U.S.-China Trade Talks Making Progress, Trump Says, but What Could a Deal Look Like?

The Trade Balance

According to CNBC, China’s trade surplus with the U.S. grew by 17% in 2018 from a year ago to hit $323.32 billion (the highest on record dating to 2006).
A central plank of the president’s campaign was rebalancing the trade deficit with China — yet, so far, it has continued to grow.
China does appear to be indicating it will import more as part of a deal, largely supplanting purchases from elsewhere for U.S. supplies of agricultural goods such as soybeans, corn, wheat, beef and poultry, manufactured goods such as aircraft, and energy in the form of natural gas.

Currency Manipulation

The U.S. has long argued that China manages — that is, manipulates — its currency to suit its trading priorities, weakening the currency when exporters need assistance and allowing it to rise if inflation becomes more of a priority.
A weakened currency directly contributes to the trade imbalance by supporting exports. Early indications suggest some form of agreement could be reached that would require Beijing to announce when and why it was making adjustments to its exchange rate. However, a fully floating Renminbi is very unlikely.

Intellectual Property Rights

This is arguably the longest running grievance of Western firms looking to invest or operate in the Chinese market. With the tacit approval of Beijing, Chinese firms engage in the theft of intellectual property rights and forced transfer of technology to domestic Chinese companies, particularly state-owned enterprises as a matter of government policy.
It is very unclear how, or even if, Beijing will take any meaningful steps to change this. Previous promises have come to nothing.

An End to Prosecutions

The arrest of Huawei CFO Meng Wanzhou on charges of stealing trade secrets and violating sanctions has incensed Beijing, but the Huawei case is not alone.
Other firms, like Fujian Jinhua, a chipmaker that is also the subject of a criminal case in the U.S., have opened up a worrying new practice — for Beijing — of the U.S. to take a much tougher line with Chinese firms.
Beijing will likely be looking for charges against Huawei to be dropped.

Regulatory Relief

China has traditionally operated a system that places significant restrictions on foreign investments in China, including approvals in areas like biotech and chemicals.
Even after many years, Visa and Mastercard are still not allowed free access to the market. It is probable some relaxation in such restrictions could be achieved, but the devil will be in the details and in the implementation.

Industrial Subsidies

Despite protestations to the contrary, it is no secret Beijing has long supported national champions, particularly state-owned enterprises, with subsidies, tax breaks and loans.
This was tolerated in China’s early stages of industrialization as a necessary evil — much as Japan, South Korea and other Asian countries have done — but as China has grown to become the second-largest economy in the world, it was expected such support would be scaled back.
But China’s drive to become the preeminent power economically, militarily and technologically has, if anything, entrenched these tactics to support Beijing’s China First policy.
Whatever promises come out of these negotiations, China’s aspirations to overtake the U.S. technologically — including in fields like robotics, genomics, artificial intelligence and quantum computing — will not be compromised or hamstrung by promises made today.
How China separates support for industries involved in cutting-edge technologies like these from more mundane steel, cement or automotive is a challenge for the West to monitor. The focus has been on the latter, but the future will be determined by the former high technology industries. Many in the U.S. government worry the desire to be seen to achieve a deal will result in vague promises being accepted in what is probably the most crucial area of engagement in these talks.
That brings us to an important question: how does the U.S. ensure China abides by any promises made?
Negotiations are being handled by United States Trade Representative Robert Lighthizer, a consummate Washington trade lawyer, he is no fool and no fan of resorting to the WTO to raise issues about compliance. According to the FT, his favored approach is some formalization of a process to loosen or reinstate U.S. tariffs depending on Chinese compliance with the deal.
Consumers in the U.S. will be keen to know what happens to tariffs in the event of a deal. Are they simply removed, or is the threat of greater tariffs put on the back burner, with the existing 25% on some $50 billion of goods and 10% on a further $200 billion remaining in place?
Trump’s focus on the trade balance is arguably a short-term issue, but a desire to show a win in that area could take precedence over the new struggle that is taking place: a struggle for technological dominance that will go on for decades.
Many in both parties fear the series of overly positive tweets coming out of the White House this week indicate the president is more focused on image than substance, and as the March crunch date approaches will result in compromises being made.
Dan DiMicco and Michael Stumo, the chairman and CEO, respectively, of the Coalition for a Prosperous America, are quoted by the South China Morning Post in a joint statement saying “We urge President Trump to continue focusing on the long-term national interests of the American people and resist short-term pressure from Wall Street,” and they may add from popularity ratings.
The stock market’s rise has shown how sensitive Wall Street is to the success of a trade deal, but the president’s recent tweets could be more to do with the upcoming summit with North Korean leader Kim Jong-un, for which the president benefits from Chinese diplomatic support. Once that is out of the way, he may just return to playing hardball.
Will this be the end of U.S.-China tensions?
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No — rather than the end, it is but the beginning. The U.S. and China are entering a new period of rivalry, a new century in which the U.S.’s dominance can no longer be taken for granted. Many will scoff at the idea, but in the years to come an increasingly isolationist U.S. will find China as a growing rival.
Today’s skirmishes are just the beginning.