China: Eyeing a February Deal

Published on February 4, 2019

The news flow from China since last week’s high-level trade negotiations in Washington between Vice-Premier Liu He, US Trade Representative Robert Lighthizer, and US Treasury Secretary Steven Mnuchin has slowed to a crawl with the coming of the Lunar New Year and its week full of celebrations ahead.

*** But from what we understand, those meetings are seen in Beijing to have set the stage for a series of breakthroughs in the remaining month that are likely to lead to a trade deal between the US and China. ***

*** Indeed, upon the conclusion of another round of high level negotiations that are slated to be held in mid-February in Beijing, senior Chinese officials indicate they expect the US and China to reach a trade agreement before the self-imposed March 1 deadline that was agreed to last year in Buenos Aires. ***

*** The idea, if all goes as planned, is for a deal to be signed at the summit that is being negotiated now between Presidents Donald Trump and Xi Jinping, to be held tentatively on February 27-28. ***

An Invitation from Xi

At their private meeting last week, Vice-Premier Liu He extended a personal invitation from President Xi Jinping to Trump to a summit in late February, and Trump is said to have tentatively accepted the invitation.

With a second summit meeting between Trump and North Korea’s Supreme Leader Kim Jong-Un expected to be held in Da Nang, Vietnam, Xi welcomed Trump to follow that either with a meeting in Beijing, or in the island resort of Hainan.

However, from what we understand, US officials have balked at a summit on Chinese soil, especially if it is to sign an agreement, and the summit between Xi and Trump is likely to directly follow Trump’s February 26 meeting with Kim Jing-Un and be held on neutral soil as well, in Vietnam, on February 27-28.

By then, Chinese negotiators believe Xi and Trump will give their respective sides final instructions to sign off on a deal.

Upon signature, China will, as widely floated, start the importation of large quantities of US goods in March, focusing mainly on agricultural and energy products, but including high-tech imports as well. Beijing has also already pledged to allow more US financial institutions and companies to conduct business in China.

The larger stumbling blocks to a deal are of course all still there. But even these appear far less “intractable” than markets may assume, especially in light of the desire for a truce in the trade wars by two leaders increasingly in need of a victory at home.

Progress on Stumbling Blocks

The three main stumbling blocks remain as before; the protection of Intellectual Property Rights (IPR), forced technology transfers, and subsidies for China’s State-Owned Enterprises, with, from Beijing’s perspective, the addition now of a fourth issue –the US “assault and discrimination” against Chinese enterprises. From the US perspective, the key question of verification also remains as of yet unresolved.

But there has been some progress on most of those fronts (see SGH 1/23/19; “China: Keeping US Trade Talks on Track”).

On the protection of IPR, Liu He and his delegation last week pointed in negotiations to an IPR court set up since January 1 of this year under the Supreme People’s Court with expertise to hear exclusively such cases. Such courts, he stressed, have already been set up on a regional basis in some major cities, including in Beijing and Shanghai, and going forward, Liu pledged that China would take additional and more effective measures to strengthen protection of IPRs through legislation, the justice system and law enforcement, enhanced IPR reviews, and harsher crackdowns and punitive damages for violations.

On forced technology transfers, Liu held to Beijing’s position that the central government does not endorse such deals, struck between US-China joint ventures on a “voluntary” basis independent of the government – the so-called “market share for technology transfer” argument. But Liu did offer that if there are specific disputes that need to be brought to Beijing’s attention, the US should do so, and Beijing would look for a resolution on those.

On subsidies for SOEs, Liu and his delegation again stressed that China is in no way unique in that practice – pointing as in the past to American and European subsidy policies as evidence. But he did nevertheless promise, from what we understand, “a significant” reduction in “direct subsidies” from the central government to these enterprises.

Finally, in regards the treatment of Chinese technology companies, by implication including the pressure Washington has been directing around the globe on Huawei, Liu and his delegation called, in rather restrained language, for the US to adopt and open and inclusive mindset regarding the technological development and progress of China.

Liu further urged the US government to create a “fair, just and stable” legal and policy environment for Chinese companies. As the number one  technological power in the world, he added, the US should not allow room solely for its own development, while leaving others out.

That message in tone and emphasis is a far cry from Xi Jinping’s more confrontational “Made in China 2025” strategy and the strident rhetoric of years past.

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