China and the World, Talking Point

So no big deal

The China-US trade row got a lot messier over the past week


Neither can afford to look weak

The toughest ‘trade talks’ Beijing had previously held with Washington involved China’s accession to the World Trade Organisation (WTO). The negotiations dragged on for 15 years. That was long enough to “turn black hair white” as former Chinese Premier Zhu Rongji adroitly put it.

The two sides were very close to a deal in April 1999 when Zhu visited Washington and readied to sign off on a raft of concessions. These included reforms that would open up China’s telecom and banking sectors to American investment as well as exposing Chinese farmers to foreign competition.

Yet US President Bill Clinton vetoed the deal at the eleventh hour. His administration then published the list of concessions Zhu’s team had proposed, believing the disclosure would prevent Beijing from backtracking from the proposal and also bring forward compromises on other American demands.

Back in China the concessions were deemed breathtaking enough for hawks to call Zhu a traitor. Some called not only for his job but also his head (especially amid anti-American sentiment stoked by the US-led NATO bombing of the building housing the Chinese embassy in Belgrade the same year). But pressure was also building up in Washington as business executives lobbied Clinton to wrap up the accord – with US companies excited about the potential of the China market. The two countries finally clinched a deal in November 1999.

Two decades on, the landmark agreement is now viewed in Beijing and Washington very differently. Most in China believe Zhu managed to set the stage for China to blossom into the world’s largest exporter and its second biggest economy; while the Americans, or at least those who support current leader Donald Trump’s trade policy, have lamented that Clinton made a very bad deal, one so bad that Trump’s administration has sought to eradicate it by means of a trade war. The outcome has been rounds of heated talks in both capitals in an attempt to seal a deal that heads off the threat of US tariffs being imposed on all Chinese goods. But the year-long negotiations appeared to have ground to a halt last week with both sides pointing the finger of blame at the other.

How do things stand now?

Hopes were high that a breakthrough was imminent just before the Chinese delegation set off for Washington last week. A pact was so near that the Wall Street Journal reported that both governments had discussed the logistics of a signing ceremony (a key aspect: whether it would be in Washington or at one of Trump’s golf resorts).

But similar to the way events unfolded 20 years ago in the WTO negotiation, the dynamic shifted dramatically at the eleventh hour. The rift went public when Trump tweeted on May 5 that a 10% tariff on $200 billion of Chinese products was set to be increased to 25% if American demands were not met, and another 25% tariff on a further $325 billion in Chinese exports could shortly follow.

The Americans upped the stakes because, according to US Treasury Secretary Steven Mnuchin, the Chinese sent through an updated draft of the agreement that had the “potential to change the deal very dramatically”.

Following Trump’s tariff threat, the Wall Street Journal reported that Chinese officials contemplated cancelling their scheduled Washington trip. However, they decided to go so as to “at least avoid a rift that could be difficult to repair”. Against such a backdrop, the 11th round of meetings between Chinese and American negotiators ended last Friday with no deal and no agreed date set for further talks.

China has since retaliated to the tariff hikes by announcing its own punitive measures. As of next month tariffs on more than 5,000 US export items (worth about $60 billion) will be raised to as much as 25% – matching the Trump figure.

To calm startled investors, Mnuchin told CNBC on Monday that negotiations are still on and on Wednesday said he will travel to Beijing “in the near future”. Trump also announced that he will meet face-to-face with Chinese President Xi Jinping at the G20 summit in Japan next month. Predicting the meeting to be “very fruitful”, Trump reiterated his belief that Washington is in a much stronger position.

“There will be nobody left in China to do business with. Very bad for China, very good for USA! But China has taken so advantage of the US for so many years, that they are way ahead (Our Presidents did not do the job),” he wrote in one tweet.

So basically things are back to where they stood before the last G20 summit on December 1 – where Xi and Trump met and reached a three-month truce (which was later extended) for their negotiators to sort out their differences. Observers generally don’t expect any breakthrough before the two presidents see each other again to reboot the trade talks.

Is Beijing backing down or backing out?

In November Trump told reporters that Chinese officials had given his administration a list of about 140 concessions that Beijing was willing to make. Describing it as a “pretty good list”, Trump then added that it was not enough as it lacked “four or five large items” that needed to be resolved before a deal could be clinched.

His administration didn’t follow Clinton’s example this time by making public Beijing’s hand. What has been aired to the American press instead are Washington’s own demands.

In the most telling revelation, the New York Times published a list of trade demands from ‘Team Trump’ on the eve of the Chinese delegation’s arrival last week.

Among what the newspaper termed the “unexpectedly sweeping” demands, was a proviso that China “halt all subsidies to advanced manufacturing industries in its so-called Made In China 2025 programme” (involving 10 sectors that range from electric cars to semiconductors). Additionally there was a mandate that China “must accept United States restrictions on Chinese investments in sensitive technologies without retaliating”.

“The list reads like the terms for a surrender rather than a basis for negotiation,” Eswar Prasad, an economics professor at Cornell University, told the New York Times.

