China: Behind Liu He’s Visit

Published on May 22, 2018

American and Chinese officials have gone out of their way since the high-profile visit by Vice Premier Liu He to Washington last week to emphasize that “trade wars are over” – or at least on hold – for now, as Washington and Beijing look to resolve their economic differences through constructive negotiations going forward.

To underscore that progress, US officials, rather awkwardly, have hinted at a possible framework for settlement of the dispute with Chinese telecoms giant ZTE, while Beijing has announced a reduction in auto tariffs from 25% to 15% effective July 1 – a promise markets appear to have forgotten was already made by China’s President Xi Jinping last month at the Boao Forum for Asia.

But according to senior Chinese officials, last week’s negotiators also touched on and agreed to the following items:

  • From what we understand, the Trump administration’s $200 billion deficit reduction target was in fact explicitly discussed, with the two sides broadly agreeing to “work together on the basis of joint efforts” to reduce the US trade deficit with China by $100 billion in 2019, and by $200 billion in 2020.
  • Chinese officials stressed, however, that China could not reduce its deficit through unilateral actions alone, and urged the US to increase its exports of high tech goods to China, which they believe US officials promised to do. This, or more precisely, the lifting of the US ban on exports of sensitive high-tech products to China, has been a long time ask of Beijing, and beyond broad pledges, an actual lifting or easing of those restrictions would be controversial, to say the least.
  • As to how else that elusive $100 billion target might be hit, the two sides agreed that the US will send its “largest delegation ever” to China to attend the first China International Import Expo, to be held in Shanghai from November 5 to November 10 (spanning, incidentally, right across the November 6 US Congressional mid-term elections). At that Expo, US officials were assured Chinese firms would pledge to purchase no less than $100 billion worth of US goods and services.
  • While that may not exactly translate into a commitment by Beijing to reduce the bilateral deficit with the US by Washington’s desired amount, it does put Trump’s number out there at least, and we believe may explain the somewhat confused messaging after the trade talks by National Economic Director Larry Kudlow on meeting the $200 billion target figure that was subsequently walked back.
  • As hinted in public, the US side in turn suggested it would delay and, if all goes well, abandon its Section 301 $50 billion tariff threat on Chinese imports, and China would in turn shelf its already announced retaliatory measures against the US. The two sides then agreed to a follow-on visit by Commerce Secretary Wilbur Ross to Beijing to further discuss trade issues, with a focus especially on agriculture and energy products.
  • But perhaps of greatest alarm to the more hardline trade negotiators in the Trump Administration, Chinese officials maintain they also received assurances from US officials that Washington recognizes that the “Made in China 2025” strategic plan is in China’s “core” national interest, and that the US does not intend to “challenge or offend” China’s core national interests, an assurance that while of paramount importance to President Xi, may be hard for the White House to publicly back and concede.
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