China-US: Trade Talk Limbo

Published on March 6, 2018

Sources close to China’s powerful incoming Vice-Premier, Liu He, report that his just concluded trip to Washington DC was successful in achieving the goals Beijing originally set out for the trip.

Unfortunately, those goals were set rather low, and perhaps wisely so, given the tense political atmospherics currently surrounding trade relations with the US (see SGH 2/26/18, “China: New PBOC Leadership, and a Mission to Washington”). Those goals were to introduce and share views on macroeconomic policies, especially trade policies, and to ensure any economic and trade disputes are settled through negotiations.

*** While most meetings went smoothly enough, we are told Liu was seriously taken aback, and offended, by the frosty reception given him by US Trade Representative Robert Lighthizer, a meeting whose tone was characterized as downright hostile. Lighthizer, an avowed hard-liner on China and trade, gave short shrift to Liu’s presentation of the benefits to US firms of smooth access to China’s economy and markets, prompting the Chinese official to lay out China’s “bottom line” on trade. ***

*** The bottom line that would trigger a material escalation of tensions, starting with but not limited to retaliation on imports of agricultural products from the US, would undoubtedly be any real movement on Section 301 of the Trade Act of 1974 Intellectual Property actions that are scheduled to be heard by the US Treasury in two days, on March 8, and held out, in theory at least, for resolution by the end of April 2018. ***

*** Upon the conclusion of Liu He’s tour, the local press was quick to report a commitment to resume the stalled Sino-US Economic Dialogue back home – a source of frustration to date for Beijing. But tellingly, there has been no date or time attached to that promise, at least not as of yet. In the meantime, Chinese officials shrug off the ultimate impact of threatened tariffs on steel, aluminum, and washing machines on China’s economy, tariffs they maintain hurt US allies more than they do China. ***

Chinese officials fully appreciate the “good cop/bad cop” negotiating tactics often played by disparate voices from within the Trump White House, including from the President himself, even when these do represent fundamentally divergent views within the administration.

But they appear genuinely concerned with the continued hard line political messaging still being taken, even behind the scenes, a message clearly counter to what they perceive to be the real interests and benefits of smooth bilateral relations to both economies, and to powerful personal and business interests in the United States.

China’s Counter, and Talking Point

Beijing contends that the enormous US trade deficit with China will remain at current, record high levels, for at least five years, unless Washington finally concede to China’s long-sought efforts to lift the restrictions on high-tech exports to China, particularly in the chip sector. Even if China were to double its imports of agricultural products from the United States, the largest export market for the US in the world, the deficit, officials claim, would remain unsolved.

On the carrot side, China has hinted at the potential for preferential treatment of US financial institutions in its markets, even while stressing the roadmap and timetable for the opening of China’s financial sector has already been formulated and announced, a roadmap that will not be changed overnight. Beijing also refuses to cut subsidies to China’s State-Owned Enterprises, as demanded by the “fair-traders” in Washington, just as the US, officials pointedly note, cannot or will not eliminate subsidies to American farmers.

Beijing will also hold out energy cooperation between the US and China, specifically on imports of oil and gas from the United States. And Chinese officials are quick to list the benefits accrued to US firms overall in China, who they estimate to have earned on average profits of over 25% on their ventures in China.

Beneficiaries listed include GM and Starbucks, with officials pointing to Apple’s voluntary handover of Chinese iCloud accounts to Guizhou-Cloud Big Data as a sign of how lucrative their market really is. They will remind their US counterparts that Boeing is scheduled to open its first overseas factory ever – the Boeing (Zhoushan) Completion Centre – in, of course, China, scheduled to make their first delivery of Boeing 737 aircraft in late 2018.

But the good old “Boeing trump card,” so to speak, does not come as news to Washington. The ultimate bet in Beijing is that some new, behind the scenes, concessions will still need to be delivered to ensure that while Trump’s trade “thunder is loud, the rain is small.”

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