Trade war truce may placate US, but changing China in 90 days is ‘wildly optimistic’

The clock is ticking on the 90-day trade war truce agreed to by US President Donald Trump and Chinese President Xi Jinping in Buenos Aires last weekend, with analysts warning it is nowhere near long enough to allow the two sides to bridge the large differences between their positions on key issues.

Moreover, while progress in intellectual property protection may be possible during the three-month grace period, expectations for major Chinese concessions in other areas, particularly the reform of state-owned enterprises, are all but certain to be disappointed.

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US demands for China to make economic reforms are long-standing. The official White House communique said that negotiations on “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture” would begin immediately. China is preparing to send a delegation of as many as 30 officials to Washington later this month to start the talks, the South China Morning Post reported on Monday.

However, in trade negotiations, 90 days barely equates to the blink of an eye.

“I agree, 90 days is wildly optimistic in terms of what can be achieved,” said Elliot Papageorgiou, a Shanghai-based partner at law firm Clyde & Co specialising in intellectual property. “This looks like a happy announcement for Christmas – we’ve got the trade war averted – but it has really been kicked into next year.”

Several analysts interviewed for this article viewed the “deal” as something to placate those at home through what could be troubling economic times, rather than as a binding and significant piece of diplomacy.

Trade negotiations are typically notoriously complex, layered and protracted, and drag on for years. The China-Australia Free Trade Agreement took more than a decade to negotiate, while the Canada-EU deal has yet to be applied in full, despite negotiations that started in 2007.

“The most extreme example is the Doha Round of World Trade Organisation negotiations, which dragged on for more than 12 years, and failed,” said Stephen Olson, research fellow at the Hong Kong-based Hinrich Foundation, a pro-trade lobby group, and a member of the US negotiating team for the original North American Free Trade Agreement (Nafta) deal.

“Even the US-Canada [Free Trade Agreement], a negotiation between two close partners with very similar economic systems and philosophies, took roughly two years,” he said.

Negotiating trade deals can be an arduous process even for countries with long-established free trade credentials.

“Given the protracted nature of trade negotiations, from a practical and technical standpoint, the 90-day deadline seems impossible to secure consensus on the wide range of issues that the US has raised with China,” said Kelvin Tan, a former Singapore government trade negotiator, who now runs the venture capital firm GTR Ventures.

However, there may be some relatively low-hanging fruit that can be plucked, if not in three months then over the next year.

Clyde &Co lawyer Papageorgiou said that China may be willing to offer some concessions on IP reform.

“It could go two directions, like with the North Korea situation, where there was a high-profile announcement and little visible appears to have happened afterwards.

“Or we could get some movement, or the middle of the road, where China was likely to make some concessions in any event. China was going to come towards the US, and on certain points China needs to think about how it is dealing with the US on an IP basis.”

US companies would welcome an improvement in a situation which is estimated to cost them between US$225 billion and US$600 billion a year by the Commission on the Theft of American Intellectual Property.

“At this rate, the United States has suffered over US$1.2 trillion in economic damage since the publication of the original IP Commission Report more than three years ago,” read its 2017 report.

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As it happens, the Buenos Aires summit may have come at a fortuitous time. Currently, IP courts in China are organised on a regional basis, with those covering industrial hubs on the country’s east coast viewed as being far more protective of international companies.

It is expected among legal scholars that a new patent law, which would allow for nationwide issuance of patents, will be issued in 2019.

This may be accompanied by an upgraded copyright law. Both have been in the pipeline for years, but should they be announced within the next few months, they could be presented as easy wins for the Trump administration.

“When I heard the announcement, I thought: ‘I’ve been in China for 13 years and now they’re going to solve all the problems in 90 days,’” Papageorgiou said.

Reform of China’s state-owned enterprise (SOE) system, on the other hand, will be harder to come by.

The US government estimates that there are around 150,000 Chinese SOEs, with 33 per cent owned centrally and the remainder by local governments. These account for up to 40 per cent of GDP and 20 per cent of employment, and dominate many sectors of the Chinese economy.

Even before China’s accession to the World Trade Organisation (WTO) in 2001, SOE reform was high on the agenda of its trading partners. Government-funded companies operating at the upper echelons of the economy skew the market, critics say, and prevent international companies from operating on a level playing field.

As trade war escalates, China intensifies role of state-owned enterprises

In a speech at Johns Hopkins University in March 2000, then-President Bill Clinton tried to promote WTO membership as a means of remaking the Chinese economy.

“Nearly 60 per cent of the investment, and 80 per cent of all business lending, still goes toward state-owned dinosaurs that are least likely to survive in the global economy,” he said.

Eighteen years later, these “dinosaurs” are more entrenched than ever, despite the anti-protectionist rhetoric used by Xi at forums such as Davos. In 2017, central government-owned companies posted record profits of 1.4 trillion yuan (US$203 billion), a rise of 15.2 per cent from the previous year. In many cases, however, these companies are debt-laden and unproductive.

“When President Xi came to power he promised reforms to address this problem, but in practice he appears reluctant to pare back the role of the state,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note this week.

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It is therefore viewed as unrealistic to expect meaningful reform of SOEs in the short to medium term.

“I don’t think the US can really negotiate state ownership in the Chinese economy,” said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, the French bank.

“It’s just not credible. I wouldn’t take it [demand for reform] very seriously. I don’t think the US even knows how to reform it. What happens if you reform it? What would you do if China was to enter a financial crisis because of that reform – are you ready to step in?”

The outcome of the talks can instead be viewed as each side trying to appease their respective bases, to buy some time, and the US establishing in print what it hopes to achieve from the trade war.

Crucially, the 90-day negotiating period has not been widely reported in Chinese state media’s coverage of the summit.

“You can see that this was a way for both sides to buy time,” Garcia-Herrero said. “None of the topics that have been put on the table can be agreed upon in three months.

“Why would you need three months? From the US side, one of the key reasons is to allow companies to adapt to a new reality.”

Former US trade officials, in separate interviews before and after the meeting, implied that some movement on these structural areas would be a positive development.

Beijing’s tilt towards state-owned enterprises raises doubts about future of private sector in Chinese economy

Dean Pinkert, commissioner of the US International Trade Commission in the George W. Bush and Barack Obama administrations, told the South China Morning Post that the demand for “fundamental change in China’s trade model” dates back to the Obama government. Achieving this demand, he said, would take much longer than three months.

Orit Frenkel, a trade official in the Ronald Reagan administration, said in an email exchange before the summit: “For the US, success would be some meaningful changes in China’s pressure for forced technology transfer, investment restrictions and procurement preferences for its SOEs.”

“Trump may still be looking at it through a [trade] deficit-reducing lens, which may involve significant purchase commitment by China – which would be more of a short-term concession as opposed to a systemic change.”