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US-China Trade Talks Reach Critical Phase

FILE - U.S. and Chinese delegations meet in the Indian Treaty Room in the Eisenhower Executive Office Building on the White House complex, during continuing meetings on the U.S.-China bilateral trade relationship, Feb. 21, 2019, in Washington.

Mandarin service reporters Mo Yu and Lin Feng also contributed to this report.

Deal or no deal? Trade talks between the U.S. and China -- the world’s two largest economies -- have reached a critical phase.

Yet mixed signals coming from the White House and Beijing are causing analysts to question whether President Donald Trump and his Chinese counterpart, President Xi Jinping, will be able to finalize an agreement to end a costly trade war by early April as originally predicted.

White House press secretary Sarah Sanders told reporters on Monday that the two sides haven’t set a date yet for a signing summit between Trump and Xi to end the dueling tariffs that are hurting both countries’ economies. In an appearance on Fox News over the weekend, White House economic adviser Larry Kudlow said that negotiations are "making great progress."

However, last week the Chinese side reportedly canceled tentative plans to have Xi travel to President Trump’s Florida retreat, Mar-a-Lago, at the beginning of April for a signing ceremony, causing some analysts to question whether an agreement is truly imminent. Trump has repeatedly touted progress in the talks, but warned that he would pull out of the negotiations if he concluded he wasn’t getting a good enough deal.

"He’s going to make a deal if it’s in the best interest of America," Sanders said. "If he doesn’t feel like it’s a good deal, it’s not worth just signing a piece of paper."

Any deal negotiators reach is likely to address U.S. concerns with what it sees as unfair trade practices by the Chinese government to advantage its domestic industries over foreign competitors. It is also expected to include provisions that would reduce the trade deficit between the two countries, most likely through Chinese government-directed purchases of U.S. commodities, like soybeans and liquefied natural gas.

Hanging in the balance is a crucial relationship that accounted for $710 billion in two-way trade in 2017, according to the Office of the U.S. Trade Representative. That trade also supported about 911,000 U.S. jobs in 2015, the latest year for which that data is available.

High political stakes

But the political stakes for the two leaders are nearly as great as the economic ones. And both Trump and Xi must be able to extract major concessions from the other in order for the negotiations to be successfully concluded, analysts say.

"If an agreement is finally reached between China and the United States in the trade war, it will certainly be a win-win outcome," said Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation in Beijing. "If one side wins and the other side loses, an agreement cannot be reached."

Trump is coming off a failed nuclear summit with North Korean dictator Kim Jong Un last month, undercutting his claims of deal-making mastery.

The White House has been praising Trump’s decision to use tariffs on a wide array of Chinese goods to drag Beijing to the negotiating table. However, despite the president’s claims to the contrary, economists have found that the full burden of the tariffs is actually being passed on to U.S. manufacturers and consumers in the form of higher prices, while U.S. farmers are being punished by retaliatory sanctions levied by China.

In addition, last week the administration received two doses of bad economic news. On Friday, the Labor Department reported surprisingly low job growth in February. That followed the announcement by the Commerce Department on Tuesday that the U.S. trade deficit, excluding services, hit its highest level in history at $891 billion in 2018. (Including services, on which the U.S. runs a surplus, the total trade deficit was $621 billion, a 12.5 percent increase over the previous year.)

The factors driving the increased trade deficit are many and varied, and often have little or no connection to the administration’s trade policies. But for President Trump, who promised to quickly eliminate the trade deficit, those numbers pose a real political problem.

While President Xi currently faces no major challenge to his leadership of China -- he is effectively president for life -- a slowing economy and a stock market battered by fallout from the trade dispute make reaching a deal at least as much of a priority for him as it is for Trump.

Striking an agreement with Trump on a large package of Chinese purchases of American agriculture and manufacturing products will be "the easiest thing" for the Chinese to do, "because it doesn’t force them to make any internal change in their economy," said William Reinsch of the Center for Strategic and International Studies.

Trump’s success or failure in the talks will be largely measured by the number of economic and structural changes he extracts from the Chinese government to provide the U.S. with more of a competitive edge in the future – but that won’t be easy.

"So the big number today may cause the president to focus more on Chinese purchases and less on the harder things we’re asking them to do," added Reinsch, who is the Scholl Chair in International Business at CSIS.

No half-baked deal

However, not all experts on trade with China see this as a likely outcome. Erin Ennis, executive vice president of the US-China Business Council, said that neither side has much incentive to accept a half-baked deal.

"Neither side seems interested in compromising for the sake of compromise," Ennis said. "In many ways, the concern that has been expressed here in the United States about the president settling for a weak deal are messages that are actually being voiced in China as well about concern that President Xi might settle for a weak deal. Neither side has any sort of motivation to agree to something that doesn’t have at least something that’s in its interest."

