China: Digging in for Prolonged Fight

Published on May 13, 2019

At the conclusion of the two-day meeting last week between China’s Vice Premier Liu He, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin, Lighthizer conveyed to Liu the hope that China would accept the US version of the Agreement Text and their two respective leaders meet by the end of next month, in late June.

*** Chinese sources, however, are defiant in their insistence they will not accept the “blackmail” demand by the American negotiators to reach an agreement next month, even if Presidents Donald Trump and Xi Jinping are almost certain to meet at the G20 summit on June 28-29 in Osaka. They discount the threat of tariffs on all Chinese goods if there is no deal by then as a bluff and, if it is not, insist they are not afraid of facing the consequences of full tariffs rather than concede to any US demands that run counter to China’s “core interests.” ***

*** Indeed, Xi, we are told, does not expect to sign an agreement with Trump in Osaka; furthermore, Chinese negotiators at this point have little expectation there will be a trade deal with the US this quarter, or even this year. Whether and when a deal is signed, they continue to maintain, is entirely in Trump’s hands. and they believe only a sustained decline in the US stock market and weakness in the economy will soften his stance. As things stand, they expect a deal would most likely only be signed in the run up to the 2020 US presidential elections. ***

*** As to Beijing’s response to Trump’s latest tariff hike on Friday, the weekend silence before today’s announcement of retaliatory measures is being explained not just as an attempt to ease some pressure off the latest round of negotiations. The delay is also, more ominously, attributed to the central government’s consideration of potential countermeasures in addition to the tariffs on $60 billion of US exports to China that was flagged privately in advance, and announced today (see SGH 5/9/19, “China: Tariff Hikes Looming”). ***

Liu, in turn, also warned Lighthizer before leaving Washington that imposing tariffs on all remaining Chinese imports as Trump has threatened would blow back on the US as more than one third of these products in particular are made by US companies based in China. 

He nevertheless invited the US negotiators to Beijing, albeit leaving the date for any resumption in talks undetermined. That next round, from what we understand, could come in the last week of May.

China Seeking to Diversify Away from US

Chinese sources have also pointed to measures they are taking and changing economic dynamics that could protect their economy from the full brunt of a US onslaught in the increasingly possible case of a prolonged punitive tariff regime.

For one, Beijing will increasingly focus on the EU, and not the US, as its most important bilateral economic and trade relationship. For what it’s worth, Chinese sources also point to the “vigorous improvement” in economic and trade relationships between China and the countries along the “Belt and Road” initiative.

Along those lines, China is increasingly focused on concluding the EU-China Bilateral Investment Agreement in 2020, and the Regional Comprehensive Economic Partnership (RCEP) at the end of 2019 or early 2020, as “more important” deals than a US-China trade agreement. 

Whether or not that is, as claimed, more important than economic ties with the US, the mounting concern within China and drive to diversify away from the US towards the EU is real and predicated on the assumption that even if China and the US were to reach a trade deal, it will be a fragile and temporary agreement at best.

Finally, Beijing threatens it will no longer deem the US an ideal destination for study – and investment – abroad. In addition to warning of a drop in the willingness of Chinese investors to invest in the US, the Ministry of Education we are told will take “appropriate measures” to restrict Chinese students from studying in the US.

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