China: Negotiating a Truce with Trump

Published on November 16, 2018

If there is one thing President Donald Trump does not take kindly to, it is having his negotiating stance on China undermined by “globalists” seemingly eager to grab any deal proffered by Beijing beneficial in the short term to corporate interests and Wall Street.

It is with that in mind that the comments should be taken from US Trade Representative Robert Lighthizer yesterday, a tough negotiator himself, in which he firmly denied rumors he was telling business executives the bump up in tariffs to be imposed on China come January were effectively already off the table. That is certainly not an assurance one would telegraph before a key negotiation.

*** The dynamics in Washington, however, are indeed shifting to where, beyond a simple photo-op when President Trump meets with his counterpart Chinese President Xi Jinping at the November 30 – December 1 G20 summit in Buenos Aires, President Trump is willing to accept a “victory” and with it a cease-fire or truce that would entail a likely postponement of the threatened escalation of tariffs on China in January. ***

*** Key to that “truce” would be for Beijing to deliver on a framework of negotiations to be followed through next year addressing Intellectual property theft and forced technology transfer issues on top of the traditional trade tariff and barrier issues. From what we understand, assurances over those thorny issues are indeed on the table in active discussions between the two negotiating teams. ***

*** And while China’s lead negotiator, Vice Premier Liu He, does not appear yet to have a trip formally scheduled to Washington prior to the G20 summit, senior officials in Beijing indicate he is in fact ready to come to Washington for a third meeting this year to lay the groundwork for a successful summit between the two presidents in Buenos Aires. ***

To be clear, the Chinese side does remain wary of a sudden resurgence in Trump’s more hard line leanings, but for now, as opposed to in previous times, there appears to have been a significant and sustained improvement in the tone and substance of bilateral discussions – including those directly between Treasury Secretary Steve Mnuchin and Vice Premier Liu.

And that, in turn, appears to be enough to assuage the caution of the Chinese over an eventual commitment by the Trump Administration to begin a de-escalation in the trade wars. That would be likely to come through an outline of an agreement that, we suspect, would in part be sufficient at a minimum to stave off the threatened escalation of tariffs come January.

Communications with Beijing

Critical for any tangible success, communications between the two sides have been restored at all levels ever since the November 1 call between Presidents Trump and Xi, according to sources in Beijing.

And for Beijing’s very real concerns about longer term strategic pressure from Washington on China, senior Chinese officials believe indications are that both Xi and Trump are interested in a mutual compromise, and are fully prepared for the summit to achieve a trade war truce if not an actual agreement, even if temporary and focused largely in principle.

And in a more encouraging sign than in past negotiations and all the fits and starts between the two leaders, communications at very senior, as well as more technical, levels have also been encouraging to date.

Those include the direct discussions between Treasury Secretary Mnuchin and Liu He.

Mnuchin – Liu Talks

After the Xi-Trump call on November 1 (see SGH 11/8/18, “China: G20 Summit and Politburo Concerns”), Liu and Mnuchin spoke directly by phone on November 9.

Top level Chinese officials interpret the renewal of direct contact between the two officials, and subsequent calls, to indicate the two sides are now engaged in a genuine effort to defuse trade tensions, to avoid the continuation of punitive tariffs on China, and to come to a broader accommodation down the line.

Indeed, in last Friday’s call with Secretary Mnuchin, Liu committed that the Chinese government will take stringent measures to protect intellectual property, will not allow forced technology transfers, and will increase imports from the US at an unprecedented scale.

For his part, Mnuchin, from what we understand, was also seen as sending some key positive negotiating signals, including that the US has no interest in challenging China’s “core national interests,” as well as acknowledging a series of measures China has taken recently to reshape China’s markets and future.

And finally, in that call, Liu and Mnuchin are said to have both expressed the view that the best result would be for the two countries to agree to stop increasing import tariff levels at the summit – in other words, an agreement.

Interpreting Mixed Signals

Nevertheless, the Chinese side believes the US ban on the import by Chinese companies of certain sensitive technologies will not be lifted. And Liu is reportedly not certain yet the summit can reach a trade agreement.

The Trump administration, they believe, is still sending mixed signals in public that include both a willingness to reach a reconciliation with Beijing, and tough rhetoric accusing China of being untrustworthy.

But when it comes to mixed signals from Washington, we would put little significance on yesterday’s quite understandable denials by Lighthizer that he had been quietly signaling to contacts something so sensitive and still in flux as an assurance that the threatened tariff hikes will not be coming come January.

On the other hand, we would attach a great deal of weight on the very public and clearly sanctioned admonishment by National Economic Council Director Larry Kudlow of White House Trade Advisor Peter Navarro’s fiery and characteristically hardline comments at a speech in a well-known think-tank in Washington.

That smackdown, we believe, is entirely consistent with the positive signals we have picked up in negotiations behind the scene, and, we believe, a desire by Trump himself to leave the summit with tangible progress in hand.

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