China G20: A Rocky Road to Chile

Published on July 1, 2019

Markets have responded with cheer to the de-escalation of trade tensions between the US and China after the G20 meeting between Presidents Donald Trump and Xi Jinping in Osaka this weekend.

*** But even with lowered expectations going into the G20, there is perhaps less than meets the eye on some of the key issues that will need to be addressed for a full agreement between the two countries – with one, any potential amendments to domestic Chinese law, still standing out in particular. ***

*** An agreement, Chinese officials believe, should it happen would be a long time in the making. It could however, if all goes well, come in time for a meeting of APEC in Santiago, Chile, that is scheduled for November 16-17. ***

Post-Truce: Three Stumbling Blocks

Chinese officials, for their part, were especially pleased coming out of the G20 summit this weekend that in addition to postponing new tariffs and restarting talks, as expected, Trump agreed to allow US companies to resume the sale of certain supplies to Huawei, that being a particularly charged issue politically back home in Beijing (see SGH 6/28/19, “G20: Seeking a US-China Trade Truce”).

Furthermore, Trump reportedly pledged to ask the Department of Commerce to consider the possibility of lifting Huawei at some point entirely off its blacklist, a promise, even if highly conditional and vague, that has already landed the President in some hot waters with Congress.

But beyond any issues surrounding Huawei, at least three major stumbling blocks still remain to an actual deal.

First, regarding any firm commitment to import agricultural products from the US, Chinese officials are considerably more circumspect than indicated in the immediate tweets from Trump after the G20. 

Trump, they maintain, told Xi at their 80-minute working lunch he very much hoped China would open a bigger market to the US and buy more American products, especially agricultural products. Xi is reported to have responded simply that as long as negotiations resume, and the US is willing to reach a trade deal, treat Chinese companies, people, and especially students fairly, China is willing to buy more US products (including agricultural).

And on a more granular level, senior Chinese officials indicate that with the year already half-way through, China, while willing to buy more US goods, will not, or will not be able to, import $200 billion worth of American goods this year as previously demanded by the US side (see also SGH 5/9/19, “China: Beijing’s Negotiating Position”).

Second, from what we understand, Xi indicated to his delegation after the summit that the US should not keep pressing against China’s State-owned economic model. This, a key structural demand of US Trade Representative Robert Lighthizer, has been a non-starter from Beijing’s perspective from day one.

Third, and perhaps most critically, Xi is also said to have continued to reject any pressure from the US to ask China to change its domestic laws. This resistance, if confirmed, may be most problematic, as it was the stumbling block singularly cited by the White House for blowing up trade talks in early May.

Finally, Beijing will continue to insist, on the enforcement issue, that any deal with the US include a full rollback of existing tariffs, a lever the US side has to date been unwilling to concede.

A Small Geopolitical Thaw

Top national security officials in China are also, for their part, warning the US it must in no way introduce China’s “internal affairs” such as Taiwan, Hong Kong, Tibet, and the plight of the Xinjiang Uyghurs, into trade talks. 

But truth be told, while these all represent geopolitical issues of utmost importance to the Washington foreign policy and military establishments, Trump has already studiously steered clear of dragging them into the trade arena.

Regarding North Korea and the now famous foray by Trump across the Demilitarized Zone, Xi is said to have pressed Trump to ease sanctions against Pyongyang.

From what we understand, Trump has indicated he would consider returning a seized North Korean cargo ship as soon as possible as a sign of goodwill.

Negotiating Fatigue

As to the laying of any preparatory groundwork before the summit, both sides appear last Friday to have simply stated their respective positions, before their respective leaders agreed to break the ice the next day. 

Indeed, Chinese officials maintain that the positions of the two sides had not changed at all, and that there was no substantive progress to have been reported in the talks between China’s Vice Premier Liu He, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin on the day before the summit.

Chinese delegates in fact complained of “negotiation fatigue,” and that to them Lighthizer remained “too tough, [still pushing for] and agreement that is entirely beneficial to the US but damages China.” 

Beijing, of course, nevertheless very much welcomed Trump’s intercession to restart negotiations and hold off on additional tariffs, while repeating their continued demands that any negotiations be more balanced, respecting China’s “sovereignty, dignity, and core interests.”

Eyeing Chile APEC in November?

All said, Chinese officials see the Osaka G20 as somewhat akin to the G20 summit in Buenos Aires last December that prevented, at least temporarily, a further deterioration in bilateral relationships and an all-out trade war. But all sources stress that they do not expect the “US-launched” trade war with China to end soon. 

The US, they note, has not made any substantial promises and left many of China’s requests unresolved. That position will most certainly be soundly rejected by US negotiators, who see the concessions to correct a lop-sided trade relationship as almost entirely needing to come from Beijing.

Indeed, senior Chinese sources believe there is no chance a final trade deal can be reached anytime soon but, they add intriguingly, “at least not before the APEC summit in Chile in mid-November.”

November, which may now represent a new marker, may seem eons away in the heat of summer to markets, businesses, and policymakers seeking greater certainty on the trade front. But to weary negotiators, that date could not come too soon.

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