US-China trade talks: there’s so much more at stake, including Hong Kong and Taiwan. And that’s why they won’t succeed

Donald Trump can’t take a soft line on China with an upcoming presidential election, and his aggressive tactics will only meet a similar response from Beijing
This is especially so given the protests in Hong Kong and deteriorating cross-strait relations, and after the ‘currency manipulator’ charge angered Beijing’s moderates

Chen Long

Published: 1:30am, 5 Sep 2019

Why you can trust SCMP

Hope is again in the air with upcoming talks between negotiators from China and the United States about the ongoing trade war. But developments over the past few months in Beijing, Washington and Hong Kong should make it clear that the conflict is about much more than just trade, and a couple of days of face-to-face meetings cannot resolve much, if anything.

Washington’s decision to maximise pressure on Beijing will only meet more resistance, leaving the chances of reaching a deal close to nil.

With a presidential election next year, it seems that the Trump administration, especially President Donald Trump himself, is convinced that the best tactic is to be more aggressive with China. Therefore, Trump has announced two further rounds of tariff hikes since early August – and is waging at least three other wars on Beijing.

First is the technology war. The US government has put restrictions on several Chinese technology firms by either limiting supply or demand. In the case of Huawei, it’s both: the US has announced export controls to prevent Huawei purchasing items from American suppliers and is trying everything in its power to stop the Chinese firm from gaining market share elsewhere.

Recently, US prosecutors have started new investigations into Huawei, related to intellectual property. Furthermore, things have moved from the corporate to an individual level, in an attempt to cut off potential transfers of knowledge from the US to China. For example, some Chinese or ethnic-Chinese researchers are under investigation by the US government, which has cited “national security” concerns.

Second, there is the financial war. Some members of US Congress have even said US asset managers should be prevented from investing in Chinese firms. This is unlikely to materialise soon.

However, Chinese financial institutions are under greater pressure these days if they operate in the US, simply because Beijing’s foreign policy is so different from Washington’s.

An appeal court recently upheld contempt orders against three major Chinese banks that failed to comply with subpoenas from the Department of Justice, relating to North Korean sanctions, and they face fines of US$50,000 a day – from April.

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It is entirely plausible that the US will target other Chinese banks or firms doing business with Iranians and Russians, and hit them with large fines.

There is also the currency war. On August 5, the US Treasury Department labelled China a currency manipulator after the People’s Bank of China failed to prevent the exchange rate from dropping below the key 7 yuan to the dollar level.

This is a highly controversial move by the US and could be self-defeating – the US Treasury said in its own report in May that China did not meet all three criteria of a “currency manipulator”. The label also does not, in itself, lead to anything material beyond bilateral talks and consultation with the International Monetary Fund, which disagrees with the US Treasury’s decision.

Politics in Taiwan and Hong Kong are not helping either. Cross-strait relations are at their worst in the past decade; Beijing recent suspended individual travel to Taiwan and voiced its objection to the latest US arms sales to Taipei. As a result, the firms selling arms could face sanctions from Beijing.

Under Trump, US arms sales to Taiwan could be the new normal

Hong Kong, meanwhile, is embroiled in a major political crisis, and Beijing is convinced that the Americans are involved in attempting to destabilise the nation. From China’s perspective, anything happening in Hong Kong is a domestic affair.

Speeches and comments from American politicians about Hong Kong have already angered Chinese leaders, and any attempt to include Hong Kong in bilateral talks would provoke them further.

It is highly unlikely that Washington will succeed with such aggressive tactics. Of course, it is still in Beijing’s best interests to strike a deal, but it will not soften its stance in order to do so.

For example, it says any deal must include the immediate elimination of all additional tariffs implemented since last year. So far, Washington has been unwilling to agree, insisting that only part of the tariffs could be removed.

In the face of such external pressure, the Chinese leadership will only gain more domestic support by taking a tough stand.

With the 70th anniversary of the establishment of the People’s Republic of China less than a month away, the Chinese leadership could use this opportunity to remind people of the history of foreign powers meddling in Chinese affairs and tell people to unite against the bullying Americans.

Trump says the US does not want to discuss Huawei with China

Washington’s aggressiveness has also alienated and annoyed many moderate minds in China. For instance, the “currency manipulator” label has outraged Chinese central bankers, because for many years they had tried to make the renminbi exchange rate more market-driven, and they are probably among the most reform-minded people in the government.

The US has shown the PBOC that it doesn’t play by rules, even the rules it sets. If the moderates in Beijing also lose faith, it is hard to imagine how a “trade” deal can be struck.

The only chance is for Trump to suddenly soften his stance. However, despite his mercurial nature, the odds of this happening are low because his political opponents will accuse him of “kowtowing” to China. And that’s not something he wants to risk ahead of the presidential election.

Chen Long is an independent economist based in Beijing. He writes extensively on the Chinese economy

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