U.S./China Trade Update: Next Talks in Beijing

Posted on 05/11/2019 2:27 PM

China lists major differences with U.S. | Will Trump lift all tariffs as part of final offer?


Word is awaited on how China will react to the Trump administration's increasing tariffs and threats on still more on around $300 billion of Chinese products. Officials from both countries talked about recent events, including Thursday-Friday talks and what is ahead for a further meeting in Beijing and what could get both sides to a final accord. The following are updates of pending key issues, with further developments in Monday's Pro Farmer Policy Updates.

 

U.S./China trade policy update:

  • Trump's Friday tweet helped equities. U.S. equities mostly rebounded Friday after President Donald Trump tweeted that talks between U.S. and Chinese officials had been “candid and constructive.” Treasury Secretary Steven Mnuchin told CNBC the most recent trade talks were “constructive.” Trump also said his relationship with Chinese President Xi Jinping “remains a very strong one and conversations into the future will continue.” Trump also said he expected to talk to Xi, but no talks have yet been scheduled.
  • China's chief negotiator outlines three major differences between China and U.S. Chinese Vice Premier Liu He outlined what he said were the three major differences between both sides: Beijing required a complete removal of tariffs, a realistic scale of Chinese purchases of American products and a deal that would not undermine China’s sovereignty and dignity. The “realistic scale” of Chinese purchases of U.S. products will no doubt get the attention of would-be U.S commodity bulls and other U.S. ag sector stakeholders who have been conditioned on getting a very high level of Chinese commitments regarding future purchases of a host of U.S. farm products; ditto on energy. China watchers say Beijing’s red lines are its industrial policies and underlying model of development.
  • What did President Trump mean when he tweeted that tariffs “may or may not be removed,” depending on future negotiations? A China watcher informs that could be key. Reason: China could offer to bring back some or all of the key provisions they recently pulled back from in prior negotiations in a seven-chapter, 150-page report if the U.S. were to agree to lift all tariffs immediately upon a confirmed agreement. Or they could provide more assurances that most U.S. goals would have verifiable enforcement. That would give both Trump and Xi a win. Another murky issue ahead: the U.S. wants Beijing to agree not to retaliate if the U.S. judged that Beijing did not meet some of its obligations under any trade deal. If Trump were to lift all tariffs on China as part of any final deal, China watchers say this would go a long way toward the “balanced approach” Chinese negotiators say is a must to reach final agreement.
  • Bottom line on recent talks: impasse, not a breakdown or walkaway. “The negotiations have not broken down,” Liu said in a video clip published on Xinhua’s website. “Quite the opposite. I think they are normal. Small setbacks are inevitable in bilateral negotiations. Looking ahead, we are cautiously optimistic about the future.”
  • Both countries noted there will be additional talks ahead. Reports note that U.S. officials told China’s Liu that China has until June 1 to get to a final accord, with a signing ceremony still hopeful for Trump and Xi at a later date.
  • Trump and Xi are next scheduled to meet at the end of June at the Group of 20 gathering in Osaka, Japan, giving negotiators a target to work toward. While traders and others are anxious for this tit-for-tat trade war to end, trade officials are on their own schedule, not traders or stakeholders feeling the impacts. Evidence: Trump on Friday said the U.S. will continue to negotiate but there is “absolutely no need to rush.” Meanwhile, China's Liu said, “We need to take it bit by bit. It’s like running a marathon. It gets harder as you reach the final stages. At that moment, you need to hold on to get past the dark and reach the dawn. We just hope that there can be understanding and support on all sides.”
  • Next negotiations in Beijing “in the future.” Liu on Friday said the two sides have agreed to meet in Beijing in the future, but he provided no specific date.
  • Liu: China did not backtrack. Liu made a very telling remark when he said the two countries now held different views on what had actually been agreed in prior talks. In remarks reported by the Hong Kong news site Phoenix New Media Limited, Liu did not detail what caused the recent negotiations to founder. He disagreed that the Chinese side backtracked, saying in any negotiation changes are natural before a final agreement is reached. Sources say Liu was limited during last week's talks regarding what he could offer, which meant that Xi and more hardliners in China had taken over the last steps of any accord with the U.S. But U.S. negotiators made it clear that the Chinese did walk back significant concessions on intellectual property theft, subsidies and forced technology transfers. China reportedly is willing to boost intellectual property protection, but via regulatory changes like directives issued by the State Council, the government’s top executive body. But U.S. officials say prior directives on subsidies for high tech companies did not result in big changes in Chinese behavior. Existing complications, most believe, include Chinese hawks who did not like the tentative agreement the two countries were working on, with around 90% of the talks “completed.” U.S. Trade Representative Bob Lighthizer on May 6 told reporters, “My own view is that these were serious, real commitments that were enforceable and that some people in China found difficult and objected to.” Liu said, “We are very clear that we cannot make concessions on matters of principle. We hope our U.S. colleagues understand this.”
  • Latest tariff situation: The U.S. as expected raised punitive tariffs to 25%, from 10%, for $200 billion in goods leaving China on Friday, May 10, and thereafter. President Trump also ordered the U.S. Trade Representative staff to begin the paperwork to impose levies on the around $300 billion worth of everything else China sells to the U.S. (a timeline that will take at least four weeks). Meanwhile, few noticed another Friday development: Just hours before Liu arrived in Washington for the trade talks, the U.S. Federal Communications Commission rejected China Mobile’s application to provide interconnection services for phone calls between the U.S. and other countries.

