Cornered by Congress into signing a Hong Kong bill that was sure to inflame bilateral relations with China, President Donald Trump all but apologized last week to President Xi Jinping as he enacted it into law, while Xi, for his part, limited Beijing’s retaliatory punches to largely symbolic jabs.
In both cases, the objective was to keep bilateral geo-strategic tensions and trade negotiations on separate tracks, reflecting an understanding that was quietly communicated by the two sides in back channel discussions, including with Trump’s son-in-law Jared Kushner, before the signing of the bill into law (see SGH 11/25/19, “China: ‘HK Act’ and Phase-One Deal Timing”).
** Since the signing of the HK bill, our understanding is that the two sides have held a working group (or “technical level”) consultation on the first-phase trade agreement. Chinese sources characterize this as a “very ordinary” consultation at the working group level, and they give no indications a principal’s level call was, or will be, held this week.
** But despite recent expressions of frustration with the pace of negotiations by President Trump, Chinese sources still believe he very much cares about striking a first phase deal with China soon, and continue to believe, despite Commerce Secretary Wilbur Ross’ warnings to the contrary, that they have assurances the threatened December 15 tariffs will not be imposed if there is progress, but still no deal, by then.
** Nevertheless, revealing a degree of unease in their negotiations with this White House, senior officials in Beijing also warn that if a new round of tariffs were to be levied on December 15, China would suspend trade negotiations with the US and take corresponding retaliatory measures immediately.
** As to the remaining hurdles to a deal, Chinese negotiators reiterate that the US must agree to roll back current tariffs in a trade agreement, and not just avert the upcoming tariffs scheduled for December 15. This rollback could be in several stages (presumably starting with last September’s tariff hikes), but however it is presented, Beijing wants a path to seeing all tariffs removed if the US is to “show sincerity” on its negotiating side.
** Indeed, the complication for Beijing is that while President Trump has attempted to pull China into concrete commitments to multiple years of (unrealistically) ambitious agricultural purchases in this “phase one” agreement, there is no assurance in reality there will ever be a “Phase Two” to address some of China’s concerns about the existing tariff regime. So Beijing, we believe, has doubled down in pushing for a roadmap, at least, for the removal of all tariffs in this round.
** For these reasons, and despite some of the more optimistic spin reported by some wires, our sources in Beijing continue not to expect a deal to be signed by the December 15 tariff deadline, unless Trump is willing to give the final order now to the US side to “fully accept” the latest text of the phase one US-China trade agreement.
** And those words — fully accept — do not indicate to us a pre-December 15 signing is at all likely. Given that, of some concern on the margins is that a delay might also add a non-negligible wild card risk to the December 15 tariff hikes, depending on how frustrated President Trump is at that stage by the progress of these talks – among other considerations.
** In the meantime, Chinese officials will refrain from extending an invitation to Beijing to the US lead negotiators if and until they express a readiness to travel to Beijing, at which point they will of course be then welcomed.
All said, sources in China remain “cautiously optimistic” a phase one deal can be signed, but as we have written, not by December 15, but perhaps, if all goes well, they now expect it could happen before the advent of the Chinese New Year, on January 25 of next year.