1.Trade talks stagger on, but deal remains elusive
It has been another busy month for China-US trade negotiations. The two sides are reported to have been in near daily contact as they seek to iron out differences and construct a comprehensive, lasting deal.
As readers will know:
- The US delegation is in Beijing for the latest round of in-person talks right now.
- Liu He will then lead the Chinese delegationback to Washington next week.
A week can feel like a year in the trade war saga. So it’s helpful to step back and remember what has happened over the past five weeks.
- The lead negotiators for both sides – Vice Premier Liu He from China and US Trade Representative Robert Lighthizer from the US – met in Washington, DC from Feb 21-24. The talks were originally scheduled to last only two days, but were then extended to four days as the two sides sought to make further progress.
- Sufficient progress was made such that the original March 1 deadline for concluding a deal was suspended indefinitely, and the US did not raise tariffs from 10% to 25% on USD 200 billion of Chinese goods as originally threatened.
- There had been no more face-to-face negotiations since February 24, until yesterday – in large part because China’s Two Sessions took place from March 3-15. However, the two sides have continued to negotiate, and Liu and Lighthizer spoke by phone on the morning of March 12, Beijing time.
2.Outlines of a deal emerge…
As negotiations progress, the outlines of a deal are becoming clearer. Reuters has reported that the two sides are attempting to agree to MOUs in six different areas:
- Forced technology transfer and cyber theft
- Intellectual property rights
- Non-tariff barriers to trade
Details of the negotiations remain confidential, but key developments that have become public include:
- China revised an offer on intellectual property protection.
- China has offered to increase purchases of American goods by USD 1.2 trillion over the next six years.
- China has offered to grant further market access in some sectors.
- China has agreed that it will not engage in competitive devaluation.
In addition, China’s new Foreign Investment Law, which was passed on March 15, was amended at the last minute to address US concerns over intellectual property.
Reuters: Exclusive: U.S., China sketch outlines of deal to end trade war – sources
3….but sticking points remain
The key sticking point to concluding a deal centers around issues of enforcement:
- The US wants to retain the ability to reinstitute tariffs if China fails to meet its obligations under a potential deal. However, Beijing sees such a unilateral enforcement mechanism as fundamentally unfair.
- Chinese officials are also insistent that any deal result in the removal of all tariffs imposed by the US since the trade war began in 2018. However, US negotiators would prefer to keep the current tariffs in place until Beijing has proven that it is in compliance.
Most importantly, US President Donald Trump now appears to favor keeping the tariffs in place, saying on March 20 that, “They’ve [i.e. China] had a lot of problems living by certain deals.”
4.No Xi-Trump meeting in sight
As talks progressed throughout February, speculation increased that Chinese President Xi Jinping might soon meet with Trump to finalize a potential deal.
Indeed, a possible meeting in the US at the end of March was mooted by the US, and appeared to be in the worksas of late February.
But Xi clearly wants to make sure that any meeting – especially on involving travel to the US – is certain to ink a deal.
- Trump’s failure to come to an agreement with North Korean leader Kim Jong-un at their February 27-28 summit in Hanoi is thought to have spooked Beijing.
- It would be a humiliation for Xi to travel halfway across the world, only to be rebuffed by Trump at the last minute.
- This means that China will now be insistent that a deal is already hammered out before Xi and Trump meet.
Meanwhile, Trump, who seemed increasingly eager for a deal earlier in the year, has appeared more ambivalent of late, saying on March 13 that he is in “no rush” to get a deal done with China.
It now looks unlikely that the two leaders will meet before June.
Bloomberg: Fear of Trump Walking on Xi Haunts China as Trade Talks Near End
5.The Trivium Take
Feel free to use this at cocktail parties to impress your friends.
Get smart: The Chinese side will not sign any deal in which they look to be subservient to the US. Top of mind for all Chinese leaders – and citizens – are the series of “unequal treaties” that China was forced to sign with colonial powers in the 19th century.
Given that a key plank of CCP legitimacy rests on its having “liberated” China from its semi-colonial past, no Chinese leader – even one as powerful as Xi Jinping – can be seen as bowing to foreign pressure.
The bottom line: A deal, which seemed so close a month ago, now seems much more unlikely.
With the perpetual caveat: As recent months show, developments on the China-US front can change quickly, making firm predictions of what will happen difficult – and foolish.
EU’s evolving approach
6.EU steps into the game
Not to be outdone by the US, the EU is upping pressure on China as well.
On March 12, the European Commission released a position paper to the European Parliament, the European Council, and the Council of the European Union titled “EU-China – A strategic outlook.”
- “China is, simultaneously, in different policy areas, a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”
The report complains about China’s “discriminatory” and “unpredictable” trade and investment practices and calls for a more balanced and reciprocal economic relationship.
To achieve this outcome, the paper urges the EU to:
- Push for WTO reform that would force China to get rid of subsidies
- Pass a proposed measure on procurement that would give the EU greater scope to negotiate reciprocal arrangements with China
- Enhance industrial policy so that EU firms can better compete with China’s SOEs, especially in the fields of artificial intelligence and batteries
The Chinese have attempted to play down any tensions. Foreign Minister Wang Yi visited the EU a week after the Commission released its paper, where he said:
- “Overall China and Europe relations are in good shape. There are far more areas where we agree than disagree.”
EU leaders discussed China at a summit on March 22 but failed to reach any formal conclusion on measures to deal with the country.
European Commission: EU-China – A strategic outlook
Reuters: Exclusive: Germany to create fund to foil foreign takeovers after China moves
EU’s evolving approach
7.Another HOT TAKE from Trivium
Again…for the weekend cocktail parties:
Get smart: There is a general trend in Europe – as well as in the US – towards “reciprocity” in economic relations with China. That means tightening restrictions on Chinese investment, while pushing for China to grant more access to foreign firms.
What to watch: A bilateral investment treaty currently under negotiation will reflect just how much the EU is willing to close, and just how much China is willing to open.
The bottom line: EU member states are far from unified in their views of China, with many southern member states – notably Portugal, Italy, and Greece – more well-disposed towards China. This is limiting the ability of the EU to take collective action against Chinese trade and investment practices.
China and the world
8.How China sees the world
The two-front fight with the US and EU on trade and investment are making China more determined to shape global rules.
The Government Work Report issued by Premier Li Keqiang on March 5 (see March 5 Tip Sheet) was explicit that China will be much more “proactive” in shaping global rules on trade:
- “China will be proactive about developing global partnerships, make full use of international platforms to enhance policy coordination, and expand converging interests with other countries.”
- “We will actively take part in reform of the WTO, firmly uphold the multilateral trading regime, play a positive role in the formulation of multilateral trade rules, and promote the establishment of a fair, reasonable, and transparent system of international trade rules.”
Get smart: China’s increased urgency reflects the fact that the US and EU – though employing vastly different approaches – are both trying to reform the global trading system to address perceived inequities related to China’s trade and investment practices.
To oversimplify, the US and EU want to force China to stop subsidizing domestic firms, and to allow more market access to foreign firms.
China, on the other hand, wants to preserve its right to take supportive measures by dint of its being a developing country.
And that’s where we are. See everybody in Q2 2019.