    Trade war impacts
  • Next key issue: How will China react to increased U.S. tariffs and threats for more. China has already surprised some by not immediately announcing a countermeasure on Friday after increased U.S. tariffs went into effect, and news that Trump ordered paperwork on around $300 billion more in increased tariffs ahead. China's go-slow approach to a countermeasure signals to some that discussions are taking place at the highest level in Beijing. For example, raising existing tariffs or imposing new ones could hit products China’s economy needs, especially semiconductors, pork, oil and passenger jets.
  • China's economy: China’s Liu told Chinese reporters before leaving Washington on Friday that the domestic economy is in better shape than last year, with sufficient policy tools and business confidence to withstand pressure and “maintain smooth, healthy development.” Liu talked up the resilience of China’s economy, citing rising industrial competitiveness and strong domestic consumption. “China firmly opposes the trade war but is fully prepared for it and will deal with the matter rationally,” he said.
  • Seeking alternative markets goes both ways and is a very import topic now and in future. U.S. ag stakeholders have frequently noted their concerns that China has and will continue to see alternative farm product suppliers from countries outside the U.S., as China increases their imports from Brazil, Australia and other countries. But the same is true for U.S. manufacturers and other businesses that have already expanded their importing countries beyond China and will likely seek to do more ahead, with or without the end of tariffs between the U.S. Countries seeing increased business include Vietnam, Cambodia, Thailand, Bangladesh, Mexico and others. And non-farm product imports easily surpass agricultural imports. Another angle on this topic is that even if there is an agreement, if you believe China will always cheat, then the U.S. would resurrect tariffs and planned efforts to find alternative import sources would make a lot of sense, now and in the future. And for those who think there will not be a U.S./China trade accord, the alternative sourcing is just as valid.
  • Biggest wild card: If the U.S. or China miscalculates and goes too far.
  • The Federal Reserve could react to the additional tariffs if they hurt consumer spending, Atlanta Fed President Raphael Bostic said on Friday. So far, consumers haven’t felt the full effect of tariffs, which seem to have been absorbed mosty by businesses and farmers and ranchers. But if households pull back because of higher prices, he said, the central bank could consider interest-rate cuts. He also said the Fed could raise interest rates if the tariffs cause inflation. That raises the question: If inflation is likely if the full-tariff war happens, and if the economy slows down and inflation comes, what would the Fed do? Most say: nothing.
  • A White House contingency plan surfaces via potential additional aid for the U.S. ag sector. Trump made that clear via Friday tweets, and USDA Secretary Sonny Perdue in Japan on Friday reversed his prior “no more aid” when he tweeted: "While China may backtrack, @POTUS is steadfast in his support for U.S. farmers and directed @USDA to work on a plan quickly.” While financial aid cannot offset lost market share, Trump knows many farmers hail from states he won in 2016 and needs again in his 2020 re-election drive. Trump's suggestion that the U.S would resume paying farmers for lost exports to help insulate them from the trade battle with China suggested to some that the U.S. is ready for a prolonged fight.
  • China could also be preparing for more lengthy talks than most expect. There are signs that Beijing could be preparing for the long haul, with Communist Party mouthpiece People’s Daily saying on Saturday that it took 15 years of marathon talks before China’s joined the World Trade Organization in 2001. It said progress had so far been made in intellectual property protection, market access and the trade imbalance, but China’s core concerns remained unsolved.
  • Bottom line: It is a positive that both countries want to keep talking. The last round of any “sporting event” frequently seems to take a lot longer, especially when there is a lot on the line. And just as sports have “time outs,” the next few weeks will allow both countries breathing room to strategize their bottom-line offers for the final round or rounds. But in this sport, the referees to help decide winners or losers will come after the talks either succeed or fail. Meanwhile, traders and others who think there will be no final U.S./China trade agreement are currently noting an opinion item on CNBC written by Atlantic Council CEO Fred Kempe — Link.

 

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