First Details From US-China Trade Talks Emerge

With roughly a week left before the first round of in-person trade-deal talks, the White House has leaked a rough outline of its expectations for a deal reportedly gleaned from preliminary conversations between President Trump and President Xi (Trump tweeted on Saturday that he and Xi had made “big progress” toward a deal during their early calls).

If nothing else, the report in the Wall Street Journal offers a benchmark against which the final deal can be judged. According to WSJ, the talks are focusing on boosting US exports and loosening regulations that discriminate against US firms operating in China (something the Chinese have been hinting at in recent policy decisions to lift import bans and remove retaliatory tariffs, while also reportedly weighing a decision to scrap their “Made in China 2025” policy).

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However, as with anything leaked from the West Wing, WSJ cautions its readers to take the report with a grain of salt. Because given the market volatility in December, Trump could be liable to exaggerate the chances of a deal if it might boost markets.

But people familiar with the state of negotiations said the president may be overstating how close the two sides are to an agreement. They note Mr. Trump has looked to calm markets, which have gyrated in recent days, in part, because of concern that the trade fight between the US and China could spin out of control.

One other notable detail from the WSJ report is that the US likely won’t seek a commitment from China to end its cyberespionage practices. Instead of bundling this in with the trade talks, Treasury is pushing for China’s espionage program (which recently won it the condemnation of the US and a group of its allies, as well as a host of indictments of hackers and agents allegedly affiliated with the Ministry of State Security), to be put off for a separate round of negotiations (showing that the US is being practical about setting realistic expectations for a deal, since China has repeatedly promised to rein in these practices, only to allow them to continue).

After the first round of in-person talks beginning Jan. 7, a more-senior delegation led by Treasury Secretary Mnuchin, Trade Rep. Lighthizer (on the US side) and Vice Premier Liu He (on China’s side) will meet in Washington the following week. Right now, Lighthizer’s office is leading the talks, with close cooperation from Treasury:

A team of U.S. trade officials, including Deputy Trade Representative Jeffrey Gerrish and Treasury Undersecretary David Malpass is expected in Beijing the week of Jan. 7 for several days of talks. If those negotiations make progress, Chinese trade officials, led by Vice Premier Liu He, will follow up with talks in Washington the following week, or soon after that with U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin.

The trade representative’s office is now leading trade talks, though Treasury is also playing a significant role. For instance, Mr. Mnuchin lobbied successfully before Christmas to keep Chinese firms from being hit with sanctions for cyber espionage on the same day that the Justice Department announced indictments of two Chinese citizens allegedly tied to a state-sponsored campaign to steal sensitive information from U.S. businesses.

Treasury has wanted to keep the espionage issue separate from trade talks. But others in the government continue to press for Treasury sanctions, both to punish Beijing and to make clear that the U.S. will enforce agreements.

When it comes to Chinese promises to end or limit IP transfers and offer greater access to its markets, the US is planning to demand that verifiable steps be taken on China’s part before the US rolls back its tariffs.

The latter proposals include cracking down on Chinese officials who pressure U.S. firms to transfer technology to Chinese partners—the heart of the Trump administration complaints against China. Beijing is also expected to propose giving foreign firms greater access to financial services and other sought-after sectors.

But China has made pledges of this sort in the past. U.S. negotiators now are pressing their Chinese counterparts to spell out, in great detail, the kinds of changes they would make—and to assure that Beijing doesn’t use other means to restrict foreign firms. Over the past year, China has resisted giving such detailed information.

[…]

The U.S. is also focusing on how such a deal would be enforced. One way is to keep current tariffs on China and only remove them after Beijing has carried out its pledges.

If China promises to grant US firms greater access to its domestic market, the US will want to verify that Beijing isn’t using some other method to effectively drive them out.

For instance, if Chinese regulations are revised to boost foreign participation in financial markets, the US wants to be assured that Beijing won’t use government authority over licensing, environment, land use and other areas to hinder US firms anyway. Washington also wants to make sure US firms benefit quickly and that approvals don’t stretch out for years.

For those who have been following the trade dispute so far, it might seem like the US is setting a high bar for an agreement – and analysts at Goldman Sachs would agree. They don’t expect a deal to be forthcoming by the March 2 deadline, and that tariffs will likely rise further in 2019.

However, they believe the Trump administration will ultimately cave and strike a deal by 2020, just as it did with Canada and Mexico before the midterms.

* * *

Will the US impose further tariffs?

Yes. We believe tariffs on imports from China are likely to rise somewhat further in 2019, though we also expect that an agreement could be reached by late 2019. On March 2, tariffs are scheduled to increase to 25% on $200bn of imports from China unless the White House intervenes to prevent this. Chinese policymakers appear intent on easing tensions—China has announced purchases of US soybeans, rescinded retaliatory tariffs on US autos, and backed away from the “Made in China 2025” plan— but it is unclear whether this will be enough to satisfy the White House. US Trade Representative Robert Lighthizer, who is leading talks from the US side, has stated that March 2 is a “hard deadline” for reaching an agreement and that postponing the increase will require a “verifiable” deal that brings about “structural change” and “protection of US technology”, which appears to set a high bar for a deal. We also note that while Presidents Trump and Xi were able to reach an agreement at their face-to-face  meeting on December 1, further postponement of the 25% tariff might be harder to achieve without another face-to-face meeting, which has not been scheduled.

While we believe an increase in the tariff rate is more likely than not, we nevertheless believe that tariffs on imports from China are likely to peak in 2019, for two reasons. First, we expect that the White House will want to announce a more comprehensive agreement with China ahead of the 2020 presidential election, similar to the agreement President Trump struck with Canada and Mexico on revising NAFTA ahead of the 2018 midterm election. Second, the measures the US government is taking with regard to China go beyond tariffs. In recent weeks, the Trump Administration has proposed restricting exports of certain technologies and foreign investment in companies that focus on such technologies, as well high-profile legal actions focused on technology-related issues having to do with China.

If no deal is reached by the March “hard deadline”, the US will raise tariffs on some $200 billion of Chinese imports from 10% to 25%, and begin the process of slapping tariffs on another $200 billion-plus worth of Chinese goods flowing into the US.

CHina

via zerohedge

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