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US-China trade war
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Chinese Vice-Premier Liu He says goodbye to US Treasury Secretary Steven Mnuchin (centre) and Trade Representative Robert Lighthizer after negotiations in Washington on May 10 – but the talks may already have been doomed. Photo: EPA-EFE
ChinaDiplomacy

ExclusiveWas this the moment US-China trade talks fell apart?

  • Five days before hopes of a deal receded dramatically, a private chat between China’s Liu He and the US’ Robert Lighthizer and Steven Mnuchin changed the mood
  • Claim that US side had kept adding extra demands before accusing Beijing of reneging on what was agreed
US-China trade war
Zhou Xin
Wendy Wu
Zhou Xinin Hong KongandWendy Wuin Beijing
Why you can trust SCMP
On April 30, Chinese Vice-Premier Liu He made an unusual request of his American guests Robert Lighthizer and Steven Mnuchin, who were in Beijing for pivotal talks to end the costly trade war between the world’s two largest economies.

Liu, President Xi Jinping’s trusted economic lieutenant, wanted to have a quiet word with the two senior American officials in private. The three broke away from the rest of the negotiation teams. Accompanied only by a Chinese interpreter, they entered a small room at the meeting venue and stayed inside for nearly an hour.

When they emerged, they did not give any briefings or instructions to their aides. But their expressions were stern and gloomy, according to a person who was present. A sense of foreboding permeated the meeting hall, but nobody dared to ask why.

Five days later, the once hopeful negotiations took a sudden turn. US President Donald Trump announced on Twitter on May 5 that the United States would increase tariffs from 10 per cent to 25 per cent on US$200 billion of Chinese goods.

Chinese official media hit back at the announcement, saying that the additional tariffs would make it even harder to strike an agreement. At a meeting on May 13, Xi canvassed the other 24 Politburo members for their views on the latest US demands. The Politburo overwhelmingly decided that the Americans had gone too far and that China should put its foot down, according to a source.

What exactly had caused this costly impasse in the trade talks and sent global markets into a tailspin remained unclear. The US side accused Beijing of “reneging” on its earlier promises.

The Americans painted a vivid picture of how the Chinese had taken out the most crucial agreements from a 130-page document that both sides had “agreed” earlier. The document returned to Washington had been reduced to 103 pages, according to American sources.

Beijing was livid at the accusation, calling it “untruthful and deliberately confusing”. Yet the Chinese government never offered its side of the story to the public.

Two separate Chinese sources told the South China Morning Post that the talks hit a snag because the US side “kept adding new demands in the late stages of the negotiations”. They said “some of these would directly affect China’s political and social stability”. Beijing was particularly angered by the additional tariffs and what it saw as the US’ attempt to shift the blame to China.

“The real reason is that the US side keep changing their demands,” one source said. “There were so many changes that we can’t [keep giving in]. And then they turned around and accused us of backtracking.”

He also revealed some of the key areas that the two sides could not agree on.

For instance, Washington demanded China “completely open its internet” and relax its controls that require foreign cloud computing companies to store all their data in China.

“China can only agree to selectively open some areas. A completely open internet is impossible,” the source said.

Another contentious point was the quantity of American products China must purchase annually. “The US wants China to increase imports of American products by another US$100 billion a year,” the source said. “It is difficult to achieve that immediately.”

Given that Washington has kept in place an extensive ban on hi-tech exports to China, there would be limited choices of imports for Beijing besides agricultural products and liquefied natural gas.

The two sides also could not agree on the issue of currency manipulation. Although Beijing agrees to the principle that it should not use currency depreciation to gain trade advantages, it wants more flexibility and control to ensure the stability of its financial system. The US, however, wanted a rigid system that allowed little room to manoeuvre. The source did not elaborate further.
Most critically, the US negotiators demanded to have a monitoring mechanism to track and verify progress, and wanted it to be stipulated in the final agreement that the US could impose tariffs on Chinese products if it was not satisfied with developments. Some Chinese laws would also need to be rewritten to accommodate the demands.

“These are unacceptable to the Chinese side,” the source said, adding that a core issue was the US’ lack of trust in Beijing.

“To have a deal, both sides need to be able to see things from the other side’s perspective,” the source said. “The Americans need to understand that it will take time for China to implement these changes. If they refuse to accept that and demand instant changes, then there is no way that we can continue.”

This article appeared in the South China Morning Post print edition as: A private chat, then negotiations began to unravel
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