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U.S.-China Trade Deal Inches Ahead, Shadowed by Risk of Failure

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After almost two years of negotiations and escalations — and plenty of false dawns — trade negotiators from the U.S. and China are making progress in key areas even as concerns grow that efforts to nail down the first phase of a broader deal are stalling. However, it is anybody’s guess where this will head or how long it will take and the situation in Hong Kong is not helping.

Some people close to the talks describe them as being in a sensitive, make-or-break stage and caution that what President Donald Trump proclaimed as a done deal a month ago, sending U.S. stocks soaring to records, could still easily fall apart.

Hanging over the discussion is the deteriorating situation in Hong Kong — and a push by the U.S. Congress to send a bill to Trump for his signature that would require annual reviews of the territory’s special status and sanction officials deemed responsible for undermining the city’s autonomy. The House plans to vote on the measure Wednesday and China has threatened to retaliate.

That means less than a year from the 2020 presidential elections, Trump’s push to rewire the world’s most important economic relationship is oddly simultaneously close to yielding its first narrow victory and teetering on the edge of a collapse.

The latter outcome would trigger another round of tit-for-tat tariffs, the potential consequences of which will be on display Wednesday when the president visits an Apple Inc. factory in Texas. Apple has said producing its high-end Mac Pro laptop at the plant was only possible because of the exemption of key components from existing tariffs.

But if efforts to reach a “phase one” deal fail before Dec. 15, Trump has threatened to impose 15% tariffs on some $160 billion in imports from China including smartphones and laptop computers — two key Apple products. Stocks gyrated Wednesday on conflicting reports about the timing of any pact.

People close to the discussions insist negotiators so far have been able to avoid having growing areas of friction, like Hong Kong, infect the talks. The looming December tariffs, meanwhile, have replaced a canceled Nov. 16-17 summit in Chile at which Trump and China’s Xi Jinping were expected to sign a deal as a hard deadline.

During a video conference between Robert Lighthizer, Trump’s trade representative, Treasury Secretary Steven Mnuchin and China’s lead negotiator, Vice Premier Liu He, the two sides agreed to accelerate efforts to reach a deal to avoid the new tariffs taking effect, according to people briefed on the discussions.

During that call and others in recent days, officials from the two sides have made some progress on issues ranging from the parameters of a Chinese crackdown on intellectual-property theft to how a deal might be enforced, according to officials and other people briefed on the discussions.

They have struggled, however, to find agreement over the details of other commitments that Trump wants to be part of an initial agreement including the schedule of agricultural purchases he is demanding and exactly which tariffs to remove, those people say.

Trump has sought to maintain pressure on China in public. “China’s going to have to make a deal that I like, if they don’t that’s it,” he told reporters on Tuesday. “If we don’t make a deal with China, I’ll just raise the tariffs even higher.”

The Asian country’s media, meanwhile, has continued to take a tough line. “Few Chinese believe that China and the U.S. can reach a deal soon,” Hu Xijin, editor of the state-run Global Times tweeted on Wednesday. “China wants a deal but is prepared for the worst-case scenario, a prolonged trade war.”

One thing that has become increasingly less likely is a face-to-face meeting between Trump and Xi before the year’s end.

The Chinese Communist Party’s flagship newspaper, the People’s Daily, earlier this week described Xi’s recently concluded visit to Brazil as his “final foreign trip this year,” indicating there are no plans now to venture overseas for a signing ceremony in the closing weeks of 2019.

In response, officials on both sides have begun to discuss the possibility that ministers sign a deal instead of opting for a more logistically complicated ceremony involving the two leaders.

People close to the talks in China say Liu could be given the title “special envoy” to sign the deal, pointing to 2016 and the fact that then-Vice Premier Zhang Gaoli acted as Xi’s special envoy to sign the Paris Agreement on climate change on behalf of China.

But the priority before those details are worked out remains overcoming the final sticking points.

Farm Purchases
China’s reluctance to agree to the detailed commitments on agricultural purchases that Trump has said he wants to see double from pre-trade war levels to as much as $50 billion annually within a couple of years is based in part on the difficulty of reaching those heights. Chinese officials continue to insist any purchases would have be market-based and comply with World Trade Organization rules.

Officials in Beijing are continuing to push for all additional tariffs to be rolled back, and both sides indicated they would accept an enforcement mechanism that could see duties reimposed if differences can’t be resolved through negotiation, according to people briefed on the talks.

China is insisting that tariff moves have to be “reciprocal,” borrowing a key word from Trump’s trade lexicon.

How the deal would be enforced was one of the main sticking points when talks fell apart in May, and Beijing faulted the Trump administration for violating its sovereignty by forcing the country to change its laws and sign up to a one-way enforcement regime.

The negotiating teams are using their failed May proposal as a benchmark for how much a phase-one deal covers of the once-near agreement and how much tariffs will be removed as part of the initial deal.

Observers Skeptical
Those difficult issues are just one of the reasons some close observers of the talks remain skeptical that even the once-promising initial deal will surface.

Scott Kennedy, an expert on U.S.-China economic relations at the Center for Strategic and International Studies in Washington, said Trump’s escalation over the summer had been ill-conceived and signs of progress seemed more targeted at calming markets than resolving significant structural problems like China’s vast web of industrial subsidies.

“We’re far beyond, ‘The boy who cried wolf,’” Kennedy said. “Someone now could write a new story, ‘The leader who called ‘deal’.

Source: Bloomberg

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