The U.S. is the destination for 19 percent of all Chinese exports, according to World Bank data. This means that the near-term health of the Chinese economy is dependent on the ability of its companies to sell to the U.S. market. On Thursday, it was announced that China’s exports in February were 21 percent lower than they had been the previous year, marking the third straight month of decline.

The trade battle with China began last summer when, in a series of back and forth moves, the U.S. imposed tariffs on Chinese imports and Beijing retaliated with levies of its own.

By December, when the two countries agreed to temporarily halt the escalation, about $200 billion in Chinese imports faced 10 percent tariffs in the U.S., and another $50 billion faced a 25 percent charge. In China, $50 billion worth of goods imported from the U.S. faced a 25 percent tariff, and another $60 billion in imports faced levies of between 5 and 10 percent.

Tariffs were scheduled to ratchet up yet again on March 1, but Trump announced a delay in late February, saying "substantial progress" had been made in talks led by U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.

The sticking points

The U.S. and Chinese negotiating teams are treading familiar ground as they work toward a deal. Many of the complaints that the Trump administration is seeking to address have been raised by former U.S. presidents and businesses for years.

For example, China has a long and well-documented history of ignoring the intellectual property rights of foreign companies and individuals. American businesses have repeatedly complained about the government-supported theft of trade secrets by Chinese firms. Any deal that fails to bind China to greater respect for intellectual property rights would be largely viewed as a failure for the Trump administration.

Another issue, also related to intellectual property rights, is what’s become known as "forced technology transfer." For many foreign firms, handing over data on proprietary technologies and innovations has become a de facto requirement for operating within the Chinese market. U.S. negotiators are seeking an end to that practice.

Chinese lawmakers are reportedly drafting legislation that would address many of the intellectual property concerns that trouble foreign firms. U.S. negotiators, however, will want to see signs of a commitment to enforcement beyond the simple passage of a new law.

Chinese government's economic controls

One of the widest gaps between the U.S. and China is on the question of government involvement in the economy. While the U.S. government is generally expected to take a laissez-faire approach to businesses operating within the law and applicable regulations, the Chinese government plays a far more active role.

The government owns many businesses outright, and offers industrial subsidies to others. While the attitude in the U.S. is that these practices create an unfair playing field, Beijing defends them as necessary to its plan to drag the massive Chinese economy into the modern era by developing high-value industries quickly.

The problem, according to Jeffrey Schott, a senior fellow with the Peterson Institute for International Economics, is that Beijing and Washington are operating on very different timelines.

In Beijing, he said, "They are trying to maintain substantial rate of growth of the economy to facilitate the adjustment needed in their labor force, but they are trying to do it in a way that does not undercut the authority of the Communist Party."

That places them in conflict with the priorities of the U.S., which would like to see China take quick and decisive action to cut state intervention in the economy.

"It can’t happen in the time period that is desired by U.S. politicians, because they -- and especially the president -- want immediate gratification," Schott said. "It’s in the interest of the Chinese officials to have an incremental transition ... but they are willing to look at a longer horizon than U.S. political leaders can do, because U.S. leaders have to answer to the electorate and Chinese leaders don’t."

U.S. negotiators will also be looking for the Chinese to roll back restrictive regulations that make it difficult for U.S. businesses to operate in China, particularly rules that limit the ownership stake that a non-Chinese individual or corporation can hold in ventures doing business there. Also in play are rules that make it extremely difficult for foreign firms to gain regulatory approval for products in certain industries, such as biotechnology.

The Chinese legislature is expected to put forward proposed legislation that would accomplish many of these goals in the near future.

Guarantees against currency manipulation

Given China’s history of manipulating the value of its currency, the renminbi, U.S. negotiators will also be seeking guarantees that Beijing won’t artificially lower its value against the dollar in order to make exported Chinese products relatively less expensive than similar products made by foreign competitors.

Also essential to the U.S. will be some sort of enforcement mechanism that guarantees that China actually takes steps it commits to in negotiations. This is a trickier proposition than it might seem, because it would likely require the Chinese government to allow a degree of foreign monitoring of its interactions with domestic industries -- a level of transparency rarely seen in Beijing’s relations with the outside world.

Finally, any deal is also expected to include a provision under which the Chinese government agrees to direct spending toward U.S. commodities, like soybeans or liquefied natural gas (LNG), in an effort to reduce the trade deficit between the two countries.

Economically speaking, such an arrangement would likely make little real difference to the U.S. economy in the near term, except insofar as suppliers who had lost business due to tariffs would be getting it back. The soybean and LNG China purchases won’t represent new U.S. production, but rather a change only in who does the buying.

Given how much President Trump has invested in making the trade deficit with China a political symbol, however, it is considered unlikely that he would agree to a deal that doesn’t let him claim a win on that particular issue.

But without the more important structural changes in China’s economy and trade practices, said Derek Scissors, a resident scholar with the American Enterprise Institute, "We will be right back in a situation where you know we have been in for some time."​