China doubts long-term trade deal possible with Trump

Bloomberg Washington | Updated on November 01, 2019

Representative image   -  Reuters

Wants the US President to cancel a new wave of import taxes due to take effect from December 15 on American consumer favorites such as smartphones and toys

Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the United States (US) even as the two sides get close to signing a phase one agreement.

In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they wont budge on the thorniest issues, according to sources. They remain concerned about President Donald Trump’s impulsive nature and the risk that he may back out of even the limited deal, which China and the US said they want to sign in the coming weeks.

Chinese policy makers concluded a key political gathering in Beijing on Thursday. In meetings ahead of that plenum some officials have relayed low expectations that future negotiations could result in anything meaningful -- unless the US is willing to roll back more of the tariffs. “In some cases, they have urged American visitors to carry that very message back to Washington,” the officials said.

Chilean President Sebastian Pinera threw up another hurdle when he announced Wednesday that the country had cancelled the Asia-Pacific Economic Cooperation summit November 16-17 because of social unrest in the country.

US stocks were little changed and bond yields retreated on concern about a protracted trade war between the world’s two largest economies. Earlier, a report showed a gauge of the outlook for Chinas manufacturing sector dropped to the lowest level since February. On Wednesday, a government report in Washington showed US growth slowed to a 1.9 per cent annual rate, the weakest since the end of 2018.

In a tweet on Thursday, Trump said the search is ongoing for a new location for Xi and him to sign the deal, which he said would be about 60 per cent of total deal.

That first step, according to the Trump administration, is meant to lead to a more comprehensive agreement involving more substantial economic reforms than those contained in the proposed initial phase. But Chinese officials are skeptical, saying that would require the US to withdraw tariffs in place on some $360 billion in imports from China -- something many dont see Trump being ready to do.

Sources said the tariffs don’t all have to be removed immediately, but they must be part of the next stage. “China also wants Trump to cancel a new wave of import taxes due to take effect from December 15 on American consumer favourites such as smartphones and toys as part of the phase one deal,” they said.

Beijing is open and willing to continue talks after an initial phase, but both sides recognise that it will be very difficult to reach an agreement on the deep structural reforms the US is pushing for, said one Chinese official familiar with the talks.

China has stated for months that a final deal must include the removal of all punitive tariffs, and has balked at reforms in areas such as state-run enterprises that could jeopardize the Communist Party’s grip on power. Its politically unfeasible for Xi to accept any deal that would keep the punitive tariffs: Nationalists in the party have pressured him through state-run media editorials to avoid signing an unequal treaty reminiscent of those China signed with colonial powers.

Tariff Pressure

So far, US Trade Representative Robert Lighthizer and his team, have been adamant that the duties on $250 billion in Chinese goods -- imposed early in the trade war -- be maintained over the long term as a way to enforce any commitments China makes.

The questions over the future of negotiations reflect a change in US strategy. After ramping up tariffs and pressure on China over the summer and saying he would settle only for an all-encompassing agreement, Trump in early October shifted to the step-by-step approach.

The first phase, which negotiators are still trying to nail down, is expected to include a resumption of Chinese purchases of US farm goods and other products such as aircraft.

Its also expected to include Chinese commitments to protect American intellectual property and an agreement by both sides not to manipulate their currencies. In return, Trump agreed not to go ahead with an October 15 tariff increase and aides have raised the possibility of canceling the December 15 levies.

But missing from the deal, that is now taking shape are many of the deeper economic reforms, such as a change to the regime of government subsidies Chinese companies benefit from that the Trump administration and American businesses have been seeking, raising questions over whether the economic cost of Trump’s trade assault will have been worth it.

Trump has sought to preempt criticism that hes getting little from China by arguing that the tougher issues will be dealt with in future phases. Phase two will start negotiations almost immediately after weve concluded phase one, he told reporters this month.

White House spokesman Judd Deere said Thursday, after this story was first published, that the president wants real structural changes that yield actual, verifiable, and enforceable results that lead to fairer trade with China.

Modelling Global GDP Impact of Trade War

Yet the move to a phased approach reflects Chinas resistance to many US demands and a concession by the White House to abandon its stance that nothing is agreed until all the thorny issues are resolved.

Even if they do get a phase one, a phase two is going to be substantially more difficult because all the really difficult issues are being deferred, said Eswar Prasad, who once led the International Monetary Fund’s (IMF) China team and is now at Cornell University.

During recent conversations with senior Chinese policy makers, Prasad said, “The common theme they expressed was skepticism. They are quite pessimistic. They fear that any deal that they negotiate with Trump could blow up in their face.”

The differences were evident even as Trump announced the substantial phase one deal with China’s lead negotiator, Vice Premier Liu He, and promised a broader thaw in relations as part of what he dubbed a love-fest.

Behind closed doors though, the mood was not quite as fulsome. According to sources, both sides were still debating how to apportion issues between phases and what to announce just minutes before reporters were let in for the announcement.

Positive direction

Trump declared before the press that there could be as many as three phases to a deal while Liu declined to discuss details.

We very much agree that to get the China-US economic relationship right, its something that is good for China, for the United States, and for the whole world and we are making a lot of progress toward a positive direction, Liu told reporters.

China’s Ministry of Commerce did not immediately respond to a fax seeking comment on the trade talks. But a former official says there could still be a long road ahead.

If the US demands are too much, such as insisting on the so-called structural changes that will alter Chinas economic model, then the complete deal cant be finished during Trump’s first term, said Zhou Xiaoming, a former Ministry of Commerce official. Other than that, China wants to have a deal as quickly as possible though a complete deal would include the removal of all punitive tariffs, he said.

“That’s far from what the Trump administration is prepared to offer. It’s not obvious that there is a real meeting of minds,” Prasad said.

Published on November 01, 2019

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