The problem is that China’s current boss Xi Jinping is no Zhu Rongji. Zhu knew China’s economy needed to change and the WTO’s trade rules would actually assist his coalition of economic reformers to liberalise industries dominated by bloated and inefficient state-owned enterprises. By contrast Xi is the most powerful Chinese political figure since Mao Zedong and has an entirely different agenda and worldview to Zhu. His exact stance on market reforms has (maybe deliberately) never been entirely clear, but one thing is eminently transparent: as the leader who pledged to lead China into a “new era” encompassing the “great renaissance of the Chinese nation”, Xi cannot afford to appear weak.

His “China Dream”, as we have reported extensively, is the policy antithesis of the so-called “hundred years of national humiliation” – a reference to the century of quasi-colonialism imposed on the Chinese by foreign powers and the “unequal treaties” forced on the country (beginning with Britain’s 1842 victory in the First Opium War and the Treaty of Nanjing).

Citing senior diplomatic sources, Nikkei Asian Review reported that the latest China-US trade talks broke down after the Chinese leadership deemed the draft of the pending agreement “tantamount to an unequal treaty” (after reading the Chinese translation of the original English language document). When all the sections considered “unequal” were deleted or revised, the original 150-page draft – compiled through five months of negotiations – was reduced to 105 pages, whereupon it was returned to the desk of the American negotiators, according to the source. (The timing was especially sensitive for Beijing too: circulation of the draft coincided with the centenary of the May 4th Movement, an event that commemorates a mass protest against an earlier Chinese government’s humiliation at the hands of foreign powers over an ‘unequal treaty’; for more on this see WiC450.)

Throughout the negotiations, there have been complaints on the US side that China was reneging on previously agreed terms. “The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding,” one American official involved in the discussions told the Wall Street Journal, suggesting a change in American tactics. “You can be nice to someone, but sometimes you need to say ‘stop screwing me’. ”

What are the reactions from China so far?

The country’s Party-controlled media outlets were largely silent prior to the meeting last December between Xi and Trump. But this time round they have been firing on all cylinders.

The People’s Daily, for one, declared: “Talk – Fine! Fight – We’ll be there! Bully us? Delusion!” The rallying cry was then turned into an image posted on its weibo account.

The state broadcaster CCTV also told viewers to give their support to what it called “the people’s war” and stressed that China had seen it all after “5,000 years of winds and rains”. Nor have the official mouthpieces held back from fanning nationalistic sentiment this time. For instance, Xinhua reminded its readers of the 20th anniversary this month of the (US-led) NATO bombing of the Chinese embassy in Belgrade. “No matter what is going to happen, we have always insisted on strengthening our economy, our military and our national identity. We did that 20 years ago and can you tell us if our decision was correct?” Xinhua wrote. “If you want to talk, let’s talk; if you insist on a fight, let’s fight.”

The Chinese government has also sought to shift the blame for the breakdown to the US. In what the Financial Times called Beijing’s “first detailed explanation of the failure of the talks”, China’s foreign ministry on Tuesday accused Washington of seeking “a sudden increase in the volume of goods Beijing was willing to buy from the US as part of an agreement, violating terms struck in December”. The ministry’s spokesperson noted: “The hat that violates promises is absolutely not on the Chinese head.”

How is the trade war likely to shape up?

In November 1999 American officials spent a week in Beijing drawing up the final WTO entry agreement. The US negotiators booked air tickets home and walked out four times – only to cancel their flights and return to the bargaining table. This precedent implies that any China-US trade talk is prone to last-minute brinkmanship.

Over the past month Chinese media outlets have started to more frequently mention a tactic known in the country as “fight fight; talk talk”. Ever since taking power in 1949 the Party has used this approach in dealing with a host of foreign policy questions. The idea is that you keep on negotiating and buying time even though you have no interest in a compromise solution.

“The war to resist US aggression and aid Korea [aka the Korean War] took three years but actually two years were spent ‘fighting and talking [with the Americans] at the same time’,” wrote.

China might be happy to see the trade tensions drag on – without either a major breakthrough or bust-up. But Trump the dealmaker seems to be fully aware of the approach. “I think that China felt they were being beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky and have a Democrat win – in which case they would continue to rip-off the USA for $500 Billion a year….” he tweeted this week.

Even if China could clinch a deal with the US after Xi’s meeting with Trump next month, CCTV has suggested “fighting while talking” could become the “new normal” for China-US relations.

After all, running in parallel with the trade row is the ongoing tech war, where both countries are seeking dominance in areas like artificial intelligence. No matter who wins the White House in 2020, they will be dealing with a Xi administration trying to surpass America in these key technologies of the future.

Indeed, the ongoing attempts to contain Huawei are an early skirmish in what promises to be a longer-running conflict between an older superpower and a newer one.

And that first battle grinds on: Trump delivered another blow on Wednesday when his commerce department put Huawei on a ‘black list’ which will effectively bar the Chinese telecoms firm from buying key parts and components from American suppliers.

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