that directly address the US side’s intellectual property concerns. However, Beijing continues to maintain it is completely within its rights under WTO rules to ask foreign investors to establish joint ventures when entering certain Chinese industries.

Before any negotiations are to proceed in earnest, Washington and Beijing will have to navigate the May 15 Section 301 USTR hearing, and an announcement expected from Treasury at the end of May slapping restrictions on, precisely, the other hot button issue, Chinese investments into the US.

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