China Narrows Scope for Trade Deal With U.S. Ahead of Talks 

Source: BloombergQuint, October 7 2019 

By Shawn Donnan and Jenny Leonard

•  Chinese officials suggest a broad pact is off the table

•  U.S. president still insists any deal has to be “100% for us”

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Chinese officials are signaling they’re increasingly reluctant to agree to a broad trade deal pursued by President Donald Trump, ahead of negotiations this week that have raised hopes of a potential truce.

In meetings with U.S. visitors to Beijing in recent weeks, senior Chinese officials have indicated the range of topics they’re willing to discuss has narrowed considerably, according to people familiar with the discussions.

Vice Premier Liu He, who will lead the Chinese contingent in high-level talks that begin Thursday, told visiting dignitaries he would bring an offer to Washington that won’t include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints, one of the people said.

That offer would take one of the Trump administration’s core demands off the table. It’s emblematic of what analysts see as China’s strengthening hand as the Trump administration faces an impeachment crisis — which has recently drawn in China — and a slowing economy blamed by businesses on the disruption caused by the president’s trade wars.

People close to the Trump administration say the impeachment inquiry isn’t affecting trade talks with China. Any attempt to portray anything different is an attempt to weaken the U.S. hand at the negotiating table and, they argue, would be a miscalculation by the Chinese.

Read more: Trump Starts Impeachment Battle With Self-Inflicted Wounds

China’s foreign and commerce ministries in Beijing didn’t immediately respond to faxed requests for comments Monday. The Chinese government was expected to resume normal work Tuesday after a weeklong National Day holiday. 

U.S. stock futures fell, the yen edged up and the yuan slipped Monday after the report. Treasuries climbed. 

China — beset by its own escalating political crisis in Hong Kong — was drawn into the Washington furor after Trump last week called for a Chinese investigation into his Democratic rival Joe Biden and the former vice president’s son, moments after threatening another escalation in the trade spat.

Trump insisted on Friday that there’s no linkage. Yet the president’s latest comments suggest why Chinese leaders, already frustrated with what they see as the president’s impetuous conduct in the trade talks, may see room to take advantage.

China’s leadership “are interpreting the impeachment discussion as a weakening of Trump’s position, or certainly a distraction,” said Jude Blanchette, an expert on China’s elite politics at the Center for Strategic and International Studies.

“Their calculation is that Trump needs a win” and is willing to make compromises on substance as a result, he said.

‘Very Tough Deal’

Trump has said repeatedly he would entertain only an all-encompassing deal with China. People close to him say he remains firm in that view.

“We’ve had good moments with China. We’ve had bad moments with China. Right now, we’re in a very important stage in terms of possibly making a deal,” Trump told reporters on Friday. “But what we’re doing is we’re negotiating a very tough deal. If the deal is not going to be 100% for us, then we’re not going to make it.”

People familiar with the state of play say contacts that resumed over the summer after a breakdown in May have focused on how to resume negotiations and avoid further escalating the tariff wars that have unnerved financial markets.

Yet those talks have centered more on a timeline for implementing a limited deal rather than the substance of provisions where the two sides are at odds.

Discussions have focused on what U.S. administration officials view as a three-phase process, people familiar with the talks said. The sequence would involve large-scale purchases of U.S. agricultural and energy exports by China, implementing intellectual-property commitments China made in a draft agreement this year and, finally, a partial rollback of U.S. tariffs.

Bloomberg News reported in September that Trump’s team was discussing a potential limited agreement that includes those elements. That could clear the way for broader negotiations next year. Yet if China insists it will not engage in any discussions on industrial policy, those plans could be scuttled.

Fundamental Conflict

Hopes have always been limited that China would agree to give up its economic model in a trade deal with the U.S. A draft agreement reached in April before talks broke down included few substantive commitments from China to abandon the sort of industrial policies the Trump administration and others before it have complained about, according to people familiar with the talks.

That draft focused on securing more transparency from China on the extent of its subsidies. It included a commitment essentially to disavow Made in China 2025, Xi Jinping’s plan for Chinese domination of key 21st century industry such as artificial intelligence, robotics and electric vehicles, though it lacked a schedule for removing Chinese government subsidies that fuel the plan.

One reason for that is U.S. Trade Representative Robert Lighthizer’s focus on what he views as pragmatic demands for Chinese change, rather than shriller calls for a wholesale abandonment of Beijing’s industrial policy some hawks believe should be required of Beijing.

Lighthizer declined to comment on the state of negotiations through an aide. While he’s unlikely to accept any Chinese offer that doesn’t address industrial subsidies or policy, people close to him say he may be willing to embrace “sequencing” a deal and an “early-harvest” agreement as long as broader talks continue.

Still, people close to the administration say Trump’s trade chief probably would need some kind of commitment resembling a concession on subsidies and industrial policy to sell the agreement at home.

Japan-U.S. Deal

A possible model is last month’s U.S. deal with Japan on agriculture, digital trade and a limited number of industrial tariffs, which was presented as the first phase of a longer negotiation.

Any such deal would leave the fate of a major Trump administration demand hanging in the wind, putting the president on the defensive at home ahead of the 2020 election.

Addressing issues such as industrial subsidies “were the whole reason this case started in the first place,” said Rufus Yerxa, a former U.S. trade official who heads the National Foreign Trade Council, a lobby group that’s critical of Trump’s trade wars. “At a minimum the administration will have a lot of explaining to do if those drop off the table.”

David Dollar, a former U.S. Treasury representative in China now at the Brookings Institution, says China’s push to narrow the discussions is more evidence that both sides are hardening their positions on a broader deal.

The U.S. and China increasingly have reasons to strike a “mini deal” and avoid an escalation, he said. China needs agricultural products such as pork that Trump wants it to buy so he can placate American farmers. And even people in the White House concede there’s a U.S. incentive to hold off on further tariffs to avoid a worsening economic slowdown going into 2020.

“It’s a funny kind of negotiation where both sides’ so-called concession is something that they need,” Dollar said.

— With assistance by Dandan Li

(Updates with requests for comment and market reaction in sixth and seventh paragraphs.)